Good evening and welcome to Universal Music Group's third-quarter earnings call for the period ending September 30, 2025. My name is Alex, and I'll be your conference operator today. Your speakers for today's call will be Sir Lucian Grainge, Chairman and CEO of Universal Music Group, and Matt Ellis, Chief Financial Officer. They'll be joined during Q&A by Michael Nash, Chief Digital Officer, and Boyd Muir, Chief Operating Officer. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. As a reminder, this call is being recorded.
Please also let me remind you that management's commentary and responses to questions on today's call may include forward-looking statements which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may vary in a material way. For a discussion of some of the factors that could cause actual results to differ from expected results, please see the risk factors sections on UMG's 2024 annual report, which is available on the Investor Relations page of UMG's website at universalmusic.com. Management's commentary will also refer to non-IFRS measures on today's call. Reconciliations are available in the press release on the Investor Relations page of UMG's website. Thank you. Sir Lucian, you may begin your conference.
Thank you. Hello, and welcome to all of you for joining us today. I'm very pleased to report that for our third quarter, we once again continued to post strong financial results whilst also making significant advances on the implementation of our strategic plan. For the quarter, revenue grew 10% and adjusted EBITDA grew 12%, both in current currency. Matt will go into greater detail on the numbers later, but before he takes the mic, I will focus my remarks today on three strategic areas. First, how we continue to propel our new and established artists' careers to new heights, including how we extend the value of their IP by bringing our artists' music and stories into areas such as feature films. Second, our work with partners to develop commercial and creative opportunities for artists, songwriters, and fans, specifically in leveraging responsible Gen AI technology.
Third, our ever-growing presence in established and high-potential markets around the globe. I'll begin my remarks by highlighting just a few of the stunning successes our artists continue to rack up around the world. In the U.S., UMG had seven of the top ten albums for the third quarter, with Morgan Wallen, I'm the Problem at number one, and our publishing company had interest in seven of the top ten albums. Of course, there's Taylor Swift. What Taylor has achieved with her 12th studio album is literally breathtaking. The biggest first week in music history now belongs to The Life of a Showgirl: over 4 million U.S. and 5.5 million global album equivalent sales. The album shattered a slew of other records as well. By debuting at number one on the U.S.
Billboard album chart, Taylor now has the most number one albums, 15, by any artist in the 21st century, as well as the most number one albums ever by a solo artist. I can't tell you how proud we are of her. The soundtrack for the animated film K-pop Demon Hunters on Republic continues its historic chart success, twice hitting number one in the U.S. The lead single, Golden, has spent multiple weeks at number one around the world, including nine weeks in Australia and eight weeks in both the U.K. and the U.S. It is also the first soundtrack album in U.S. history to have four of its singles in the top ten of the U.S. 100, all at the same time.
Sabrina Carpenter's Man's Best Friend also debuted at number one in the U.S., spent two weeks at number one in the U.K., and hit number one in 13 other countries as well. It's her second number one album. K-pop group Stray Kids' album Karma is their seventh number one album in the U.S., breaking the record for the most number one albums by a group on the Billboard 200 chart this century. I'm excited about the progress I'm seeing that's happening in the U.K. market as well. Olivia Dean secured the number one album spot and the number one single, a feat that made her the first British female solo artist to claim both top spots simultaneously since Adele did in 2021. Also in the U.K., we're thrilled that Sam Fender was awarded the prestigious Mercury Music Prize for his third album, People Watching.
That's the kind of artist development that we like. Something which means a great deal to us as a global company is we're thrilled to see several of our Japanese artists now beginning to gain traction globally. As you know, Japan is the world's second largest music market, but there's been a misconception that opportunities for local talent outside of Japan are limited. I'm extremely proud to report that UMG is shattering that misconception in several ways. For example, BABYMETAL released its first album after signing with Capitol in the U.S. in August. The album debuted at number nine on the Billboard 200, making them the first Japanese group ever to reach the top 10 in the U.S.
In partnership with our Japanese company, here's another example: the recent tour by superstar Ado in 33 cities across Asia, Europe, the U.S., and Latin America, attracting half a million fans, was also a historic first for a Japanese artist purely outside of Japan. Here's a third example of a Japanese artist gaining global traction: FujiI Kaze. His enormous success with his third album, released in September by Republic Records, and next year he's set to perform at Coachella. This is quite a major development. I've also believed that we can break more local talent from Japan around the world. I'm really thrilled to see this progress, and it really, I think, is what sets us out and defines us as a creative company.
