In a surprising twist, I bought some shares in Warner Music Group, the company who brought me much joy as a consumer and more headaches as an entrepreneur.
So apparently, while gaming took off during a pandemic, growth in music streaming seems to be slowing down. Should we be surprised? And are labels leaving money (i.e. value) on the table?
After file sharing and resistance to embrace change decimated the recording industry, streaming has brought them back from the brink and filled their coffers. Of the four majors, only one is publicly-traded:
- Universal Music Group‘s parent Vivendi is planning to spin out the world’s largest record label. China’s Tencent invested another 10% into the music giant after making an initial 10% investment in March. UMG has a 30% market share.
- Sony Music is firmly in the hands of its Japanese parent, it has a 17% market share.
- BMG is a unit of Germany’s Bertelsmann, whom I had to fend off last year through my unconventional but effective powers of persuasion in my series exposing abuses of YouTube’s ContentID. It trails the behemoth UMG and Sony and WMG with a 10% market share.
- Warner Music Group ranks alongside Sony with 17% market share, behind UMG. WMG is publicly traded, commanding nearly $20 billion in market value off of $4.4B in revenues and a net loss of $475K, according to Yahoo! Finance.
We first worked in partnership with record labels doing interviews of then-unknown artists like Justin Bieber, moving on to doing biographies of popular celebrities to mark new releases, to eventually focusing on top 10s – be it artist specific or on a given theme.
Since 2012 when we nailed platform/format fit after the 2006-11 experimental years and made our four big bets, we’ve served as tastemakers and curators, helping introduce young audiences to new movies, tv shows, video games and music.
Throughout, I developed an expertise in copyright and fair use, not only taming rights holders’ possible concerns and objections to our editorial, but largely bringing them on board as partners. We have dozens and dozens of media companies – namely movie studios, TV networks, streamers, gaming companies – coming to us and wanting to work with us. With music, it’s been a bit of a schizophrenic dynamic, So we steered our editorial coverage to emphasize and help friends in the media landscape who return the love. Organizations suffer from Dr Jekyll / Mr Hyde dynamics: the labels’ marketing departments love WatchMojo and most senior executives see the value we bring them especially with a global reach of 150 million viewers in 150 countries,
I acknowledge some in their legal and rights department didn’t love my “exposé” entitled “are rights holders unlawfully claiming $2 billion,” and drilled down to the dollar what such labels were allegedly exposed to – though you can imagine the lengths I was pushed to to do so.
No, I don’t plan to be an activist shareholder, though as a stockholder, I would be fearful, maybe… with that risk.
“I’m shocked, shocked to find that gambling is going on in here!”
As I have alluded to in the first episode in the series, YouTube went from pariah to the belle of the ball as consumers flocked to the platform once Google’s platform 1) created ContentID and 2) introduced Google Preferred (the lucrative ad stream now known as YouTube Select). Over time, it became ground zero for video advertising, which is now going to shift from TV to digital at an accelerated rate. Indeed, YouTube generates more revenues than TV networks:
With a dearth of live sports and new programming due to Covid, marketers will be shifting more money than ever to YouTube:
Music Was Made For Loving You…Tube, baby…
Historically, music and gaming have served as YouTube’s two pillars. Both share the advantage to be replayed infinitely, but gaming does eventually grow stale to a user and older games tend to not retain their value compared to music, where a given user may never get tired of listening to the work over and over again… and classics don’t really go out of style (especially if a given channel with tens of millions of subscribers would unearth old music and serve it to new fans – but I digress). If I detach myself emotionally and just compare the risk/reward profile of a song vs a game, look at ROI, IRR, payback period, yada yada… in 2020, what is more valuable, $1 from a gaming company or a music one? It’s a good question, and something I will touch on in an article soon.
Yes, YouTube trots out influencers on stage, but that’s because the RIAA views it as a frenemy and artists give it the cold shoulder, viewing it as a necessary evil. Music companies could be making even more money, but they are punishing creators and negatively conditioning them. In the “old days” this was understandable, but given the macro trends, it’s near-signted at best and defeatist at worse.
It shouldn’t be this way, since music streaming revenues are growing nice and steady, via Statista:
Unlike gaming – which requires massive investment and time to release new titles, which are sometimes then botched – music is relatively simple to harvest and harness. Yet despite the seemingly lower risk and more stability in revenues, music trades at a discount to gaming.
Why? To some extent, gaming companies are valued differently because they are tech firms with high growth potential, but in the era of digital – where content is the new software – I would argue music could be valued like gaming firms, if they change their philosophy, approach and tactics.
Were WMG, in which I own shares in, were to be valued like a gaming publisher, it could be worth twice as much. Before I go any further:
Disclaimers my lawyers would like me to relay: this should NOT be misconstrued as investing advice, which I am NOT licensed to give any advice in. These are the philosophical musings of a biased entrepreneur who has partnered – and disputed matters – with WMG. It is intended as entertainment to put into context how a media entrepreneur and investor thinks, given my unique time horizon and risk profile. Educate yourself, read up on mistakes others have made and speak to a licensed professional who can help you based on your investment profile and time horizon. The majority of my holdings are in safer, value stocks and managed by professionals. My direct investment portfolio represent riskier investments that make sense for my time horizon.
