Okay, so we'll get started. My name is David Karnofsky. I cover media, entertainment, and advertising at J.P. Morgan. Happy to have back at the conference again, Bryan Castellani, Exec VP and CFO, Warner Music Group. Thanks so much for being here.
Thanks for having me.
All right, so you've been with Warner Music for just over half a year now. Early days, but, you know, what are you happy with so far? What gets you excited when we look out 12-18 months?
Again, thanks for having me. Good to see everybody. It's been seven months, give or take, and it's really been good. You know, I think about it through three filters. One is just music and the industry, two is the company, and three is the team. And you know, music has always been an interesting, fast-moving, dynamic space, fun as well. It you know, I think is more aligned with the internet than other spaces in entertainment. It's short-form, shareable in nature. You know, when I was joining and thinking about it, the macro setup has been strong in terms of just the sub growth pricing. The user engagement continues to rise. It's incredibly... Starting from a great place, I think, just in the consumer value proposition, and so really excited about the industry.
And then Warner, you have this iconic company with an iconic catalog. You know, I grew up with Van Halen and AC/DC, that's in our deep catalog and probably doesn't get enough attention, but just an iconic company. And then the team and Robert, you know, in terms of just investing into new skill sets and tech in particular, a very embracive, collaborative culture, which plays to my DNA, and I've been super grateful for the welcome and the onboard by the team and the company. And so, good space, good things happening, and excited that we're hungry to keep doing more.
Got it. I hope you meant David Lee Roth Van Halen and not-
Both. There were some in there that, you know, like Panama and, the post-David Lee Roth was good too.
Got it. So you and Robert have emphasized a strategy to increase the use of tech and data to drive better decision-making, repeatable results, lower costs. Maybe expand on, you know, how this is working through the business, the scale of the impact you're making there.
Yeah, and, you know, we live in an increasingly, if in many ways, only digitized world. And so everything we do, we try to really augment with tech, and when we think about our tech investment, we're focused on a few, things. One is efficiency, two is data and insights, and three is growth and scale. It all starts with investing into that foundational stability and just efficiency of the operation, so that we have reliability, and our operators and marketers can deal with the millions of tracks we have and do auto- whether it's doing automated releases and following DSP best practices. On the data and insight side, how does it improve our discovery, marketing, distribution, of music?
On the growth and scale, building the platform in a way that we can leverage it, not only for our first-party roster, but also expand and grow our distribution business through ADA and better leverage our overall infrastructure across the ecosystem.
Got it. I wanna move to recorded music streaming. Normalized growth in the quarter was steady at 11%. There were some, you know, noise, moving parts in terms of what accelerated, decelerated. Maybe you could unpack the pieces a bit.
Yeah, this one got some attention, this last quarter.
It did. Yeah, yeah.
Uh-
Put it up front.
You know, it wasn't too long ago, it was two quarters ago, through our fiscal 2023, we reported one number, which was just recorded music streaming, and then we talked about some of the movements within it. We now break out subscription and ad-supported, and ad-supported is really two pieces, which is the traditional ad-supported, your Spotifys, your YouTubes, down to Pandora. And then emerging platforms, that is, you know, your social networks, Meta, TikTok, as well as fitness, like Apple in there. And so those three buckets or those three revenue lines, two of the three accelerated in our Q2. Subscription went from 12-13.5, which was strong. Our ad-supported went from high single digits to low double digits, so sequential acceleration there.
And those two are roughly 90% of the overall recorded music streaming revenue. And then in emerging platforms, you can get some lumpiness in there based on mix of platforms, deal timing, and content delivery. We had some content delivery with one of our platform partners in Q1 that didn't recur in Q2, and that caused a sequential revenue deceleration. Having said that, all three of those lines, I think, are poised, when you look out over the long term and just the tailwinds and the trends, poised to grow. And so some of that, I would say, you know, two of the three grew, one decelerated, but you look over the long term, and they're poised to grow.
And just on the emerging and some of that lumpiness quarter to quarter, is that... You know, should we expect that volatility to come from time to time? Does that get reduced at any point as these scale up?
... Yeah, the, and again, it's about 10% of the overall.
Right.
And so we see it over the long term growing. Those deals are generally 2-3 years shorter term in nature. The platforms are still evolving their capabilities to track and attribute data down to the song level. So you do end up with more of a fixed recognition, but we're always looking upon those renewals to get better reporting and, and make them, ideally, move them more towards our traditional subscription-based deals, where they do grow with the user engagement over time. And so at the moment, you get some of that fixed, but over time, we expect those to grow.