Helping our artists reach new levels of success also means extending their IP in ways that deepen connections with their existing fan base whilst introducing their music to a new generation of fans. One way we do this is through film. For example, the documentary produced by UMG's Polygram Entertainment, offering an intimate look at the life and legacy of Mexican-American artist Selena. The film was awarded at the Sundance Film Festival earlier this year and was acquired by Netflix, who has recently announced its November release. Amazon MGM Studios has picked up Man on the Run, another Polygram Entertainment documentary exploring Paul McCartney's creative rebirth after the Beatles' breakup. Man on the Run will be released in select theaters and then hit Prime Video globally in February next year.
It will coincide with tour dates across North America this fall, as well as the release of his book, Wings: The Story of a Band on the Run. I've seen it, and it's special, thoughtful, dramatic, and emotional. The last film I'll mention is Song Sang Blue from Focus Features. It stars Hugh Jackman and Kate Hudson as the Neil Diamond tribute band, Lightning and the Thunder. The film features performances from Neil Diamond's iconic songwriting catalog and opens in U.S. theaters on Christmas Day. I'm not exaggerating when I say I could go on and on about many more of our other artists' stellar achievements and projects, but I'd like to shift gears and speak a bit about our strategic advances, starting with our work with partners to develop commercial and creative opportunities for our artists as well as their fans.
First, I'm pleased to report that we have successfully concluded our third major Streaming 2.0 agreement, this one with YouTube, covering both recorded music and music publishing. The agreement includes all aspects of YouTube's various music services and platforms, embodies our artist-centric principles, and drives greater monetization for artists and songwriters. As part of our new YouTube deal, we've secured really important guardrails and protection for our artists and writers around gen AI content. This brings me to my second topic. We're seeing significant creative and commercial opportunities in gen AI technology, which is why UMG is playing a pioneering role in fostering its enormous potential in music. Our foundational belief is that artists, songwriters, music companies, and technology companies all working together will create a healthy and thriving commercial AI ecosystem in which all of us, including fans, can flourish.
For several years now, we've been driving initiatives with our partners to put artists at the center of the conversation around gen AI. We've struck artist-centric agreements, establishing foundations and parameters for innovation, innovative new products that will unlock the power of this revolutionary technology. Both creatively and commercially, our portfolio of AI partnerships continues to expand. You will have seen, I hope, yesterday's announcement that we've reached an industry-first strategic agreement with Udio, under which the company has settled copyright infringement litigation and will collaborate on an innovative new commercial music consumption interaction and hyper-personalization streaming product. The new platform, which is expected to launch in 2026, will be powered by cutting-edge generative AI technology that will be ethically trained on authorized and licensed music and will provide further revenue opportunities for artists and songwriters and UMG.
The new subscription service will transform the user engagement experience, creating a licensed and protected environment to customize, stream, and share music responsibly on the Udio platform. We also entered into an agreement and then a strategic alliance with Stability AI to co-develop professional AI music creation tools for creators of video, images, and now music. The purposes of this agreement are to provide our artists and labels with an opportunity for direct feedback into the construction of a professional studio music product that uses AI to generate music ideas and demos. As we've said all along, artists should be at the center of the AI conversation, and this agreement aligns closely with that objective. These advancements are made with both global and regional partners.
For example, just last month, Universal Music Japan announced an agreement with KDDI, a leading Japanese telecommunications company, that will establish a collaboration to use gen AI to develop new music experiences for fans and artists in that really important market. Even as we lead the way forward on creating commercial and creating opportunities with our new partners, we're also working closely with established partners on the AI front, which includes making sure that the safeguards are put in place to protect them and their work. Spotify recently announced critical steps they're taking to advance our artist-centric initiatives as they relate to AI. We look forward to the products that will be introduced through this partnership.
As I said, at the time of their announcement, it's essential that we work with strategic partners such as Spotify to enable gen AI products with a thriving commercial landscape in which artists, songwriters, fans, music companies, and the technology companies can all flourish, as I've said. As we strike agreements with other companies, we will only consider AI products based on models that are trained responsibly. We're in discussions with numerous other like-minded companies whose products provide accurate attributes and tools which empower and compensate artists' products, both that protect music and enhance its monetization and the entire experience. Ensuring safeguards is also the reason we've partnered with SoundLabs, a company led by Stanford scientists. SoundLabs deploys groundbreaking neural fingerprinting technologies for detecting copyright infringement in music, including in AI-generated works.
