Universal Music Group Earnings: Concerns About Generative AI Overshadow Continued Revenue Growth

Universal Music Group UMG reported strong top-line growth as first-quarter revenue improved by 11%, or 9% in constant currency. The growth at recorded music and music publishing drove the improvement. Similar to its former parent, Vivendi, the firm reports only revenue and total company adjusted EBITDA for the first and third quarters. We are maintaining our narrow moat rating and our fair value estimate of EUR 31.

While top-line growth remains strong, management spent a considerable portion of the call discussing the potential threat of generative AI on the music business generally and UMG specifically. The recent viral TikTok hit featuring AI-created voices from Drake and The Weeknd, two of UMG’s most popular artists, precipitated the discussion. Management was forceful that generative AI that uses copyrighted recordings to train and then imitate artists violates copyright protections. Additionally, UMG believes its agreements with streaming partners does not allow for a third party to use its recorded content for training AI. The label or artists themselves also own their name, likeness, and other brand trademarks that AI-created songs may be also infringing upon. While UMG may have a strong legal case, it will need to work with streaming platforms and other sites to attempt to stop the potential proliferation of AI-generated copies.

Recorded music improved by 10% in constant currency versus last year despite ad-supported streaming falling by 2% to EUR 315 million because of the weak ad environment. Subscription streaming revenue jumped by 10% to EUR 1 billion because of subscriber growth and price increases. U.S. subscription revenue improved by 12% despite the market’s relative maturity. Strength in Japan and vinyl adoption boosted physical revenue by 33%. Top sellers in the quarter came from Morgan Wallen, Taylor Swift, J-pop group King & Prince, and K-pop group Tomorrow X Together.