Do you think the technology has evolved enough that that could be possible in the coming years?
Yeah.
or is that still a little further away?
Yeah, I think it's evolving. I think, you know, the best example of that is probably YouTube and looking at how they developed Content ID for UGC and how that is able to better track and monetize. And so, you know, I think they have the capability, and it's really in every platform's interest to invest in that capability because you want to ensure that, you know, for content creators, it's properly monetized, and on the same token, for advertisers, you're able to have attribution for them as well. So I think over time, it evolves.
Maybe just staying on the, emerging platforms. A peer of yours just ended a pretty public process with TikTok, compensation, copyright, AI protection. I think those were the major issues. You talked about potentially, you know, future rounds of negotiations. Are you planning to approach things differently? What are the kind of incremental priorities against those, what I, I think were first-round agreements in some cases?
Yeah. Listen, every negotiation has its nuances, and it's hard to predict the hypothetical.
Yeah, fair.
I think that in any negotiation, we want to ensure that the content experience is good and well represented. We want to ensure that the content is properly protected and there's fair use, and on the same token, we want to ensure there's fair value or reward or monetization of that content. And so, those, I would say, are evergreen in nature, and then every negotiation has its nuances. And again, they're generally, we in the industry try to continue to move all the deals to, you know, better royalty models, as well as better, attribution and protection around any of the technology and AI considerations.
What are the priorities on the AI side?
Well, on the AI side, we've spoken about you know, we want to stay aligned with the platforms because that's where the experience is happening. We want to also stay aligned with the engines and ensure that there is fair use of the content and artists have a choice. And then we certainly also want to stay aligned with the legislative bodies, and I think there you see a number of movements across, you know, whether it's the ELVIS Act or others, that I think everybody's much more proactive. And, you know, if you go back 15, 20 years and look at the Napster experience versus where we are today, I think everybody's approach and collaboration around AI is much more forward-thinking and much more collaborative, and so that is a good thing.
Okay. As you noted, subscription and ad-supported growth both accelerated in the quarter. Maybe how would you frame the, the underlying drivers for the business currently, price increases, sub growth, share? And then just for ad-supported, specifically, anything, can you highlight on, on the overall ad market at the moment?
Yeah, on just the growth in general, again, we continue to see rising subscribers and sub growth around the world, which is great because that just speaks to the user engagement and the rising tide that, in terms of volume, can lift all boats. Pricing, you know, Robert made a call on the call, made the comment that we're talking about the fact that we're starting to lap some of the price increases like YouTube and Apple, and that was the first price increase in 15 years, which is pretty incredible. And then, you know, you certainly got to have consistency of slate and the artist roster. And, you know, we've had a really strong run here in Q2 with Jack Harlow and Benson Boone, Teddy Swims, Zach Bryan, all performing.
And then I think on advertising, you know, advertising is a, a, you know, that dual revenue stream, subscription and advertising is, you know, I think everybody's goal and certainly supports the overall ecosystem. Advertising, by nature, is gonna be a little more volatile, lumpy, tied to the economic cycle than subscription, because subscription is stickier. But the user engagement and, you know, the monetization of advertising continues to grow, and I think we're in the middle of this massive shift from traditional platforms to streaming and the fact that you can do data targeting and optimization on streaming advertising. So I think, you know, we're in a state where, again, I mentioned the earlier sequential improvement.
Now, some of that's flattered by weakness in the prior year, first half of the year across the industry, but overall, poised to grow, and we're encouraged by the trends we see there.
... On the content slate, fiscal 2024 looks somewhat back-half-weighted, not dissimilar to 2023. You've stated a goal to smooth out the release timing, reduce volatility. It is a people-driven business, creative process. Touring has to come into consideration. You know, how do you balance the artist's needs against, you know, your desire for more consistency?
Well, first, I wanna push back and say that 2024 looks like 2023. I think that 2023, we've acknowledged we had a soft first half, and we've worked really hard to get more consistent, and I think you've seen sequential improvement, Q3, Q4, Q1, Q2, which is all good. It is a human exercise, and so there is some unpredictability in releases and release timing. The music and the content has to be ready first and foremost. It's always been a logistical exercise, but we are focused on trying to have that stability. New releases on their own are generally small in terms of the overall impact to the business, but collectively, they add up, and they certainly can lift the shallow catalog. And we've spoken about the business generally being one-third new release, one-third shallow, one-third deep catalog.
and so, you know, we're focused working with artists on that logistical exercise. We've done it for decades, and it's in everybody's interest to be as thoughtful and planful about those releases because we all want the music to have the space and the opportunity to be promoted and succeed.