Based on our experience with our AI partners and discussions underway with possible future partners, we can confidently say that AI has the potential to deliver creative tools that will connect our artists with their fans in groundbreaking ways and on a scale that we've never encountered. Further, I strongly believe that Agentic AI will dynamically employ complex reasoning and adaptation. It has the power to revolutionize the manner in which fans interact with and discover music. Imagine interacting with your favorite music through a sophisticated, highly personalized chatbot. We envisage that exciting possibility on the horizon. We see the bottom line like this. As we successfully navigate the challenges and seize the opportunities presented by new AI products and others yet to come, we will be creating new and significant sources of future revenue for UMG and our entire ecosystem: artists and songwriters.
Now, I'd like to move on to another area in which we've recently made meaningful progress, and that is the expansion of our presence in established and high-potential markets. In Japan, we recently increased the majority stake we bought earlier this year in Asketch, the Japanese label and artist management business, by acquiring from KDDI its minority stake in the company. In August, we entered into a strategic partnership with Maddock Films, one of India's most prolific Hindi film production studios and its newly formed music label, Maddock Music. Under this partnership. Universal Music India is now Maddock Music's global strategic partner for future film tracks, another business and other businesses and product offerings. The partnership deepens our presence in domestic film music, which is the largest music category in India. In Vietnam, Virgin Music Group formed a partnership with the Metub Company, Vietnam's leading digital entertainment and creative company.
This innovative venture will focus on signing and servicing local talent and independent labels to help them grow their music both domestically and internationally. In Ghana, for example, Virgin Music Group took another step in its ongoing mission to invest in Africa's music and creative scene by announcing a global distribution partnership with MyPro, one of Ghana's longest-serving creative media platforms. I'd also like to briefly mention a significant development for our business in China. Universal Music Greater China announced the appointment of Zhang Yadong, one of the most iconic producers in the Chinese music industry, to the role of Chief Music Advisor at Universal Music China. Widely recognized as a visionary whose work has defined the sound of Mandarin pop for more than three decades, he's going to work along with UMG's worldwide infrastructure to introduce the next generation of Chinese artists to international audiences.
We're extremely excited and committed about the moves that we've made in China and will be investing and are investing in next-generation local talent. I'd like to close with this: the third quarter, whilst obviously just a snapshot, marked another great quarter where we delivered strong financial growth, drove exceptional success for our artists and songwriters, shaped the future direction of our company with groundbreaking announcements, and continued to expand our global footprint. The consistency of our performance, combined with the continued execution of the strategic plan, demonstrates that with UMG's entrepreneurial energy, we'll continue to bring artistry and creativity of the world's most brilliant and beloved music makers that we have to every corner of the globe, and at the same time, leaning into distribution and business models for the future in new and innovative ways. Thank you, and I'd like to hand over to Matt.
Thank you, Lucian.
I'm pleased to have joined a great business and team at such an exciting and promising time, and I'm equally pleased to be presenting our results for the first time this quarter. Q3 was another quarter of solid revenue and adjusted EBITDA growth at UMG as we continue to execute the strategy the company laid out a year ago at Capital Markets Day. On top of the continued strong, predictable subscription growth we saw once again this quarter, our results also display our healthy breadth with multiple drivers of long-term growth, as our strong physical and merchandising revenues reflect the opportunity to directly serve superfans. All of the growth figures I will discuss today will be in constant currency.
UMG's revenue for the quarter of EUR 3.02 billion grew 10.2% year-over-year, while adjusted EBITDA of EUR 664 million grew 11.6%, with margin expanding 40 basis points to 22.0%. Recorded music revenue grew 8.3% in the quarter, with strong performances from the K-pop group Stray Kids, Mrs. Green Apple, Taylor Swift, Sabrina Carpenter, and Morgan Wallen, among many others. Within recorded music, our well-diversified subscription revenue grew 8.7% for the quarter. This result was driven largely by growth in subscribers. Within the top 10 markets, there was double-digit subscription revenue growth in China, Brazil, and Mexico, and high single-digit growth in the U.S. We saw double-digit or high single-digit revenue growth from four of our top five DSP partners, with healthy subscriber growth from a range of partners across both established and high-potential markets and the monetization benefits of our Streaming 2.0 initiatives soon to follow.
We remain encouraged by the trajectory of the subscription business. Turning to ad-supported streaming, revenue was largely flat against the prior year quarter. Growth continues to be challenged by the shift to short-form consumption, which is not yet adequately monetized. We plan to continue addressing this throughout deal negotiations. Physical revenue was better than anticipated, up 23%, driven by strength in Japan, led by Mrs. Green Apple and Fujii Kaze, as well as initial shipments of Taylor Swift's latest album, The Life of a Showgirl. While physical revenue performance may be less predictable and have more seasonality than subscription revenue, it's important to note that over a longer time horizon, this is a growing business that reflects increasing demand by fans to own physical products, connecting them with the artists they love.
