Everyone, I'm Ben Black. I co-head the Internet franchise here at DB. This morning we're extremely excited to welcome back Warner Music to the MIT conference. Today we have Bryan Castellani. Thank you so much for joining.
Thanks for having me.
Big picture question here. You know, you've been in the role for about six months as it stands. And I guess, you know, a good way to sort of kick things off would be, can you give us a sense of what attracted you to Warner in the first place?
Yeah. You know, I like to think about these things as, like, the space, the company, the team. I'd been at Disney almost three decades, and so around the media and entertainment space. And always admired the music space. You know, music, I think some would say, was the canary in the coal mine on the transition from traditional to digital. And really got through the other side, healthy too. And so from the space, I was looking at it as, hey, music, it's fun, it's ubiquitous, it's everywhere, easy to love. As an industry, the macro setup was attractive. And then a company like Warner, you know, well-known, iconic content, IP music. You know, I grew up with the Van Halens and the AC/DCs. And so that was easy to love.
And then on the team side, you know, Robert, I felt like had a really differentiated vision, and was building a team and really looking to evolve and transform Warner. And so for me, even though I was at Disney for all that time, I had probably over a dozen jobs, roles, different leaders. I liked change. And so, to join Robert and the team in that evolution was just too good to pass up. And I'm thrilled to be there. And it's been a lot of fun. And so that was the calculus going in.
Awesome. Well, you're now six months in, as I said. So it'd be great to get the half-year report. So what surprised you to the upside? You know, what was perhaps more of a challenge than you previously expected?
About a half-year, huh? Okay. All right. Again, I think when you take a step back and you look at the industry, and just the, to the upside, you know, the macro drivers, you know, whether pricing and sub growth and those underlying trends continue at pace. And there is a lot of headroom still. I think we were all, favorably impressed with how well the price increases, translated. And it's, you know, on the, company side, you know, we have really established, you know, a new strategy, a new leadership team. And the integration of whether cultures, teams, that has been very easy and natural and welcome. And so I think, you know, to the upside, the pleasant surprises have been just the continued healthiness and, I would say, constructiveness across the industry.
And then at a company level, just the integration of cultures and momentum inside the company.
All right. All right. Well, you know, if we look back to 2023, it was a bit of a challenging year. You had the softer slate to begin the year. You had a leadership transition. You came in as.
Yeah.
A, right? You know.
Yeah.
You know, a softer macro environment. But it seems like you've turned the corner, right? Slate humming along, price step-ups that you mentioned seemingly well digested. And now the focus seems to be shifting to technological investment. So maybe just give us a state of the state right now in terms of, you know, why you're bullish on the prospects from here on out going forward.
Yeah. Yeah. And I wasn't there. But I think the lessons of the first half last year have, you know, galvanized the organization in terms of just being more intentional and consistent about the slate and the content. And we finished, you know, as articulated, the back half of last year strong. We started this year strong. Number of artists in the top 10, you know, in the top 200 charts, whether Zach Bryan, Megan Thee Stallion last month, Jack Harlow. So continuing to do well there. And then, you know, I said, Robert has really articulated a strategy of, you know, grow engagement with music, increase the value of music, and evolve how we work. And, you know, with that, with the industry healthiness, really with clarity of strategic priorities, and I feel like we're being proactive within that.
Our restructuring plan speaks to that, you know, from a position of strength, we're really proactive here trying to set the company up for success. Robert has spoken about, like, this year being the first of the next 10.
Mm-hmm.
That's what gives me bullishness.
All right. Well, there's a new topic that's emerging in the conversation. Obviously, sort of, you know, last week there was, you know, the announcement around your interest in Believe. So could you perhaps sort of talk us through your thinking here, what's the strategic rationale, and why do you think it fits so well into your portfolio?
Yeah. I guess there's been a little bit of news, huh?
Yeah. A little.
And so I'll say a few things. Let me first say that, you know, our respect and admiration for Denis and what he and the team built is tremendous. I mean, obviously, that's what catalyzes our interest. Two, in terms of the strategic rationale, when you look at Believe and you look at Warner, both in terms of geographic footprint, and complementary in terms of they being strong in Europe and Asia and emerging markets and our growing scale there. And then also from an infrastructure and technology standpoint, that, you know, I'm a big believer in, you know, can you be better together and and grow faster. And when you think about, trying to offer a broader range of services to artists and labels, there's everything from the traditional artist-licensed deal to do-it-yourself independent artist or label. And then there's there's flavors and colors in between.
