The modern record industry is moving into its ‘cut to grow’ phase.
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For the past five-plus years, all the blockbuster record industry has known, thanks primarily to the explosion of music streaming revenues, is bountiful growth.
That doesn’t only refer to growth in income (although, as MBW readers will know, that’s certainly been spectacular). It also refers to growth in headcount.
Yet now some of music’s largest rightsholders appear to be moving into a new era – one encompassing judicious hiring policies, tweaked allocation of resources, and, at least in the short-term, trimming costs.
This has been seen recently with layoffs (in the single percentage digits vs. total staff) at both Warner Music Group and BMG.
And it could also be seen by Universal Music Group’s confirmation, on its latest earnings call, that it will be “cutting to grow” in 2024.
UMG’s upcoming cost-savings plan was introduced by Boyd Muir, the company’s EVP and CFO, on Universal’s Q3 2023 call with analysts on October 27.
Said Muir: “[We] are currently conducting a careful review of our cost base, which we will complete over the coming months, and we will update you when appropriate about an anticipated cost savings program to commence in 2024.”
Added Muir: “We remain focused and optimistic as we continue to execute on the growth prospects that lie ahead for UMG We see enormous opportunity for value creation, both for our artists and for the company, as we advance our artist-centric initiatives and work to further capture the value of the engagement being driven by our unparalleled roster of artists and songwriters.”
“What we need to look at now is… those resources that are more focused on the legacy business in order for us to ensure that we actually have the right level of resources to execute and benefit from all of the opportunities that we see ahead.”
Boyd Muir, Universal Music Group, speaking October 27
Later on that earnings call, UMG execs were quizzed by analysts including Lisa Yang of Goldman Sachs and Julien Roch of Barclays about how this planned cost-cutting might affect margins, and particularly how it might play into UMG’s goal of hitting a mid-20-percent EBITDA margin in the next few years.
Muir confirmed that the planned 2024 cost cuts were expected to improve UMG’s EBITDA margin once completed. Yet he also noted that the 2024 program will aim to better “capture opportunities we see in the marketplace”.
Muir said that UMG intended to dedicate “the right level of resources to execute and benefit from all of the opportunities that we see ahead”, while simultaneously reviewing resources currently dedicated to Universal’s “legacy business”.
Universal Music Group Chairman and CEO, Sir Lucian Grainge, had a snappy phrase to sum up this balancing act: “Cut to grow.”
The key objective of 2024’s program, Grainge reiterated, was to “cut overheads in order to grow elsewhere”.
Universal, which employed some 9,992 people globally at the close of 2022, is not alone in making this kind of strategic decision.
In March, Warner Music Groupannounced it was laying off around 4% of its global workforce – approximately 270 global staff.
At the time, WMG CEO, Robert Kyncl, noted that the decision lay in WMG wanting to better “take advantage of the opportunities ahead of us”.
WMG would do this, noted Kyncl, by “reallocating resources towards new skills for artist and songwriter development and new tech initiatives“.
“We’re constantly challenging ourselves to operate more efficiently and effectively.”
Robert Kyncl, Warner Music Group speaking last week
In other words, WMG would cut headcount/expenditure from areas of its business that, in Kyncl’s view, didn’t best serve modern artist and songwriter development and/or fuel tech programs that could “take advantage of the opportunities ahead of us”.
Reminding investors of his commitment to fiscal prudency, Kyncl stated on WMG’s latest earnings call last Thursday (November 16) that his company’s operations today are “always underpinned by a focus on financial discipline, as we’re constantly challenging ourselves to operate more efficiently and effectively”.
A closer look at ‘cutting to grow’
So what does Universal really mean when it talks of “cutting to grow”? And what is Robert Kyncl referring to when he talks of better “taking advantage of the opportunities ahead of us”?
Neither Kyncl, Boyd Muir, or Sir Lucian Grainge – as you’d probably expect on this topic – have so far offered analysts commentary rich with detail. But there are examples, both hypothetical and tangible, that tell their own story.
First, the hypothetical example.
The power of traditional broadcast radio as a promotional platform in the US music industry continues to decline – inevitably, in the streaming age – year over year. Yet the largest companies in the US record industry continue to apportion large annual investments into terrestrial radio promo.