Moving on to music publishing, revenue grew 13.6% in the quarter, with digital revenue growing 17%, driven by the strength of streaming and subscription, particularly in the U.S., U.K., and China. Performance income also grew 17%. Growth in both digital and performance revenue benefited from the inclusion of Kord and a major television studio business win in this year's results. In merchandising and other, revenue increased 15%, driven by the strength in the U.S. and U.K. This was a result of very healthy growth in touring merch revenue, which was partially offset by a decline in D2C sales due to the timing of product releases. Our touring merch revenue strength this quarter was driven by The Weeknd, Morgan Wallen, Lady Gaga, and Nine Inch Nails, amongst others. Now, let me turn to adjusted EBITDA.
As I mentioned at the beginning of my remarks, adjusted EBITDA of EUR 664 million grew 12%, and adjusted EBITDA margin expanded by 40 basis points to 22.0%, helped by revenue growth, operating leverage, and cost savings from phase two of our previously announced realignment plan. This was partially offset by the negative margin impact of the revenue mix, in particular the strong physical sales and touring merch growth. We're very pleased with our results this quarter and excited by the momentum and opportunities that lie ahead. With improved Streaming 2.0 monetization just ahead of us and fans looking to engage with their favorite artists in new, immersive ways, UMG is at the center of a healthy and growing industry. Thank you. Lucian, Boyd, Michael, and I will now take your questions. Operator, please open the line for Q&A.
Thank you. We will now begin the Q&A session.
As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to remove your question, that's star followed by two. For today, we ask that you please limit yourselves to two questions. Thank you. Our first question for today comes from Peter Supino of Wolfe Research. Your line is now open. Please go ahead.
Hi. Good afternoon, Matt. Welcome to work with you again. We're going to start by asking you for your perspective on the physical business. Your comment stood out that you see it as potentially a growth business, and certainly that's not the consensus among investors. I wonder if you could share any figures or thoughts that would help us extend that concept in our models. As a second question, if you could just talk about the investment section of the cash flow statement.
It's been elevated for the last couple of years, and we have some commentary from your Capital Markets Day that it will moderate in the next couple of years. Is that a good thing or a bad thing? Do you see that investment spend as high ROI or not, more maintenance-oriented? Thank you.
Let me start with the second question there around the investment section. Do I think that investments in the business are a good or bad thing? They are 100% a good thing. We have the business we have today because of the investments that the company has made across many, many years now, and the investments we're making are consistent with the strategy that we laid out, whether that's continuing to support our existing roster of artists or continuing to build out where we expand. Lucian spoke about our geographic expansion.
We went into detail at Capital Markets Day about those plans, and you've seen us execute against that since then. Investments will continue to be an important part of the business as we execute on the strategy going forward, and I think you'll see that continue to be an important use of cash. As we've discussed in the past, it is the first part of our capital allocation strategy, that investment in the business. In terms of perspective on the physical business, incredibly proud of the results that we've seen from our artists this quarter with the strength there. As you look at the fourth quarter, certainly we expect to see good results.
I would remind you that very strong comps from the fourth quarter in Japan a year ago and the prior year that we'll be coming up against, but that demonstrates that this continues to be a growing part of the business. You ask if it's a good thing or not, it absolutely is a good thing. What our fans are showing us is when they have opportunities to engage in many different ways with our artists, they want to do that, and they will spend money doing that. What the team has done is find ways to meet that demand that is inherently out there. Yes, you should expect to see continued growth in the physical business. Boyd, would you like to?
Yeah, thanks, Matt. Maybe just to add a little bit about what you were inferring in the question. I mean, there's two pieces to this.
There's the old-fashioned format transformation that's going on. The reality is the CD in most of the markets in the world is very much a declining format, but we're talking about something really quite different here. This business is morphing into how we connect the fan together with the artist through a physical product. The two most significant examples of that so far is the growth in vinyl and the collectible aspect of that. As we've said before, 50% of vinyl that is sold is sold to people who do not own record players. This is about a collectible. Clearly, the growth in merchandise is just another aspect of all of this connecting the fan together with the artist. It's that aspect that is growing. It's not a format evolution of the audio format in itself.