And our being able to do that better together, we think, will offer greater growth, you know, more value for artists, songwriters, and labels. And so that's the strategic rationale. The third, I would say, that our interest indicated was on publicly available information. And so I think some of what you're seeing in terms of playout in the press is our going public with that to really get at a deeper level of due diligence to determine, you know, if how we formalize our indication. And so those are the three things I would say. Maybe just a bonus one, we've always shown ourselves to be, I think, good stewards of capital and demonstrate fiscal discipline. We've had a history and a track record of improved leverage as well as lower net debt.
and that anything we do has to fit that lens of how does it fit with the fiscal discipline and really being able to create value together, that will be healthy for both businesses and both sets of shareholders.
All right. Fantastic. Moving to the fundamentals of your business as it stands. So on the recorded music side, I think investors appreciate, you know, the share gains, you know, the improving underlying trends within subscription streaming. I guess the question is, what's next? And, you know, I know you've spoken about this, you know, a stronger slate towards the back half of the year. But, you know, what gives you the confidence that you can maintain your current share and even grow it in the back half? You know, Taylor Swift does have a new album coming out, I'm sure you're aware.
So, yes. So what gives us greater conference confidence is that, I'm at a conference, so conference is in my mind. But what gives us greater confidence is our just intentionality about being able to invest and our, you know, freeing up funds to do that and grow our A&R and marketing investment. And also into things that will serve the music like technology and using technology as a force multiplier and something that can give us operating leverage. And so, you know, as we talked about, the first half of last year also just giving greater focus to being more consistent about that investment so that we can be more consistent about the release slate. As well as we have a great and deep catalog to mine that also provides continuity and consistency. And so putting all those things together gives us greater confidence.
Okay. And then, you know, if we look past the near-term share gain story and those gyrations, I guess, what's a good way to frame the sort of growth algorithm for, you know, recorded music streaming? You know, the P versus Q, you know, you know, how fast is the industry growing subscribers? You know, how should we think about, you know, pricing longer term?
Yeah. If only it were as simple as P x Q, right? There's many versions of P. There's many versions of Q. And, you know, there's also share. So whether it's P x Q x F. But on the pricing side, we've talked a lot about the opportunities for price optimization. And again, that can be, you know, continued increases on individual and bundle plans, what I would call is kind of the rack rate on the retail side. But, there's also ways to be more sophisticated and tier or segment offerings. On the Q side, certainly sub growth is healthy and, has headroom around the world. I think global penetration is about 12%. By the end of the decade, that's supposed to go to 20%. And that, you know, when you look at, developed markets, it's maybe 40%-60%.
In emerging markets, I think it's more like going from mid-singles to low double-digit amounts. So emerging markets are likely to see more sub growth, whereas developed markets are more likely to see price growth. Now, having said that, that's on, like, the retail component of it. But within that, and we're on the wholesale side, right? So we don't control the frontline price change or retail. But our wholesale relationships can inform that. And when you think about the royalty models evolving, well, let me say first, like, on the retail side, the P and the Q grow in the pie. And then on the wholesale side, how do royalty models and what we can offer to DSPs help us participate better within the pie? And so if we can get both of those things growing, I think those are positives.
All right. And then, I mean, sticking on sort of the pricing theme here, we had pretty much most of your major DSPs raise pricing last year. I mean, I guess, how do you feel that those were digested? Can we do a quick postmortem on those? And then, you know, when should we expect the next round of increases? That's probably my next question. So what's a, like, an optimal scenario for you with regards to pricing? A price increase every year, every other year, some steady cadence? Is there something else that you're looking for?