Got it. You know, you talked about new releases and what that could mean for the shallow catalog, right? Aside from that, what are some of the ways or things that are in your control to kinda stimulate engagement with, you know, the deeper catalog or some of the, you know, kinda call it, you know, from now to three years ago, type releases?
Again, you know, starting with our new releases and just having consistency of slate and the add and the do is lifting the shallow catalog as well. And how do we augment and complement that with tech? And I mentioned a little bit earlier just about, you know, all the best practices, whether it's metadata, lyrics, motion art, thumbnails, how do we get better at that? And it's easier to do on the new releases 'cause you're starting with new. It's harder to do on the millions of tracks backwards in the catalog, but we're focused on doing that scalably, both forwards and backwards, which can help lift the overall catalog. And then, we've seen successes like Joni Mitchell performing at the Grammys and going on tour, helping lift her catalog, you know, Cher putting out a Christmas album last December.
And so, we've always been in the business of mining the catalog and keeping it current, and we'll continue to do that.
Got it. So as you noted, since late 2022, the DSPs broadly have engaged in price increases. I think there's a tendency among investors usually to focus on Spotify, its commentary around churn. Looking more generally, though, how do you think the DSPs perceive this initial round? And, you know, what are some of the factors that could lead to a more regular pace of increases, like we've seen in video, for instance?
Yeah, and I think, again, first price increase in 15 years, starting from a great place of the value proposition. You know, they can... it's great to see them being more thoughtful and really being more sophisticated about pricing. You know, you can do that via price, whether it's on individual plans, bundled plans. You can also do it on feature sets, you know, whether it's lyrics, whether it's super fans, whether it's different tiers. And so we try to focus, and we both wanna be pragmatic, and, you know, they ultimately control the consumer relationship and the price increase. We're able to inform that, I think, productively through our wholesale relationship and our discussions, but we want them to be thoughtful about it as well, and I think they're digesting these.
The first round, I think you acknowledge, was little to no churn, which positions and encourages everybody, but it's just gotta be thoughtful on the go-forward, and we think there's room for more.
Got it. Maybe another potential catalyst is, you know, the opportunity for Artist-Centric models. It is a new concept. I think the definition of Artist-Centric can differ, depending on the DSP. Some DSPs haven't made commitments at all. You know, what do you think the future of Artist-Centric look like? What do you wanna kinda see at the end of the tunnel with your partners?
Yeah, and I think about artist-centric, and, you know, there was one price increase in 15 years. A few years ago, artist-centric wasn't even being talked about, and so the fact that in a few years we've seen a real embrace of it and some initial movements... Spotify has talked about, you know, having a minimum of 1,000 tracks or 50 users for any that, you know, any of the frauds start charging those distributors for them. So those are all good acts. These are small in the beginning, and they need to evolve and broaden over time. But it is the right thing to do because I think we all agree that not all content, not all music, is created equal.
Premium music drives the biggest spikes, the biggest engagement, and so, rewarding that differently than all other streams is the appropriate and fair thing to do. And again, I think it's important that the DSPs build their brands not just with consumers, but with artists, and being a home that, you know, fairly rewards premium artists for the premium impact they have.
Got it. So Spotify recently made headlines with a plan to offer a new tier that includes both music and audiobooks. In theory, a bundle, right? Which could impact publishing revenue across the labels. I think it's important to note this isn't the first time, you know, the industry has had to navigate something like this. YouTube Music, Apple Music are part of bundles. Can you walk us through the dynamic here, how you and the labels might respond? You know, what does a healthy win-win look like potentially?
Yeah, this one's gotten some attention, huh?
Sure.
Uh-
A little bit.
I think that, you know, if you look back a couple months ago to now, the music offering hasn't changed. What has changed is that, you know, consumers were given a compulsory, automatic, unilateral addition of audiobook content and a $1 price rise, and Spotify has unilaterally changed the royalty compensation model. So I think it's natural that there is a pushback. Generally, I think that over time, these things play out in a way that, you know, you have to manage all parties in the ecosystem. There needs to be a level of harmony there, and I think that having harmony between consumers and creators is important because they're the dual lifeblood of any business in terms of, you know, fairly rewarding and also fairly pricing.