A very significant part of this is now coming through us directly, connecting the fan with the artist through, say, calling it a D2C business or a D2 fan business, where around that new release of these album products, we're seeing somewhere in the region of two-thirds to 75% of the total volume actually coming through our own managed stores in relation to this product. We're having a direct relationship with the fan. That's much more about the evolution of this going rather than it just being a tired old format transformation. I'd also add that it's the fans telling us that the belief that we have in the superfan and how we're able to provide products and services, both physically as well as what they look like digitally in the future. They're telling us about behavior and about connection.
Thank you.
Our next question comes from Jason Bazinet of Citigroup. Your line is now open. Please go ahead.
I just had one question about superfan. It seems like going back to your Capital Markets Day that you guys are maybe more optimistic about this opportunity than some of the other labels. I didn't know if that was a function of a different vision that you have about what superfan is going to be or if it's a function of maybe different agreements that you have with your artists that may allow you to participate in sort of superfan economics in a way that might be different than other record labels. Thanks.
Jason, thank you for your question. If I can infer that in part what you're asking about. Goes to super premium tiers on subscription services.
I think that there's a component of it that is simply about the opportunity to monetize more valuable fans. As we've stated before, if you look at the digital download era, the top quartile of consumers were spending three times the average. The propensity to spend is there. We think about this in terms of direct-to-consumer. Matt and Boyd talked about vinyl and what that means in terms of monetizing superfandom. There are different components to the equation that we have strong conviction about that we have invested directly in. With respect to super premium tiers, we're engaged with all of our partners talking about the opportunity. There is technology change that's going to promote opportunities, I think, around innovation to introduce more sophisticated, higher-value offers to consumers over time. We're engaged in those discussions.
We were encouraged to see executives at some of the platforms like Spotify talk about their excitement, their desire to get this right. Seeing great demand for different superfan segments. It's not just Universal Music Group seeing that. We can't speak about the perception that other music companies have regarding the opportunity. We've made our perspective clear. I think it's important to keep pointing out that one of the world's top five music subscription platforms, Tencent Music in China, has over the course of the last year plus empirically demonstrated that a super VIP product is characterized at priced at five times the average price of subscription in that market, a market regarded as a challenging market to monetize music consumption. In that market, they've gained very, very significant traction. They recently reported 15 million SVIP subs, 12% of their subscriber base, growing at 50% year-over-year.
They said that resulted in a doubling of their revenue growth versus the rate of increase of subscriber growth in that reporting period. We're seeing that. In a market where you've got some innovation leadership, there's clear demonstration of the opportunity. We believe industrial logic prevails here, where research clearly demonstrates that at least 20% of the subscriber base is the target market for a super premium offer. You see a focus on innovation. As Lucian said, we think that AI will be a significant component of the focus on innovation in terms of new digital products in the future. We think this is going to play out over time. That's the viewpoint that we have. We can't account for the viewpoint of other music companies.
Thank you. Our next question comes from Ed Young of Morgan Stanley. Your line is now open. Please go ahead.
Thank you very much.
I'd love to hear a little bit more color on the AI partnerships, particularly if it's launching in 2060, sound confident that you'll be able to sort of solve the artist-centric monetization challenge where requests are generic or by genre or style versus then being by artist name. I'd love to hear a little bit more on that. Secondly, related, you've spoken often as a management team about developing new business models and diversifying revenue streams. Do you think, or do you see Agentic AI companies as likely to join the distribution landscape? Thanks.
Thank you for your question, Ed. I'm assuming that the first question relates to recent announcements and in particular what we've announced with Udio.
In terms of artist-centricity, what's significant there is that the product vision is to focus on a superfan experience for customization, deep engagement, hyper-personalization of the experience for fans interacting through AI technology with the artists that they love. If you think about this in terms of where the marketplace is, from our perspective, the economics of the music ecosystem are really driven by fans' desire to engage with artists and by fans' desire to participate in music culture. We're envisioning products that deepen both of those things, that enable deeper engagement, that is very artist-centric, and that enable the fans to participate in music culture. I hope I'm answering the thrust of your question. Yes, the vision regarding the products that will be enabled by initiatives that we're supporting, and specifically the one that we announced with Udio, will be very artist-centric.
In terms of the question regarding Agentic and new music models, we're very excited about what we see in terms of the evolution of the technology and as it relates to consumer interest. We recently did some research in the U.S. market. In that research, the readout was 50% of music consumers are very interested in AI in relationship to the music. That's in relationship to their music experience. The thing that ranks the lowest is artist simulation, what we would call fake artists. You're seeing there's a lack of traction around that other than the occasional novelty phenomenon that may capture some headlines. That's not what fans are interested in. What fans say that they're interested in is AI application that makes their music service better, that improves discovery, that enables them to better organize playlists, to have a better recommendation system against their express preference.
