Good afternoon. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, reach out to your Morgan Stanley salesperson. Really excited to welcome to the conference for the first time, the new CEO of Warner Music Group, Robert Kyncl. Robert, thank you so much for coming.
Thank you. Thanks for having me.
Great to have you.
Good to be here.
I know it's only been a short time in your in your new seat, but I wanted to start by, you know, asking you why you decided to leave YouTube and lead Warner Music Group and, you know, why you're excited about the prospects for this company.
You know, I spent the last 20 years in two very influential companies, Netflix and YouTube and Google. As you know, they both have gone through tremendous growth, transformation from DVDs to streaming, in Netflix's case, from pretty much variable content cost to fixed content cost, right? Lots of change. On the YouTube side, from the very early days and small monetization to building a very robust advertising business, but not just that, also expanding into multiple subscriptions, doing multiple revenue streams with YouTube Music and Premium and YouTube TV, across multiple industries. It's just been a tremendous lift over the last 20 years.
Also, in YouTube's case, we've worked incredibly hard in the last 6 years or so to completely turn around the relationship with the music industry, and I would say quite successfully. It's just been a lot of work, 20 years, and it was time to change. That was it. You know, then you start thinking about what to do next and what to do, you know, so you wanna do something different. In my case, I always loved music. I play, used to play music instruments. I need to brush up on that a little bit more. Cello and guitar. When I was growing up. I love music, but more importantly, when I looked at it, music has 100% of global population as the addressable audience. Everybody in the world listens to music.
Everybody likes music. It's different for everybody, but they all do, which is very important because it gives us multiple bites at the apple to figure out our role in the industry and how we contribute and what share we take and all of those things. We'll always have conversation about music because it's ever present, and that's very, very unique from an industry standpoint. In terms of Warner, I look at the unique ownership structure and the fact that we have a very patient, long-term majority shareholder, is giving us the braveness, the braveness to challenge status quo of the industry and drive long-term value for all shareholders. When you wrap it all together, there's the decision.
Why did the board select you? Was it the cello and guitar chops or...?
Probably. No. Kidding. Not at all. Look, you know, as I just said,
Yeah
... kind of has been, for the last 20 years, straddling Silicon Valley and Hollywood, literally just even time wise. I kind of speak both languages, know how to translate both languages to each other. It's pretty clear that technology will impact the music industry more and more in the coming years, so having sort of this melding of minds between technology and media is incredibly important. You know, after a decade of incredible growth and, you know, coming out of the trough of the industry, we need to be positioned in new ways for the next decade. Having fresh thinking coming in and sort of shaking up some of the things was important to the board and the shareholders.
You know, I also bring different perspectives because I grew up in a communist country. You know, for 20 years, I lived under communism, so I've quite different perspectives on life. You know, my range of experience is pretty wide. And I grew up in a small country in Czech Republic, so today on the internet, when you think about it, the internet has leveled the playing field for everyone. The rise of local repertoire around the world is very, very important. Having people with global perspectives coming from the outside is also important. I think, you know, some of these factors mixed together-
Yeah
... probably ripe for the choice.
That's a great answer. When you were talking about the next phase of growth for Warner on the earnings call a couple weeks ago, you highlighted a couple of new hires that you've made at the senior level from Google. Can you talk about what those hires tell us about your focus at Warner?
Sure. First, you know, my first hire, I think a week in or something like that, was Tim Matusch, who's running our strategy and operations role, which was a new role, a new department at Warner. It's focused on, A, helping us develop strategies for the whole company, making sure that there's a cohesive tissue across all divisions, across the company and that we develop KPIs or OKRs for each of those goals that we're all, you know, rowing against, and then we measure them, and we execute against them. You need infrastructure for that. Like, it's very easy to say these things.
Yeah.
It's much harder to actually operationalize it. Tim Matusch was the first hire for that, and obviously we're building the team out and making sure that we have the infrastructure to actually do this. The second hire shortly after was Ariel Bardin, who is our President of Technology. It's very important and transformative for us because, you know, in the future, I view Warner as a technology-enabled music company, where technology is a force multiplier in all the wonderful things that our teams are doing today and helping us scale and be more efficient and effective. And we need a first-class technology team that's coming from the best companies in the world, has history of shipping products on time with great impact.
Ariel and I have worked together for five years at YouTube, have lots of first-hand experience, and, he's the one to do that.
Great. you know, since the IPO of Warner back in 2020, you know, investors have been attracted to the growth algorithm, which is essentially, I could distill it down, you know, healthy revenue growth, largely driven by streaming, but with additional monetization opportunities, margin expansion as a result of that top line, and consistent, healthy free cash flow conversion. Do you see any of those levers, you know, changing as you look out over the longer term, especially under your leadership?