And so I think that it will play out over time, that we'll all find a natural solution. But I think, you know, you look out over the long term, and it's... I think over the long term, its impact becomes muted. I think we'll work through the current, the current, maybe friction.
And to be clear, the impact would be on the publishing side, I think?
Correct.
Right. Okay.
Yeah.
So no impact to Recorded Music and-
Correct.
Have you done or wanna say any kinda early...? Is it material or we're just not-
Again, that's why, that's why I wanted to make the point.
Yeah
... that over the long term, I don't think it's a material impact. In the near term here-
Awesome
... I think there's more to play out among all parties-
Fair enough
... to, you know, find the most harmonious resolution that is good for creators as well as consumers.
Great. Staying on publishing, so streaming growth, streaming growth at Warner Chappell has stayed notably strong, over 30% the prior two quarters. Possibly more challenging comps coming, but maybe you could speak to growth drivers there in terms of rights acquisition, tech, more songwriters.
Yeah, let me first give a shout-out to the leadership team there 'cause, they've really rocked it, and, I think, you know, for me, and I think for us, we see our Warner Chappell business as a underappreciated asset. It has had really strong growth, as you just acknowledged. You know, certainly 30%-40% comps, you know, you start to approach the law of bigger numbers. Having said that, they have really grown, both our number of copyrights and our IP. I think if you look over the last four years, we've grown our catalog and publishing rights there by about 45%, so we're expanding. And that allows us to play beyond our own domain.
People think about Warner Music as just recorded music, but the number of copyrights we have in your publishing business allows us to go much more broadly. And so there, we're actually growing market share and expanding our rights. And then the execution has been really strong in terms of leveraging technology to better mine and surface the number of works and the number of works earning, 'cause there it is, it is a game of many, many dollars and quarters and so forth. And so getting the number of works earning, whether it's $1,000 or $10,000, those really start to add up, and leveraging tech to do that.
and then again, I think just being really smart, the team, in terms of, you know, both surfacing what we can sync and how do we better monetize it, but also just being... You know, their brand, I think, continues to grow in the industry, and they little things like putting on songwriting camps, out of which came, as an example, the Miley Cyrus "Flowers" hit. Now, she's not one of our recorded music artists, but the songwriting was part of the Chappell business. And so there, I just think we have a really strong asset that continues to grow and add value for Warner overall.
Anything to highlight on the M&A market for rights catalogs at the moment? Is that somewhere where you're still engaged opportunistically?
... Well, I think it's our job to always survey the market, and I think it's also been demonstrated that we're always strong, smart, fiscal stewards. It has to be the right thing. When I talk about growing our number of works by 45% over the last number of years, you know, there are always things that are more as we invest in A&R or in publishing rights. You know, those are smaller type, tuck-in type ones that aren't, I would say, inorganic, but they're always part of your organic growth. You know, the overall market, if you're referring to that, I think what we bring is more of a strategic partner aspect, where I think, you know, there's been a lot of activity among financial players, more so than strategic players.
One part of the music industry we're interested in now is international and emerging. Maybe to level set, just can you give some context or numbers to help frame, you know, what the opportunity is for WMG or labels broadly?
Yeah, internationally and emerging, I mean, I think some of the sell-side research has emerging markets doubling in terms of smartphone penetration by the end of the decade, from maybe 6-7% to mid-teens % by 2030. Not to say developed markets are any slouch. You know, those will go from maybe low 30% penetration to almost 50%, so that's good, too. But I think, you know, you look at a market, just take India, for example, where over the last few years, that market has doubled. And, you know, we've made investments there. We were early. We continue to be really intentional about our investment geographies and genres. And I think that you look at a market like India with a billion-plus population, and, you know, that adds value.
If that many people are listening to music, it can certainly help deliver global hits, local to global, and that's where we play. So I think emerging markets are well-poised, and we've had a good track record of being early and being able to outpace the market there.
When you think about some of the kind of partnerships you've done abroad, Africori, Rotana, right? What does it take for you to win, you know, that relationship, you know, versus a competitor? What are they looking for in a multinational distributor?
Yeah, I think they see us as a trusted, you know, well-known global partner that brings expertise and infrastructure. You know, there is a lot of work that happens in terms of discovering artists, but also As I said, in an increasingly digitized world, the ability to distribute, track, monetize, do royalty payments, and other things. And so I think for them, we bring all that expertise, and it is, I would say, the traditional, you know, better together, we can grow faster. And being early, I think it becomes a virtuous cycle, where you gain more local knowledge, and you can continue to, in the nascency of that market, do things really smart and strategic at good value.