The thing with respect to Agentic AI that we see as a significant potential point of innovation, imagine a perfect seamless blending of lean forward and lean back, where the interface that you have for music consumption is in a position to understand not just your music preferences, but the films and television shows that you watch, the books that you read, the countries you travel to, the conversations that you're engaged in, really, really sophisticated management of recommendation, and also an understanding of listening context, drive time versus dinner party versus workout. We believe that the application of technology to really enhance the consumer experience in relationship to music appreciation, music discovery, and contextual listening suggests a possibility that makes music all the more valuable, that increases the connection between artists and fans. All of that we see as being very virtuous.
Thank you.
Our next question comes from Adrien de Saint Hilaire of Bank of America. Your line is now open. Please go ahead.
Thank you very much. Good afternoon, everyone. I've got a couple of questions, if that's okay. Given the price increases that were recently announced by Spotify and presumably your new wholesale deal kicking in next year with that platform, do you have enough visibility today to see subscription growth accelerate into 2026? Second question, I'm really sorry if I've missed this in your prepared remarks, but are there any additional details that you can provide on timing for your U.S. listing? Thank you.
Thank you, Adrien. Regarding the U.S. listing, as you know, we announced in July that we had confidentially filed with the SEC. We're in the SEC review process right now. Obviously, the U.S. government shutdown makes everything there a little bit more complicated.
We're working against that backdrop and we'll have an update to market when we have additional news and it's appropriate to do so. Look forward to doing that at the right time. In terms of the price increases on. Spotify, as you mentioned, glad to see those come through. Michael, you're closer to that than anyone.
Yeah, happy to elaborate there, Matt. With respect to it, and looking into your question, to make sure I'm covering the gist of what you're interested in, the price increase impacts and the outlook for 2026. Of course, we don't provide quarterly or even annual guidance on metrics like that. In the fourth quarter, we're going to have a tough comp against some pricing changes, but we'll also see some small benefit from the Spotify price increases that were announced earlier this year. Those things pretty much trade off.
We do foresee that in 2026, we are going to start to see the pricing benefits from our Streaming 2.0 agreements. Other than that, I would simply point to the guidance that we provided on Capital Markets Day a year ago with respect to 8%- 10% CAGR in the midterm. That's the way you should really be thinking about the impact of the price increases as they play out over time.
Thank you. Our next question comes from Silvia Cuneo of Deutsche Bank. Your line is now open. Please go ahead.
Thanks. Good evening, everyone. A couple of questions from my side. The first one regarding AI, you announced two strategic agreements today. Could you elaborate on your expectations for future similar partnerships and how meaningful these could be in terms of financial benefits compared to, for example, social apps licensing?
Specifically concerning Udio, could you help us understand the mechanics of these agreements, particularly whether there are variable revenue elements tied to Udio's platform growth? Secondly, quickly, regarding your cost initiatives, could you please remind us of the key cost areas that phase two of your strategic redesign is addressing and in comparison, especially to phase one? Thanks.
I'd just like to frame some of the conversation before maybe Michael or Matt actually add some of the detail. Sequence is critical in all of this. The power of possibility of what the technology is providing all of these businesses, and you're talking about AI and Udio and all the other companies that we anticipate or we will make deals with. I think it's important to say this.
I have exactly the same feeling about this progress that I did 15 or 16 years ago when we were looking at what was the transaction business and the really early fledgling, what was perceived at the time of the disruption of the album. Into something called ad-funded streaming. Then ad-funded streaming became premium subscription. We are in a sequence of how the technology and how the platforms with us as a company and as an industry integrate and learn together how to actually create products and to provide what artists want and consumers and fans want in an organized, monetized way. We are at the front, at the vanguard of a new era.
It's one of the reasons why we're positive, we're confident, and why we continue to invest right across the board in all aspects of what we anticipate will be the growth and is the growth, not only in the company but in the marketplace. On that, maybe you'd like to have some more of the actual functional details of what the question was.
That's a great strategic framing, Lucian. Within the question regarding the new agreements and our outlook, let me start out at a more general level and then talk specifically about the two new agreements that we've announced in the last 24 hours. As Lucian said, we've clearly established our position in this sector as being the industry leader, developing new business models, supporting new products, numerous agreements that we previously announced to enable entrepreneurs working with established platforms. That goes back to 2023.