When I think about the IPO, at that time, the company was really positioned and judged against the future of subscription streaming.
Yeah.
Right? It was, like, a very sort of singular focus on it. That continues. There's healthy growth in both developed as well as emerging markets, so that still holds true. Since then, a couple other things have happened. 1, we're starting to see price increases against that core model with Amazon and Apple and Deezer starting on those. The second thing is development of emerging platforms. Those, you know, you all know who those are from following us. It's companies who have need for music because music is amplifying whatever's happening on those platforms, and they continue to grow. I think these 3, these 2 elements, I'm forgetting one more, but it can't come to me right now.
They would be very upset with me if I didn't mention this. Warner Chappell, our publishing company.
Yes
... you know, has really accelerated its growth over the last, few years, and it's just wonderful to see that. I think the algorithm's intact.
Okay. Do you think the market's underappreciating any of these opportunities as you think about sort of the early conversations you've had?
Yeah
... with investors or look at the stock price?
I think there are a couple things. One is price. I do think that music is undervalued, and I think it's underappreciated in the markets. Two, the artist-fan relationships, in general, it's an area that's very strong in terms of those relationships, but it's not well-monetized today. I can't really tell you how, you know, specifics of that yet, but I intuitively I can see that that's an area worth developing. I think the other part is AI. Look, AI could also be looked at as a threat, right? Underappreciated or as a threat, like either of those.
What I can tell you is that it is something that we're paying extreme attention to, A, from the point of view of protecting artists and songwriters and their copyright, obviously, and I have lots of thoughts on that. Also, we're looking at it in terms of opportunity, what it is that it can do to amplify. When you look at the history over the last, you know, multiple hundreds of years, every time a new technology came, after some temporary dislocation, it has generally lifted markets up and created more value opportunities. I want to make sure that we have both approaches, the one where we look at protecting copyright, but we also have a very forward-leaning stance on things to make sure that we create more value.
Great. I wanna... We'll get to AI later. I wanted to dive into some of the major investor debates and get your sense of, get a sense of how you think about them. Probably the most frequent question I've got from investors since Spotify and Warner have been public companies is: Who has the leverage? You know, sort of DSPs versus labels. That's, like, the standard approach a lot of investors have. I noted on your call, you talked about music having achieved something rare. It's built on mutually beneficial partnerships. Do you think you see things differently? I mean, you were at YouTube, you were on the other side, gives you a unique perspective. Can you just talk about the industry structure and how you approach it, and it may be different than how we're thinking about it?
Yeah. You know, YouTube, in the early days, we've had an embattled relationship with the music industry, and I was partly to blame. You know, I've lived that. You know, it's grown out of desire to move fast and grow and, so we've had that. You know, about somewhere around 2015, somewhere there, we decided it's, like, we just need to turn this around because we are in this together with the music industry forever. We recognize the value of music for us, and we just said we just want to have a long-term collaborative relationship. It doesn't change on a dime. It takes a very long, concerted effort, but that is what we've done. I think the, you know, the results are showing themselves.
YouTube has become a very significant revenue contributor to the industry, obviously a big one in terms of reach, for artists. I'm very proud of what we've done, you know, together with all of our partners, majors, indies, et cetera, across the industry.
What got you and the team at YouTube to flip your approach?
It's too exhausting to fight. You know, because there's so many other things that you have to work on.
Right.
But I'm joking partly on that. It's, like, a little bit true. It's more the. We've done tons of research on the value of music to our users, and we've decided that this is an industry that we want to be in the business with forever and that we want to have a long-term collaborative relationship, right? That the way to do is to grow the business together.
Yeah.
We invested into education, for instance, of the industry on advertising, because that wasn't really there. We, on the other hand, had to get educated on subscriptions because we didn't have it at that time and had to build up the business. You know, the collaborations, actually, I mean, I can give yo examples of those, which is, you know, Universal Music worked with YouTube to develop shared sales rights for inventory on their content and therefore for content of all of the other labels. It led to greater competition for the impressions and better results. Sony worked with YouTube on go-to-market strategies around connected TVs and music, which was very interesting.
You know, that didn't exist before, and it was, like, them truly learning the business well and then pushing us in all the right ways, collaboratively to do that. Warner has done the same around monetization of hip-hop, which had some structural issues and impediments which got lifted, and then it benefited the whole industry. These are, like, very specific examples, but you can see, like, how deeply we went with our partners, and I have the same desire and approach to be on the other side, to being on this side and doing the same thing with all of our partners.