Yeah. I don't know that we would say we think about it mechanically in terms of, you know, it just can roll and sequence. I think these recent price increases were absorbed well. And, again, using Spotify as an example, they've commented, I think, little to no churn and even exceeded subscriber growth, which speaks to the value proposition. And we're coming off a decade, right, with no price increases. And just a couple years ago, started at $1. And I think if, you know, music had inflated like other forms of entertainment, it's under-monetized underpriced relative to other forms. Like video would be closer to $20. And you're getting an incredible offering for that headline individual plan of $11. And so I think that, you know, the recent price increases went well. They set us and DSPs up well for future ones.
But I think they're, everybody needs to be pragmatic and thoughtful. Those take time to figure out, okay, how do you cadence? How do you sequence? And how do those percolate.
Right.
Through the ecosystem?
Yeah. I know leading up to the price increases, there's a, you know, we could sense a level of frustration that they weren't coming fast enough. And so a question that we've been getting from investors has been, all right, you as a label, so what's, you know, your appetite to perhaps feed a little bit on the economics of the incremental economics of price change to incentivize the DSPs to be more proactive in testing sort of, you know, pricing tiers or higher price?
Yeah. I'd be remiss to negotiate publicly. And so, but as Robert has said, like, every negotiation we go into, we wanna be holistic about it, and really find win-win relationships, win-win outcomes. I think he demonstrated that at YouTube. I think we have demonstrated that in our early deals here at Warner. And, you know, we're gonna be thoughtful about that with them so that we both can grow the ecosystem and participate better within it.
All right. All right. Good job not negotiating. Sure everyone's listening. But okay. Another sort of interesting topic here is artist-centric models. You know, last year, Deezer moved first. Spotify, you know, more recently. Are you satisfied with the changes that have been made, or do you feel like there's no more work to be done on those?
Yeah. Listen, I think it's really encouraging. And, you know, as I say, if you rewind two years ago, there was little discussion on price, and there was little discussion on artist-centric models. Here we are two years later, and we got through a round of price increase. Artist-centric models are starting to formulate. I think Spotify has commented on how they will, you know, reallocate roughly $200 million a year over the next five years to premium music. So I think we're at the beginnings of that. I think there will be more to come as, you know, people really think about how do we value premium music versus functional music or uploaded tracks that are, you know, raindrops or static or what have you. All streams are not created equal.
I think it's healthy that the industry is having that discussion around, okay, we know that the biggest artists drive the biggest spikes. And how should that be valued? You know, generally, you know, you think about advertising. You pay a higher CPM on certain contents, more premium than others. You think about cable TV, and distributors reward networks and content differently. And so I think that, you know, differential value will start to evolve as we evolve these royalty models.
Then if you look into the crystal ball and look much further out, you know, how do you think the distribution models need to change? What's a good outcome?
Yeah. I think that, you know, there's more I think they can do in terms of evolving the offering. You know, it has been a wonderful buffet of music you get within those plans. Are there opportunities for them to tier? Are there opportunities for them to upsell? Are there opportunities to better segment consumers? You know, there's a lot of talk about superfan, which I think is good because your superfan is like your 20/80 rule, that they are a super minority of maybe the users, but they're the ones that are driving the highest levels of engagement. You know, there's not, if you're a superfan, and the artist comes to town, you know, there's a live event. But outside of that, you know, there's merchandise. There's vinyl.
There's not a lot of ways as a superfan can really, you know, exploit their share of wallet . I think as we move forward on those distribution how we evolve distribution is, are there ways to better segment and monetize the engagement?
Interesting. All right. Not to bounce around, but, you know, AI is a big topic, transformational technology. And maybe could you highlight or unpack, you know, how it can be a sort of a meaningful opportunity for you guys relative to potentially being a threat as well? And so how do you balance those two?
Yeah. AI, you know, a lot of discussion around it. And, you know, Robert has articulated really three priorities or areas of focus there. One is the platforms 'cause that's where the engagement happens. Two are the AI engines, that you know those models are working with labels and artists in order to protect it and give artists a choice. And three are the legislative bodies because we need some level of consistency about protecting name, image, likeness, voice. And so I think the momentum and discussion around AI is super constructive. Perhaps hardened or encouraged or lessons of the Napster era and download and piracy and using this moment in time to work together to use technology, you know, as the creative tool that it can be. I like to say that technology is like the great enabler of supply and demand, right?