The most recent set of announcements and initiatives is building on that foundation of industry leadership. You might have noted that Lucian sounded a call to action where we started to mobilize to prepare to be able to effectively execute and implement new deals and talked about the scope of ambition being up to a dozen different conversations in which we're engaged, where we're very excited about the opportunity for innovation. With respect to commercial opportunity, as Lucian said, we believe the commercial opportunity is potentially very significant. These new products and services could constitute an important source of incremental additional new future revenue for artists and songwriters. Now, we're just preparing the way for market entry of these new products. Some of the things we've announced are 2026 in terms of scheduling scope, product launches.
It's too soon to provide commentary on more specific in terms of opportunity scope, but we do believe this is potentially significant. In terms of product scope, the recent announcements, I think, provide a very clear indication of what we're thinking about in terms of new AI products targeting the superfan, deepening the relationship between artists and fans, enabling fans to more deeply participate in music culture, and providing tools for our artists that are being responsibly developed to enable them to narrow the gap between imagination and creation of content, to broaden the palette of options they have in terms of artistic tools to be able to create content. Specific to Udio, let me just elaborate on Lucian's comments.
We entered into an industry-first strategic agreement where we've settled copyright and free legislation, and we're collaborating on this innovative new product suite, new commercial music consumption, interaction, hyper-personalization, sophisticated curation. Those are the elements that are going to define this product suite. The new platform plan is to launch in 2026. It's going to be powered by Udio's cutting-edge generative AI technology, ethically trained, responsibly trained, and authorized licensed music content. All those things are very critical and obviously to the benefit of our artists, songwriters, and to rights holders. The new service we see as potentially really transforming the user engagement experience. Within a walled garden, enabling this deep interaction with the content. I just want to briefly highlight, in terms of artist tools, the announcement with Stability AI, this is really a groundbreaking product development collaboration that we're announcing with Stability.
Stability is organizing their effort to create new tools for professionals in the category of gaming with Electronic Arts, in terms of marketing advertising with WPP, in terms of film production with their investor and board member, James Cameron. UMG joins that group of significant players in their categories as the leader in the music vertical. That puts us in a position to directly engage in a very artist-centric way the conversation with our creative community around the evolution of these tools and puts us in a position where we're going to be able to provide the best opportunity for new creative potential out of AI, responsibly trained for the ranks of artists and songwriters that we work with. This is happening. It's on. We're on.
Silvia, on the cost question you had, obviously, as you said, we're in the second phase of the program.
A lot of the activity that you've seen to date has been successful in both U.S. and U.K. platforms with Boyd. You've lived this program for the past couple of years, so you've provided a little more detail. Maybe just take a step back here to level for everyone. I mean, this strategic alignment, which we announced, I guess, a couple of years ago now, it's a proactive initiative. It's not reactive. It's a proactive initiative. It's designed to achieve efficiencies in targeted cost areas, but at the same time, providing our labels with capabilities to deepen, basically, to deepen artist connections in new kind of areas of commerce, experiential, and the like. We're focused very much on designing the label of the future, providing our labels with enhanced access to highest performing internal teams and access to additional resources.
Lucian mentioned in his opening comments, actually, about the success that we're seeing in the U.S. and the U.K., and there's little doubt that this is as a result of the strategic alignment initiative that we're pursuing.
Thank you. Our next question comes from Adam Berlin of UBS. Your line is now open. Please go ahead.
Thank you very much. I think I just got one question left, really, which is, you mentioned that Q3 physical benefited from early shipments of Taylor Swift's The Life of a Showgirl. Can you talk about how much of the revenue that that album will generate has already been captured in Q3, and is there still a lot more to come in Q4? Thanks.
Hey, Adam, thanks for the question.
Yes, certainly, we did see some benefit, especially with getting the initial volume out to retail stores ahead of the October 3rd launch of the album. We've never broken out results by a particular artist or a particular piece of work. Not going to do that. Obviously, the initial shipments were significant, as Boyd said in his comments around our fan business. A significant number of vinyl sales is now in our D2C business, not going through retailers that we work with, and so those would have been on a different timeline. The vast, vast majority of the benefit from the physical sales of the album will be in fourth quarter, but we certainly did see some of the uplift. The 23% growth in physical year-over-year was due to those initial shipments combined with the strength we saw in Japan that I mentioned.
We see this benefit not just related to one artist. Our fans want to connect with all of our artists in geographies around the world.
Thank you. Our next question comes from Joe Thomas of HSBC. Your line is now open. Please go ahead.
Hello, everyone. A couple of questions, please, on my side. Firstly, you were talking about the, I think you were talking about a new deal with YouTube, and that you've got protections across the whole gamut of what they provide. I'm just wondering if you could tie that into your comments on streaming and the difficulty of monetizing short-form video. Have you reached some sort of solution there, and what could we expect to come in the future? And then the second question is back to the cost savings. I realize there's costs coming out.