Two Major Changes
The biggest thing record labels need to do better is to exploit the IP they are sitting on and expand into new formats. They have started this with some documentaries like Ana Duvernay working on a Prince documentary for Netflix or ‘Justin Bieber: Seasons’ which was reportedly YouTube’s most expensive original ever. They can do much more, but i) as they need to manage the artists’ expectations and secure their involvement, ii) given how their existing business is so profitable for them, they may lack the motivation (which echoes the pre-Napster mindset).
The other is really how they view IP and copyright. It’s one thing for a “needle drop” to command a license when the music is being used in a TV ad, but in editorial or commentary (like the ones prevalent on YouTube) where one compares Lady Gaga’s Born This Way to WMG artist Madonna’s Express Yourself, it doesn’t… and their brass tactics will alienate fans.
Why does this limit the value of their stock?
“The Best Investor is a Social Scientist” – Mike Milken
It’s helpful to view consumers of media as in terms of:
– Format: listeners, readers, gamers, viewers, etc.
– Mode (passive or active): consumer, curator, creator.
If you think back at Digg’s heyday, analysts broke down engagement through a 1/10/100 pyramid:
- 1% of Digg’s users were “power users,” who posted the links that took over the home page;
- 10% were “active users” who drove most of the engagement, they would like/upvote links, which led to some being buried while others took off;
- finally, the bulk, or some 89%, were “passive users,” who would click on the links, read and share, but ultimately “passers-by.”
To some extent, that framework applies to “gaming vs music” but in different ways. In “How to profit from eGaming and eSports”
I explained how gaming is different than other forms of entertainment and discussed how the proxies have changed.
For what it’s worth, gaming publishers made a power move to capitalize on let’s play content by over-stepping copyright law to unlawfully profit off of YouTube’s ContentID, but then backed down when the community of let’s play streamers screamed foul (or rather, once their lawyers explained to them that YouTube does not, actually, equate to copyright law).
In doing so, gaming companies encouraged gamers to become marketing machines. With music, the labels have adopted a brass knuckle approach – and as I had to relay privately to them – encroached on rights conferred to “the mashup culture movement” via fair use, a bona fide exception to copyright which promotes the arts & sciences.
If You’re Not Doing The Right Thing…
Last year at one point, after earlier on expressing full support, a unit within the Warner Music Group empire intensified their already illegal encroachments while we were conducting good faith conversations with other departments. This was above and beyond the usual “right hand not speaking to the left hand” dynamic in large organizations. This was an attack. After many diplomatic forays eventually I advised them that (below is a frame from an unpublished video – featuring Van Halen’s Fair Warning cover in the background in a medley of symbolism and foreshadowing that would make my high school English teacher proud – which echoed my eventual email to their CEO and chief counsel):
After I emailed WMG my arguments (which I expand on in the first episode of Innersleeve, below), I also prepared a video – arguably my best from the series on copyright and #WTFU.
The FU Show episode (which stands for Fair Use) on WMG was a thing of beauty, where I coolly and calmly dismantled their arguments with “receipts” and exposed their “dirty hands.” But, as they acquiesced before I needed to publish the video, I never aired it, even though it was (if I daresay so) a masterclass.
Here Are The Rules of Engagement
As a general rule, I never go public unless a scenario meets a few conditions, namely,
a) the other party or person is conducting in prima facie illegal or egregious unethical conduct which we would prevail in at the merits, if it ever got there;
b) short of seeking an injunction (which is super complicated and having successfully defended one against News Corp/FOX/IGN/AskMen, I always hesitate to unleash), I am left with no other choice in an urgent matter to bring the matter to a resolution that is supported by the law;
c) I have given the counter party multiple opportunities to remedy the matter, they have neither provided an honest/sincere answer or a path to resolution, and clearly paying me lip service and/or telling me to go pound sand;
d) I still remain diplomatic enough when countering (which shouldn’t be surprising given my “Nature”);
e) it’s educational and infotainment, i.e. there is some value to the viewer (not surprising given my “Nurture” and our Vision);
f) I get close to a line, admittedly, which may cause some discomfort and embarrassment, but never cross it where it absolutely destroys the relationship.
Months later, I caught up with a good industry friend who worked there who called it a “power move,” which I found interesting since it was more about survival instincts, though he understood why I had to do that, since the “balance of inconvenience” was clearly in our favor and our business risked suffering “irreparable harm,” vital tests of Injunctions.
Moreover, once the matter is resolved, I remain reluctant to publicly embarrass anyone who ultimately does the right thing. To be clear, isn’t what I am doing here, I use Context Is King as more of an educational and therapeutic vehicle to make sense of the crazy past fifteen years of my life. Furthermore, since my attending Anthony Scaramucci’s SALT Conference (where I produced the Fox in the Henhouse documentary), I have decided to go back to my finance roots and pursue my passion for investing, and I am now merely explaining the context of why I am buying shares in a business I have admittedly criticized and who caused me enormous amounts of stress, anxiety and anguish even though we weren’t doing anything illegal and were, in fact, induced to do!