Like, it can explode supply, and it can improve on demand. We certainly have opportunities to use AI and technology in, you know, managing and improving upon supply. And at the same time, how can AI help better target consumers and make their listening experience more rewarding? So I think it's both a creative tool, but it needs to have the proper guardrails around it, so that everybody uses it in the right way.
All right. Now, last year, you struck a pretty interesting deal with TikTok. Now one of your peers is in a big public dispute. And, you know, I'm sure we can all speculate as to what the real grounds of that dispute are. But that's not the point of this question, really. It's about your agreement. So maybe if you look back at your agreement, what was really important for you, you know, economically, socially? What was really important for you in that deal? What was really important for TikTok? It'd be interesting to hear sort of how that shook out.
I listen. We've said a couple of our priorities are growing the engagement with music and increase the value. And, you know, our deal with TikTok, you know, that negotiation started over a year ago. Different time, different place, different context. We achieved both of those objectives. You know, these deals are not long term. They're not an end state. There's always progress to be made. We, you know, as I said, when we look to get fair value of the music, we wanna make sure our artists are rewarded and well-represented and that their content, you know, the platform, the quality of the platform, right? You wanna get fair value, and you want the quality of the platform and the experience, to be, you know, in recognition of that premium content. And so, we achieved those objectives. But as I say, these are not forever deals.
There's always progress to be made.
All right. And going back to the fallout, not you, but the UMG. But, you know, could it have an impact on you guys from either a competitive standpoint, maybe even from a financial standpoint? I mean, one thing folks are talking about is TikTok's Save to Music app functionality is now likely funneling more of your content, more of Sony's content, towards DSPs, which could have, you know, share implications in the near term.
Yeah. Just take the financial piece of that. Maybe I should have mentioned it as part of the other one is, you know, our economics and our artists are protected in our TikTok deal. You know, we hope that UMG and TikTok come to resolution in a good collaboration. That's healthy for the ecosystem. To the extent that, you know, there's greater prominence on TikTok like, greater prominence is a good thing. TikTok is a great marketing and promotion platform and tool. So whether that is prominence on or off platform, that is a good thing. And we will work to, you know, continue to have a good relationship.
All right. Then I think one of the debate points has been, many of your what was previously quote called the emerging platform deals are fixed in nature. I think there's an appetite for that to move over towards consumption-based models that you're more aligned. You know, what are some of the variables that are gonna dictate, you know, how quickly you can get there?
Yeah. Those, you know, the emerging platforms and I think we're maybe in cycle one, maybe cycle two on some of these deals. So it's still early. And, you know, a lot of the, fixed versus variable depends upon the measurement and tracking capabilities of the platform. And so I would expect over time and over cycles of deals that those eventually more match the user engagement. But where we are and therefore grow with those as well. But where we are today is more a fixed nature as we're both learning and growing together to establish the right baseline.
All right. Maybe we can shift over to the ad-supported side of streaming. And, you know, totally understood. Last year, there's pretty significant macro challenges. But it seems like your trends are slow to rebound in some of the, you know, some of the major digital platforms that we track. So the question is, why is that the case? And maybe it'd be great to hear sort of an update of sort of the ad environment as it stands sort of, you know, early on in 2024.
Yeah. So definitely, more headwinds last year improving. You know, why the case, you know, what you can see and read-through is I think it's important to keep in mind that, you know, in the portfolio we have and then in the portfolio the DSPs have, advertising is a vertical across many, right? It's not just music streaming advertising. Take YouTube as an example. It's part of a vertical advertising vertical that, yes, sells music but also has video as does Apple. And so it's not a perfect read-through in terms of advertising into music streaming. In terms of last year, you know, whether post-pandemic as well as the economic uncertainty, headwinds were much stronger last year. We have continued to see quarter-to-quarter and sequential improvement, which is good.
I think, you know, there is the ongoing shift from traditional platforms to digital platforms as well as economic uncertainty. So so there may be, you know, some volatility or or lumpiness to that. But over time, you know, the trends in music streaming and the growth in engagement, as well as DSPs being D2C and having data and targeting capability, that lends well to play continue to play into the shift from traditional platforms to streaming platforms.
Longer term, the ad-supported side of the business. How do we think about the growth profile?
