Former YouTube exec Robert Kyncl officially started as CEO at Warner Music Group at the start of the year, and he’s now got his first set of results.
It’s a tricky quarter to start off with the major reporting a year-on-year decrease in revenue of 7.8% to $1.49 billion during calendar Q4 of 2022 (the company’s fiscal Q1). Crucially, when converted to constant currency, that decline was a less worrying 2.7%.
“This was a tough quarter,” said Kyncl on his first Warner Music Group earnings call. “Like most companies, WMG has been dealing with macroeconomic headwinds and the impact of currency exchange rates.”
As well as currency volatility, the major’s results were affected by an unfavourable comparison with calendar Q4 of 2021, which had an extra week in its reported figures (WMG’s 2021 figures had 53 weeks, versus 52 weeks for 2022).
During the quarter, recorded music revenue at WMG was essentially flat in the quarter, once that extra week is factored in.
Underlying streaming growth was actually still positive during the quarter, and the major is set to benefit from a stronger release schedule in the second half of 2023. Kyncl named artists including Ed Sheeran, Cardi B, David Guetta, Aya Nakamura and Bebe Rexha as planning new music drops.
“Music’s value, power, and ubiquity are among the many reasons I decided to join WMG and lead the next phase of our evolution,” said Robert Kyncl. “As we navigate a challenging business environment, we expect to have a strong release schedule in the second half of 2023 while managing our costs throughout. The foundations of this company are strong, and our addressable market is continuously growing. We are excited to drive new monetisation opportunities through our investments in new artists and songwriters, our catalogue, and our global expansion.”
Warner Music’s overall digital revenue decreased 5% (0.9% in constant currency) and streaming revenue decreased 4% (flat in constant currency).
Music publishing streaming revenue growth showed its momentum with a year-on-year increase of 13.2% (16.8% in constant currency).
Recorded music streaming revenue was off 6.7% ( 2.6% in constant currency) as a result of a lighter release schedule and the impact of the additional week in the prior-year quarter, as well as a market-related slowdown in ad-supported revenue.
Adjusted for the impact of the additional week, however, recorded music streaming revenue was up 0.5% (4.8% in constant currency).
Music’s value, power, and ubiquity are among the many reasons I decided to join WMG and lead the next phase of our evolution
Kyncl underlined his ambitions for further growth and he has already made key appointments in newly-created roles.
He also spoke about his decision to move into the music industry, following roles at Netflix and YouTube.
“I chose music first and foremost because everyone loves music, including me,” he said. “It's embraced by 100% of the global population. In an increasingly digital world, music makes people feel. It brings them joy, hope and comfort. Plus, in an increasingly divided world, music brings people together. That engagement is very powerful. And valuable. And we expect the evolution of monetisation models to reflect that.
“On top of that, music's global appeal is matched by its ubiquity. This industry has achieved something rare. It's built mutually beneficial long-term partnerships with many of the world's biggest companies, Amazon, Apple, Google, Meta, Spotify and Tencent among them.”
While the fundamentals will remain the same, Kyncl hinted at some changes ahead for the major.
“We plan to thoughtfully reallocate some resources to accelerate how we use technology and data to empower artists and songwriters, as well as drive greater efficiency in our business,” he said.
“As subscription revenue continues to grow, ad-supported recovers, and we explore the possibilities of new technologies and business models, it’s essential we structure our deals smartly and strategically.
“I’m approaching this next phase of growth with the unique benefit of having been on both sides of the table. I’m proud that, over the last five years at YouTube, we developed a very collaborative, mutually beneficial relationship with the music industry after years of rocky ones. I plan on bringing the same approach to WMG and the industry, so that our interests are aligned with our partners, and that our artists and songwriters gain maximum participation and monetisation.”
WMG has taken a “thoughtful approach to global expansion”, he explained.
“WMG has made well-timed moves that leapfrogged the competition in dynamic, fast-growing markets such as China and the Middle East,” he said. “This approach has also delivered record-breaking global firsts with artists like Anitta from Brazil, Paulo Londra from Argentina, King from India, and Ckay from Nigeria.”
I’m approaching this next phase of growth with the unique benefit of having been on both sides of the table
The new WMG CEO identified opportunities from technology opening up emerging economies, as well as new use cases for music resulting from innovation (the medical and health sector is a growth area), and the fact that music remains undervalued compared to other forms of entertainment like video.
Following former Steve Cooper’s regular updates on the need to grow ARPU, Kyncl made clear he believes that all DSPs should be pricing subscriptions at a realistic rate.
He pointed to data showing that almost 80% of US households subscribe to at least three streaming video services. It means that the average household is spending more than four times per month on a combination of digital video services compared to that of music.
“In contrast, the price of a music subscription has stayed the same since streaming was introduced over a decade ago,” he said. “Most consumers subscribed to a single service that carries virtually all the music ever released. Against this backdrop, it's encouraging that we're seeing the first steps in the right direction by Apple, Deezer and Amazon.”
Deezer CEO Jeronimo Folguiera has spoken to Music Week about the need for price rises across all platforms.
Amid some industry-wide questions about TikTok’s connection with the music business, Kyncl said he wanted a “holistic relationship” and noted the segmentation at YouTube including subscription and multiple formats.
Asked about the declining market share of the majors on Spotify consumption with independently released music gaining ground, Kyncl had a simple message to his Warner Music teams.
“These are platforms where content providers are uploading content and we have to do a great job,” he said. “Having, a) robust catalogue, b) more great artists that are getting meaningful share - we have to do a great job at that. So the onus is on us.”
Eric Levin, CFO, also noted the role of Warner Music as a distributor and investor globally in independent music.
On the earnings call, Kyncl was also asked whether the major should be worried about the rise of AI in music. While welcoming AI to “help and support creativity”, he called on platforms to match the abilities of YouTube to protect copyrighted content that might be modified by artificial intelligence.
While the debut appearance by Kyncl was undoubtedly a major feature of interest, investors and analysts will also be looking closely at the numbers.
Overall, recorded music revenue was down 10.6% (5.6% in constant currency) driven by a decline in digital, physical and artist services and expanded-rights revenue. Excluding the impact of the additional week, recorded music revenue was flat in constant currency.
Major sellers in the quarter included Red Hot Chili Peppers, Zach Bryan, Lizzo and Ed Sheeran.
Amid signs that Q4 is no longer a banker for physical music, combined revenue for CD, vinyl and other formats was down 31.8% (26.5% in constant currency) primarily due to a lighter release schedule.
Artist services and expanded-rights revenue decreased 11.2% (4.2% in constant currency) primarily due to lower D2C merchandising revenue at EMP and lower advertising revenue. Licensing revenue increased 9% (16.9% in constant currency), thanks to an increase in broadcast fees, synchronisation and other third-party licensing, partially offset by the impact of exchange rates.
Music publishing revenue increased 9.2% (14.2% in constant currency). The increase was driven by growth in digital and performance revenue.
WMG’s operating income was $265 million compared to $239m in the prior-year quarter. OIBDA was $349m, compared to $320m in the prior-year quarter, an increase of 9.1% (16.3% in constant currency).
“Our results reflect our resilience and operational discipline in the face of macroeconomic headwinds, as well as the impact of the extra week in the prior-year quarter,” said CFO Eric Levin. “Our continued focus on efficiency enabled us to deliver strong operating and free cash flow growth, even while certain revenue lines came under pressure. We are enthusiastic about our release schedule for the second half of the fiscal year, which will feature amazing music from some of our biggest artists.”