Great. Spotify, YouTube, and Apple are 40% of your revenues, at least in fiscal 2022, which means they're an even larger part of the streaming revenues. You already said that you expect streaming revenue growth to core subscription to grow, you've asserted a number of times that music is underpriced. What needs to happen in the industry so we could establish a regular cadence of price increases? You know, for example, at YouTube Music, while you were there, you weren't raising prices every year yourself.
Right
...what has to happen to get the industry? I just interviewed Paul Vogel at Spotify. No news today, unfortunately, on the price increase front, but how do we get, how do we move forward as an industry?
All right. Number one, by the way, you know, I said this on the first earnings call, one month on the job, so, like, quickly studying things for four months and as I know on the first half, it is, music is undervalued, and this is not my opinion. There's actually numbers that back it up. The price that, let's say if you take the U.S., the price that the user pays per hour of consumption of music is half of what they pay for movies and TV shows on streaming services. I'm not even counting cable TV, where the ARPU is, like, insanely higher.
Right
...than that, just versus streaming. It's half of that. Right there, it's 50% undervalued today. How did that happen? Subscription price on streaming got established in 2011. Again, I'm just gonna use one market so it's easy to isolate things, United States. $10 per month per user. No price has moved ever since. Today, you know, today some are raising, inflation adjusted, it should be $13.25 today. On top of it, in 2014, family plans got introduced, which effectively are lowering ARPU. After the introduction of that, you can average out the ARPU to $7. Now you're at $7 roughly instead of $13.25. That's it. Without any increases, we have, you know, we have reduced ARPU over time.
I'm not saying this as a criticism because this was an industry where that went through significant value destruction for a long time, and it was very important to drive adoption of payment and paying for music. All of the DSPs, Spotify, YouTube, Amazon, Apple, and everyone else have done a great job of doing that. Family plans and student plans and maybe even the pricing staying flat were all contributors towards that growth and broad adoption of streaming. That is a long time without changing the prices, and effectively, you know, we are the lowest form of entertainment and lowest form of entertainment in terms of monetization.
It's precisely the opposite is true, which is, I would say that, music is actually the highest affinity entertainment, greater than movies and TV shows, because we use it most frequently. The amount of repeat consumption on songs, on certain artists is unmatched by any other medium.
Right.
The amount of people that show up in person to go see them is unmatched from any other medium. We have the highest form of engagement, highest form of affinity, and lowest per hour price.
Yeah.
That doesn't seem right. I think it should change in an orderly fashion. You say, "Okay, how do you arrive at that?" You ask me the question. You were at one of those, like, why didn't you raise price, right? I think it's structural in the way the agreements work with the industry, which encourage the lowest common denominator, the lowest common price, basically. If you're somebody who does the fiscally responsible thing and increase price, they can be hanging out there with a higher price for the same or similar product as someone else who hasn't.
That doesn't seem fair, and it doesn't seem smart for the industry to perpetuate as a model in an industry that has come out of the trough, has gotten people used to paying for music, and I think it's bound to change. I think, you know, in a collaborative fashion. I think there are models that exist in other industries, let's say the cable industry, where you have annual CAGR increases on the cost of content. If you look at something like YouTube TV, it has grown its subscription in the last 5 years from $35- $70, so pretty significant increase, while growing the fastest and number one vMVPD in the industry because they have a superior product.
I don't mean the content, but the actual-
No
... the experience and all of it, right? All of that is possible. I think it's just, it is up to us, the industry overall, the DSPs and the labels, to figure out a new model that drives value of music up while growing the business. I think the other idea is sort of what I call MFN, most favored nations term, which is if we get certain market share of DSPs on certain wholesale price, that it automatically rolls out to the rest. Whether they change their prices or not is up to them. You know, there's multiple different ways to play this out, and we're thinking about it quite a lot. You know, maybe we'll make some of that work.
Sounds interesting. The MFN approach would be if enough of major DSPs raised prices and brought up the wholesale cost, eventually the remainers, the laggards would see a similar cost structure, so the incentives-.
Correct. I can't say what they do with the retail prices. I'm talking about wholesale.
Understand.
Right? we get a couple of them on this wholesale price, rolls out to the rest.
Got it.
These, you know, and these are the type of fiscally responsible long-term decisions that company like ours should undertake, as well as others, right, in order to drive long-term value for artists, songwriters, and all of our shareholders.
Yeah. Makes sense. Okay. Let's talk a little bit about the business this year. You yourself acknowledged that the first quarter was a challenging one. Growth overall, I'd say, ha been slower than people were hoping for over the last several quarters. There have been some, you know, headwinds to the business that I think people are well aware of. Can you give us a sense of, you know, when those fade, and is there sort of a quarter ahead of us or a time point you'd indicate that we should think about as Warner being sort of free and clear of some of the headwinds that you faced?