I would expect that to grow with the engagement, right? And to the extent that we continue to deliver great content, and that drives subscribers and engagement, that offers the platforms more opportunity to target and sell and translate through. You know, our ad-supported is ad-supported in emerging platforms, which we've said is generally lower than a third of the overall subscription streaming revenue we have. So it's meaningful. But the impact is limited in the near term, but we expect it to grow.
All right. Okay. And then let's move over to publishing. And, you know, Chappell has been, you know, it's been a real bright spot for you guys and unfortunately often overlooked as well. So just curious, what's the source of that sort of durability of strength? And, you know, how do you supercharge that even further?
Not overlooked by us.
Okay.
A real credit to the leadership team there, Guy and Carianne and the team, that they have just, you know, done an amazing job. I think we said this last quarter, like 5 consecutive quarters of double-digit growth. It's been really, really strong. They've done a few things there to really diversify and expand the revenue base. Number one is the number of copyrights over the last four years, I think, has grown by like 45%. So in acquiring publishing rights and catalogs, it's allowed us to expand our share. You know, it allows us to play beyond just our frontline roster, and, as I said, grow share. They also have been leveraging, I think, just our investment in the technology and the ability to have a better supply chain, better discovery, better sync.
It has allowed for more efficiency and leverage into that business. The other thing I would say that I think they've done really, really well is to really make a name for themselves in Warner Chappell Music in the community and even things like the songwriting camps that they put on and really being able to support songwriters and artists in that way. And, you know, you take a Miley Cyrus Flowers, you know, came from one of those songwriting camps. So it's everything from the little things to the big things. They continue to do it well. It is by no means undiscovered by us.
Yeah. Yeah. You know, Miley Cyrus' "Flowers" is a great song. Kids love it too. Maybe sort of, you know, take a look at the macro environment. You know, interest rates have obviously sort of, you know, much higher than they were, you know, a year ago. Has the calculus changed around catalog acquisition? You know, has there been sort of a shift in the competitive landscape there?
For us, I don't think so. I think our calculus has always stayed true to, you know, seeking double-digit IRRs and the high-teens ROICs, that we've had a track record of delivering and staying consistent to that. I think higher interest rate maybe evens out the playing field a little bit. And, you know, what we bring, you know, there's financial players. And then there's financial and strategic players. And I think we bring, you know, value beyond just the financial aspect of it in, you know, having a catalog and rights that we can mine, that we can sync, that we can market, that we can distribute, and really adding value to it. And so, I don't think the calculus for us has changed. We still have, I think, a meaningful deal flow.
Our restructuring, you know, goes to that point of freeing up funds to allow us to continue to invest because we do see those opportunities. We wanna be proactive about it.
Mm-hmm. And, you know, speaking of the restructuring, so big restructuring last quarter. That was on top of a reduction for us last year. Right now where we're sitting today, how do you feel positioned from a cost perspective?
Yeah, you know, we did last year's program and this year's program, both meaningful and not to lose the human element of it 'cause it's really hard work. And we're grateful for everything the team has done and continues to do. I think it sets us up, as we said, you know, Robert came in. He's now been there about 15 months. I've been there almost six. New leaders, you know, the market has evolved. The company has evolved. And so I think it's at a natural stage to kinda take a holistic view of the strategy. We have now set that. And at the same time, you know, identify ways that we can free up those funds to invest in the music and the things that serve the music like the technology or shifts from traditional marketing to digital marketing.
From a cost perspective, I think it just gives us greater flexibility. We're set up well.
Yeah. And I think you mentioned $200 million in savings. You know, how should we expect that to sort of phase in over the next few years? And, you know, what are the exact sort of not exact, but what's your general thought on sort of the reinvestment plans? And, you know, if we add up sort of the low-margin businesses you exit, you know, the BMG termination, that's a considerable amount of firepower that you guys have. So where do you think the biggest opportunity is to reallocate those funds are?
Yeah. And so we have said that the plan will deliver $200 million of cost savings by the end of our fiscal 2025, so September 2025, with the majority of those delivered by the end of this fiscal as we particularly, you know, it's in part led. And we've announced the divestiture and wind down of some of our media businesses as well as our direct-sold advertising, which those, when you just, you know, kinda looked at where the market was, where it is now, where we're going, where we can invest for the greatest returns, that those weren't necessarily the highest use of capital.