If you ran a major music company today (and were seeking improved EBITDA margins), would you perhaps think about reducing expenditure on this declining part of the market?
If you did, might you then reallocate some of the consequent savings towards, say, the creation of social media content… while still making overall savings vs. your previous expenditure?
In some circumstances, for some labels, this might represent the sensible truncation of “legacy resources” while still enabling the growth of “opportunities ahead”.
Now, the tangible example.
The numbers don’t lie: ‘catalog’ music (especially ‘shallow’ catalog music) has eaten into the market share of ‘frontline’ (i.e. new release) music in the past few years, as consumer listening habits continue to transform.
This was likely a factor in the major record companies looking to reduce back-office spending in their frontline label operations over the past 12 months.
You can see such a reduction in the following three examples, which all took place this year:
Universal Music Group ‘folding down’ Motown from being a fully-fledged frontline label (with its own promo team etc.) into being an imprint of Capitol Music Group (i.e. Motown maintaining a distinct A&R operation, but relying on CMG for other functions);
Warner Music Group running a similar play in the UK: ‘folding down’ Parlophone – previously a fully-fledged frontline label – into being an imprint of Warner Records (UK). (Again, Parlophone maintains its own A&R resource within the wider Warner Records setup);
Sony MusicdissolvingArista Nashville, moving the shuttered label’s artists into the larger Sony Music Nashville operation, or other frontline entities like RCA or Columbia.
Interestingly, in the case of Universal, the ‘fold down’ of Motown came in the same year that UMG dedicated new investment into its global independent artist/label services division, now known as Virgin Music Group (run by JT Myers and Nat Pastor).
As anyone keeping an eye on global market share charts knows, the independent sector (a) continues to grow at a faster rate than the rest of the global business, and (b) is often where the biggest emerging hits from ‘non-Anglo’ markets – including Korea, LatAm, India, Nigeria and elsewhere – reside.
With UMG folding down Motown while investing in VMG, Universal could be argued to be displaying an early indication of the sort of move we can expect from “cut to grow” in the months ahead.
The wider backdrop… and BMG’s recent move
It’s also worth noting that Warner and UMG’s cost-cutting announcements arrive amid a backdrop of widespread redundancies across the media and entertainment spaces.
Further large numbers of layoffs have taken place at tech/media companies like DreamWorks, Activision Blizzard, Microsoft, and others.
To date, Universal Music Group (a publicly traded company) and certain other large music rightsholders have resisted following suit with a public announcement of redundancies.
UMG it should be said, remains heavily profitable; the company is expected to post an adjusted annual EBITDA comfortably in excess of USD $2 billion in 2023.
The weight of macroeconomics in media, however, plus the opportunity to shift resources towards future-facing investments, will inevitably land on the agenda at some point.
We should also mention here BMG – the Bertelsmann-owned music company – which recently executed its own round of layoffs.
BMG is a highly relevant case study in this narrative because, although significantly smaller than Universal Music Group, it too is substantially profitable (BMG’s EBITDA margin sat at 21.7% in H1 2023.)
There is some evidence of ‘cutting to grow’ in BMG’s recent layoffs, as announced in an internal note by CEO Thomas Coesfeld earlier this month.
After announcing that BMG would cut 40 staff – around 3% of its global headcount – Coesfeld noted that the business he runs was becoming “more efficient and more effective”.
The crux of that new efficiency: following sustained investment into local repertoire marketing teams, BMG’s layoffs represented a cutting back on staffing costs within centralized international marketing – to avoid ‘doubling up’ on resources.
“Obviously these are tough decisions to make, but there’s better ways to invest this money to improve our service to clients.”
BMG spokesperson on recent layoffs of 3% of company’s global staff
A BMG spokesperson explained to MBW: “A centralized international department made sense when our local repertoire teams were not as strong as we are now. We’ve addressed that and a centralized function is no longer needed. As the only global player outside the three majors, international continues to lie at the heart of what we do. We’ll just do it differently.”
Tellingly, the BMG spokesperson added: “It’s far better to make changes like these from a position of strength when you’re performing well, rather than leaving it too late.
“Obviously these are tough decisions to make, but there’s better ways to invest this money to improve our service to clients and you can expect further announcements on improvements to our service offering imminently.”