Obviously, the reason I took the job is because I believe this is a growth business.
Sure.
I believe in a whole bunch of growth levers here. Let's say two, you know, studying the entertainment industry in general, but our industry and our company, like, you can always see that no two quarters are the same, right? It's like they're just different. There are a bunch of variables that go in. I would always encourage you to judge us over a longer period of time rather than each quarter 'cause it's just, you know, if you look at the history, that kind of proves itself. Having said all that, I will entertain your question.
Thank you.
I would say that, starting Q3, we're having much more favorable comps and much more robust slate of releases, so.
There you go. Okay. Fair enough. Thank you. You mentioned this earlier, which is the emerging streaming opportunity.
Mm.
You guys have been disclosing a business to us that I think is annualizing at almost $400 million, up 20% year-on-year as of last quarter. Nice growth. Still only about, you know, 6% of the business. Maybe for the audience here, talk about the emerging streaming category that you're excited about and where you see the biggest opportunities.
Yeah, I think it's an exciting, it's an exciting thing. Look, that wasn't there a few years ago.
Yeah.
Right? It's great to see those kind of things pop up. I actually think 6% is great, right? After a few years, getting to that, and that will continue to grow. I do see, you know, opportunity, obviously pricing opportunity aligned with the growth. You know, the way it plays out here is generally when you have these new platforms, most of them start on flat fees, right? Because it's easier for everybody involved, to get in the business fast and drive it. Over time, they transition to revenue sharing agreements, but that is dependent also on technology that they have to track and remunerate, you know, correctly. So obviously there are advancements in that area, and that continues to grow. I think the.
All of these emerging platforms have built, like, very interesting experiences that use music and effectively now music content. I think that's wonderful, right? It's just expanding the reach of music. It's kind of consistent with what I said before, which is 100% of the world uses music in different ways. The internet and all kinds of new services allow for those things to meld even more. I think that we'll continue to see continued growth here, and the levers in terms of monetization, and again, through collaborative, robust partnerships, is there as well.
There's a lot of focus on TikTok right now. talk about a platform with a significant amount of music integration, music consumption. My assumption is they would argue that they are a promotional platform, maybe some of the arguments that YouTube made many years ago.
I was just gonna say that.
Not accusing you of anything.
I was gonna say that.
This is an important one for the industry, just given the size of that platform.
Yeah.
What are your hopes and expectations about how Warner's relationship and the industry's relationship with TikTok can evolve positively?
By the way, you just remind me of something. We used to say it's promotion that pays. Meaning we're not only promoting, but we're also paying, right? I remember some of my colleagues probably, if they listened, they must be laughing now. Number one, I think TikTok has, like, created an impressive single-use business. Right? It's obviously large scale, global business, lots of user affinity. I can tell you that's not an easy thing to do. It's very hard. Hats off for that. I think it's also a company that's kind of in battle today, right? With lots of different institutions around the world, I would say more so than YouTube ever was. I can tell you is that that is not fun, right?
Like when you It's just, it's not fun in your day-to-day. I would say as an industry, as a company that's going through that and as someone who has kind of gone through that myself, so I think I do have a unique view on it, is that it is much better to have friends and not fight a war on every flank. It's much better to have supporters and have holistic relationships, and that is what we're open to, and that's what we want to take advantage of together with them. I think the You know, it just, it has to all work holistically for both sides, and that's all, that's all I look for like fair set up for each side and growing the business together.
I think there's a lot of opportunity for us to do it. You know, obviously they're running tests, you know, in Australia with our music. I've gone through all of those things. Like everything that TikTok is going through, I have gone through all the same feelings, all the different tests. Like I can just like, you know, predict all the next moves. At some point it's. By the way, it's part of, you know, correct stewardship of a company, you know, for them to do. You know, at some point they need to decide how important music is to their future.
In YouTube's case, it was helping people because people like having trends and music in order to make their videos viral, and it's a simple way to like jumpstart and we leaned into it.
you're not worried about the outcome of those tests? You know the outcome of those tests.
Yeah. Again, people can make all kinds of decisions, and you have to respect them, right?
Yeah.
I was of the principle, saying, you know, I like to be understood and have my decisions respected. I think, you know, what we stand for and what I stand for is fair remuneration for content, for our artists and songwriters and holistic relationship with our partners that grow the business meaningfully, together.
Does the way music is distributed from a royalty point of view need to change? This is a big topic we hear a lot out of UMG that the structure of payouts-
Yeah
is wrong and needs to be fixed. Do you share that view?