As we look to the future and you think about the investment, you know, we have a framework that Robert has spoken about, about being much more intentional in terms of, you know, geographic, type of copyright, genre, and that, you know, typically, we should see our investment and our revenue growth move in line to be more consistent about that. Having said that, like, investment, whether an acquisition or like, sometimes it's not always linear, right? And the timing doesn't line up. But, you know, I think as we move forward on this and deliver the savings, we'll continue to capitalize on the deal flow that is out there.
Okay. Awesome. And then I guess on the last call, Robert mentioned, you know, something to the fact that you guys ingest a ton of, you know, of data. You know, you process it. You make it usable. And you make it actionable, which should drive repeatable results. I guess can you just dig into that a little bit more? What should we be expecting sort of, you know, can you give us some concrete examples of, you know, what that means?
Yeah. I mean, on the technology front, Ariel, our head of technology, has really spoken about three areas of focus, one being efficiency, you know, when you think about our digital supply chain. I'll come back to your question on that. Two being data and insights. Then three being growth. When you think about, like, Robert has used, I think, the thumbnail or the live-motion art example. You think about the millions of tracks we're trying to manage, distribute, market. On a platform, you know, that live-motion art or lyrics attached, like, that may move engagement 1% or 2%. But when you add that up and, you know, by DSPs, all the regions, all the millions of tracks, like, that can be meaningful. But you can't manage that manually, right? Like, it's just too much for an individual.
And so how do we use technology or even AI to automate that, to have more efficiency, and make it easier for the team, and give us operating leverage so that we can scale, right? Because, like, the volume of content and, you know, the opportunities and the platforms is only growing. And then you gotta attach metadata to it. And then you gotta bring it back and ingest it. And then you gotta learn and kinda repeat the cycle that you get this virtual cycle of learning and improvement.
You know, one thing that I was thinking about too is, you know, is there an element of leveraging the tech and data that you're getting to just be better at identifying talent? And could that potentially sort of supercharge your A&R efficiency, actually, longer term?
Yeah. For sure. And so the second piece I had mentioned, you know, his three being efficiency, data, and insights, and growth. And on that data and insights piece, you know, when we think about our first-party data, whether there's third-party data, being able to ingest all that and get that in a usable, actionable way, whether you're trying to discover, you know, and, you know, something like, you know, what we're doing at 10K is very much focused on digital discovery, but as well as across the organization, like, using those insights so that we can better discover. But, like, we also have to keep in mind that the technology and the data is one of many inputs, right? There is still a relationship component and the cultivation of artists that takes time.
You know, you look at a Zach Bryan who was in the Navy a few years ago. Now he's, like, a top-charting artist. Absolutely, opportunities to better use the data and technology and AI, but married with our strength in, I would say, finding and cultivating artists.
Okay. And shifting over to the margins a little bit and last quarter, you reiterated, you know, the expectations for 100 basis points of underlying, you know, margin expansion, this year. Last year, you had a much more challenging macro backdrop, revenue backdrop, and still managed, you know, close to 200 basis points of margin expansion. So, you know, what are some of the incremental sort of sources of investment this year in particular that's, not saying 100 is a little, but 200 is more?
And so, no change in guidance, right? And, you know, last year, that first half, you know, we were much more disciplined on the cost side, both marketing and A&R. And that gave us some cost benefit. And then we had the benefit in the second half of the stronger slate in the revenue. So the combination of those two things allowed for that overdelivery. You know, as we go forward, you know, we're always looking for more efficiency, more operating leverage, and being proactive about it. It, you know, by all means, like, I want technology in these things to improve what that could be.
But it would be premature for us to say, "Hey, it's gonna be greater before these things launch, before we actually have some runway and cement laid." And so I think, you know, we remain focused on growing that top line, driving margin expansion, and cash conversion, all of which will continue to create substantial shareholder value.
Awesome. I could continue this conversation. But the clock has just struck zero. And that means it's time to go, so. Bryan, thank you for your time. Thank you for your insights. Very, very, very valuable. Hopefully, we can welcome you back next year as well.
Thank you. Thanks for having me. Thanks, everybody.