There's also costs, sounds like they're going in as you invest in the capability of the business. What is the net cost saving over the quarter, please? Thank you.
Joe, thank you for your question. In terms of the YouTube deal and the benefits of the new deal, the scope of it, and then also how it relates to disruption of short-form and monetization of that supported. Yeah, we were very excited that we had an opportunity to complete this agreement with an important strategic partner. As Lucian said, our third Streaming 2.0 deal. We have a long-standing, very productive partnership with YouTube. With respect to the components of the deals related to monetization, obviously, every deal-making opportunity, we consider the unique attributes of potential licensing circumstances or category product plans, business strategy. That certainly applies to a major and uniquely diversified platform like YouTube.
In talking about the new partnership in terms of Streaming 2.0 deal, we certainly are advancing important components of our core objectives here, taking into account these unique and multifaceted components of their platform and their foundational principles that we're carrying across in all of our negotiations with our partners. As Lucian said, we secured key protections in the agreement on AI, which is a critical achievement in promoting the interest of our artists on their platform. With respect to monetization of short-form, improved monetization of short-form video is certainly an objective that we're actively advancing across multiple deal renewal discussions, including this one. Beyond that, I'm not going to comment on a specific component of a deal as relates to an individual category.
Our efforts to work on better monetization of short format to address the disruption that short format has brought to the ad-supported sector is a broad-based effort across multiple different deal renewal conversations. I'd also add that we look at the rights as an overall category and our strategic relationship and partnership with YouTube as an overall strategic partner on the music subscription, on short-form, on long-form video, and obviously all the work that we're doing on AI. It's an entire category with one strategic partner. As the marketplace and as our products, their products, the technology grows and develops, it all blends and all sets together to actually create value for everybody. With respect to the cost savings question, Joe, we don't really view it through the lens of how you think about the net cost savings.
We continue to invest in the business, whether or not we have a cost savings plan in place at a particular point in time. When you think about the margin expansion for the quarter, up 40 basis points again this quarter, you see the benefit of those investments driving the continued revenue growth, but also the operating leverage that then delivers. That, again, supplemented by the cost program. We continue to look for ways to run the business more efficiently. As Boyd discussed, continuing to evolve the business as the industry evolves and what we do evolves so that we have the resources to continue to invest and provide the support to the business that we have. I think you've seen the success of that.
Thank you. Our final question for today comes from Julien Roch of Barclays. The line is now open. Please go ahead.
Yes. Good evening, everybody.
Thank you for taking my question. Coming back on the Udio deal you've just signed, could we have some indication of the payment mechanism? Will you get a share of their revenue? Will you get micro-payments every time a song is created? Some color on how the money flow will work without giving number detail. That's the first question. Coming back on the deal you signed with Spotify, you gave one concrete example of what those products could be. Lucian did early on. I wonder whether we could get another couple of concrete examples of what those new AI products can be. Thank you.
Julien, thank you for your questions. With respect to detail on the business models, you will probably not be shocked to hear that. I can't go into granular detail.
I will say this, that obviously, the advent of AI with respect to new consumer products and new service categories on platforms obviously introduces an opportunity for us to be creative and innovative in terms of the evolution of the business model and accounting for all aspects of the value that our content and artists bring to these platforms in terms of the establishment of the model's capability and in terms of the products themselves. We're obviously looking at all the components of the consumer experience and the value created and our participation in that value. Rest assured that we're working thoughtfully with new partners and certainly with Udio and reaching the agreement with them to be able to develop a sophisticated model that is going to deliver the value to our artists and songwriters and the rights holders that it should.
In terms of more specific product concepts with respect to how we envision the future, I think Lucian provided a great general sense of our outlook. I would just encourage you to look at the specifics of the Udio announcement and the comments that have been made by their CEO and the comments that we've made. We now have a specific product development plan that has been set in motion by a new agreement for a service that's going to be launched next year. I think that what's being described there is the attributes of this customization, hyper-personalization, engagement with the artist content, and a superfan experience in a walled garden on the platform gives you a good starting point for envisioning what the product scope is going to be. I think it's a good example of the kind of thing that's possible.
We talked a little bit about on the horizon, things like Agentic AI, and obviously, that is to be constructed and developed in new conversations. It's premature to go beyond a statement of kind of aspiration and outlook there.
Thank you. That concludes today's conference call. Thank you all for joining. You may now disconnect your lines. Good.