I have a lot of thoughts on that too. I would say again, not a criticism because you always have to look at it historically, a lot of people were not paying for content in the first decade of this century, and then the streaming services helped turn it around, right? Significantly and build this wonderful thing that we all have today. Everything over time deserves a look in changing and to change it, and I think this is one of those for sure. I agree with that. The way I would look at it is separate user actions from algorithmic actions and user actions being born out of the fan-artist relationship that I spoke about before, which is the highest sort of in any little sub, any mediums.
I'll give you an example of user actions. For instance, if a user comes, a subscriber to the SV comes and is starting the session with Lizzo should get multipliers on her views and because it, you know.
Yeah
... she basically brought them to the platform. It's valuable to the platform. It's good for them. If she is consistently starting long sessions, even though it's not all with her content, it starts with her content and then through recommendation it gets to us. Somehow she's consistently long session generator, there should be multipliers for that. If she is searched for, you know, every time somebody searches for her, she should have multipliers for that versus just being recommended. I'm saying is there's so many different ways to slice and dice this that is tying the user-fan connection and the actions the user does that is good for the platform because it shows up in their churn going down and maybe even traffic drivers, right? It's aligning the incentives without changing any of the underlying economics on the top line.
Mm-hmm.
Lots of thoughts on that model.
Interesting. We'll have to stay tuned on how that evolves. We're running out of time. I want to make sure I give you an opportunity to talk just quickly about, you know, sort of Warner Music's, you know, sort of special sauce with A&R and its superstars and how you are able to attract, to generate attractive returns while you continue to run your business and also sort of capital allocation in M&A. Maybe you could touch on both of those. You know, what is it on the A&R front that allows Warner to grow margins, retain its superstars, at the same time in a highly competitive market? How do you think about acquisition capital when you guys look at assets for inorganic growth?
Yeah. First I wanna say that we've met our investment targets, to date, like you know, in the capital that we've deployed. Which obviously I'm very glad to be able to say it on behalf of the team that actually did the work.
Right.
It's, it's wonderful. The one of the things that I noticed is that we are uniquely developing talent from very early stage. We don't just take plug-and-play talent that has risen somewhere and become big, but we actually are managing to find talent, whether it's Ed Sheeran or Bruno Mars, et cetera, to and grow them and with them from very, very early stage. That is a very, very special thing. I think the, our sort of global infrastructure...
Mm-hmm
-around the world, is incredibly helpful in an increasingly noisy world to help artists break through the clutter, which is getting greater and greater, so we're leveraging that. Our investments are going towards, you know, A, growing artists and songwriters, mining the catalog, incredible, which in a, again, unlimited show space environment is driving a lot of value. We have, you know, strict investment guidelines that we're sticking to and growing those, and we continue to do it in very smart ways. I think the financial discipline that we have to deliver all of these things underpins everything that we do, and it was one of the sort of most pleasant surprises that I've had, you know, coming to the company to see how financial discipline it has been.
That was gonna be my last question.
Oh, really?
-to follow up, which is what has surprised you most at WMG?
Oh, okay.
Is that the answer?
I mean, this was one. I would say, so I'll give you one good one less good one. The good one was this, and the less good one is, when I was at YouTube, we were always, you know, because we had to basically license all the rights together and assemble them in order to play back the songs, publishing rights, US, ex US, sound recording rights, and then public performing rights all around the world in every single country. I kind of felt like we're the assembly plant, you know, putting it all together. Then we always saw the friction with songwriters, that they were not getting data, you know, about their performance.
Mm
how it ties to their remuneration. We always felt from the DSP side, it's like the publishers must be doing something to hide this, right? There's like something nefarious going on. I come in the company, I was like, "Huh, I'm gonna look at this, and I wanna understand it." I realized that we're actually not getting the data from other parties. They should be providing it to us. In this case, I'm talking about the collection societies around the world that are doing that, and there are 2 reasons for it. There's lots of murkiness. It's very hard for me to draw a straight line from the revenue to the money that we receive.
Yeah
Like in a, in a time basis, et cetera. There are two reasons for it. One is our own systems. That's something for us to work on, and we're doing that. I got, you know, I got people building things. The other is actually the relationships with the collection societies around the world and getting timely and accurate data that can be transparently, you know, provided to songwriters. You know, I think this is also one of those status quo things that is worth reexamining and making it better and more transparent and fair for songwriters, and publishers and all of us in the industry.
Wow. A lot of great ideas, and, look forward to keeping track of-
All right.
how you guys are doing. Please come back next year.
Thank you so much.
Thanks, everybody.
Great to be here.