Got it. You've discussed expanding your offering of lower-touch services for artists earlier on in their journey. This strategy, you know, arguably puts you in place to capture share in high-growth areas, albeit under a lower margin model. So how do you think about hitting the right balance here in the context of the overall company growth and margin targets?
It may be helpful to think about it just in terms of a stack. And at the top of the stack, I think you have the traditional labels in terms of new artist discovery and development, and those have traditionally been lower volume, high touch, and good high margin. As the stack broadens, you have a middle that is increasingly distribution, where it's high volume but low touch, and how do you manage that in terms of gross margin may look different, but also, too, is the investment in whether it's A&R, marketing, and support and services. And so how do you manage the net OI margin between the two to stay neutral and continue to augment both with tech? And then at the bottom is, you know, that independent, do-it-yourself tier that has the lowest unit economics.
But again, how do you use all parts of that pyramid or stack to underwrite the best investment and most profitable Warner Music? And our focus, first and foremost, is always to grow margin on an absolute basis, of course, but also manage margins within that strategically.
Got it. Got about five minutes left. Does anyone in the room have a question we can go to? Otherwise, I have a couple more. No? Quiet room. Maybe just following up on the margin comments. At the start of the fiscal year, I think you gave a target of 100 basis points of underlying margin expansion, back half weighted. Is that still the goal?
Yes, yes. One hundred basis points on margin, and then we'd also reiterated on a call just that 50%-60% cash conversion, because we knew that Q2 is a abnormally lower conversion for us, just based on the timing of working capital and payments. But both of those, our goals are always healthy top line, strong margin expansion, and that 50%-60% cash conversion over a multi-year, but for 2024 as well.
No visibility into this year. That's just working capital, deal timing, visibility?
Correct.
Got it. Okay. Maybe just one more to close out for me. I think you bring an interesting background in WMG coming from media and entertainment. You were talking about it a second ago. It's a sector that's navigating a digital transition close to a decade later than music. Maybe with that perspective, what are some guideposts you think the music industry stakeholders should keep in mind, to ensure a continued successful evolution from here?
Interesting. And far be it for me to prognosticate, what to watch for. But, yeah, I mean, I came from one of the biggest brands, and I think that ingrained a strong focus and attention to the marriage of great content and great technology, but it all starts with quality. And that at Warner, you know, we have the same maniacal focus on just the quality of the content and how do we augment it with technology. Again, I think music is well aligned to the internet, again, being short form in nature, ubiquitous, great value proposition, you know, easily shareable, pretty much enhances every content experience. And, so I think those are all good things. And then I think the third thing, you know, make great stuff, embrace technology.
I think the third thing is just how do you stay nimble in an ever-evolving landscape where change is happening much faster? You know, I think it's been said that changes in the last five years have been greater than changes in the last forty, and I mean, music's gone from vinyl to cassette, to CD, to download, to streaming, and navigating those is pretty incredible. And just staying nimble and aligned in that ecosystem, as I said, that is creators and consumers, but also in the middle, where we can continue to add a lot of value, is in that distribution and discovery and development and the platforms as well. And so, it's just a fascinating time with a lot of dynamism, and we're pretty excited.
Great. All right, last chance. Anyone in the room? Oh, we've got one in the back.
What is your latest thinking on capital allocation? Any update on that front? Thank you. Yeah, I had mentioned on the call that our capital allocation has been pretty consistent. In your traditional waterfall or cascade, we're always first and foremost focused on the organic opportunities, and for us, organically, continue to invest in A&R 'cause that's what drives the music, the catalog, the publishing. And we can do that, whether artist signings as well as, you know, maybe a little bit inorganic, is what we did last year with 10K and acquiring 51% of that and bringing in, you know, a roster of artists, but also a management team that is really starting from a much more, you know, modern, digital-oriented starting place.
And then, you know, we have a dividend, and so we're focused on returning some of that capital to shareholders and then surveying the market inorganically. And again, there it has to meet a number of strategic, organizational, financial hurdles, and I think we, you know, even back to our IPO with Access, we've always been very strong stewards of fiscal discipline, and we'll continue to do that. And so, as I said on the call, like, there really has been no change. We see a lot of runway to continue investing organically in the business. Music is a growing space, healthy ecosystem, I think we would all agree, and then continuing the survey inorganically, but doing it smartly.
Okay, great. We're out of time. Bryan, thanks so much for being here.
Thank you. Thanks, everybody.