But point being: the arguments I made therein are not only conveying the legal argument, but also showcase how the labels could “unleash” and unlock the value of their IP by adopting a more dovish stance. Of all people, I would suspect WMG’s board would probably want to see said video, but again, not here to stir the pot. As a shareholder, we’re aligned. We’re now family!
As I alluded to in another article, labels have been receptive to our concept of the “Greenlist” which would
- Reduce frivolous claim volume on YouTube,
- Align various stakeholders – rights holders and creators – with conflicting objectives,
- Set a precedent to usher in a new era of creativity and commerce on YouTube in the 2020s.
Most rights holders like movie studios and gaming publishers either recognize fair use or simply don’t discourage such editorial, since they view it as marketing/editorial. Record labels have always expressed a desire to earn revenue when their IP is used, stating: “we don’t need all of the pie or majority and recognize you have costs.”
We will always be very loyal and indebted to YouTube, since WatchMojo is the house that YouTube built. Recognizing they’re always caught between a rock and a hard place, we also decided to reduce the footprint caused to partners.
While our Greenlist concept was sound, YouTube never seemed to prioritize this, and while we began conversations with the labels in earnest, Covid hit and it got shelved. So what happens then is a company like WatchMojo picks up the ball and goes on to promote gaming, movies, etc. and music becomes de-emphasized. Don’t get me wrong, music is as popular as ever, but given where consumer behavior is going, if users cannot:
i) freely curate/create the content they consume,
ii) earn any actual tangible value out of it (the gatekeeper model is dead, DTC also works the other way where any consumer is a creator/media company)
they will move on to something else. It’s like my advertising teacher would say: if you stop advertising, nothing happens in year 1, but by year 2, you lose relevance.
But, for labels, that’s akin to letting the genie out of the bottle, a pandora’s box they are unsure of wanting to open. That “fear” is understandable, but it runs counter to where the world is headed. When I chatted with John Lack, one of MTV’s co-founders, I asked him what was the biggest difference then and now, he was quick to add “it’s all the same to consumers now: music, games, sports – it’s all entertainment, and they expect to be able to handle and live with it the same way.”
If you can’t beat ’em, join ’em?
Having fought the fight (and continuing to do so), yes you can accuse me of “selling out” by now buying up shares in Warner Music Group.
But, life and business are nuanced.
Warner Music is a best-in-class company and until one can buy shares in Universal Music Group, arguably the best exposure to the boom in YouTube and digital music with acts like Van Halen, Metallica, Madonna and more.
Ukrainian-born billionaire entrepreneur, industrialist, investor and philanthropist Lev Blavatnik‘s Access Industries bought then publicly-traded Warner for $3.3 billion – or $8.25 per share – paying a 34.4% premium for the business in 2011. He had served on the company’s board from 2004-2008, taking it off Edgar Bronfman Jr.’s hands (who side note may be fairly criticized for timing and structure, but has also been prescient, and now chairman of Fubo, another company I own shares in and which I will expand on in a future post). Fast forward to the IPO, the shrewd Mr. Blavatnik recouped the entire money it cost him to buy Warner, pocketing $7 billion, while maintaining majority ownership of a $16 billion-valued music company as demand from streaming platforms has ushered a new world order.
As someone who’s studied M&A for 25 years, that’s one for the history and record books!
By way of disclosure, I should state that at least one of Access Industries’ other companies has also pursued us to explore a commercial partnership, but as of now there is no other relationship to disclose.
No, I’m not planning to be an Activist Shareholder
In my experience, labels were both directly/indirectly extremely aggressive with me in anti-competitive ways, but also extremely gracious in welcoming me for chat when exploring commercial and strategic possibilities.
The vast majority of employees at labels not only respected what we built but also sought to work with us. I would respectfully say neither side was perfect in their communications. I did send UMG’s Sir Lucian Grainge a “get well” note when he was diagnosed with Covid.
In the end, WMG acknowledged that our works were not damaging (and we had proof based on their previous correspondence with us over the years). But it was a shame that unlike TV networks, movie studios, gaming companies, the labels didn’t adopt the same stance. While it’s not too late to revisit those conversations, I guess as I got older, it just occured to me that there may be more effective ways.
After all, while I admirably defended fair use on the platform and played a smart part to ensure YouTube reflected the law, once YouTube recruited former Def Jam and Warner Music Lyor Cohen (whom I interviewed in my early 20s) as its head of music, then the writing was on the wall.
I had done what I sought out to do – as a music fan, historian/biographer, entrepreneur, defender of media’s rights – continuing that fight meant possibly harming WatchMojo, and sacrificing my team’s well-being. Sometimes, you win the war, you have to pick and choose your battles.
When said and done, I don’t plan to be a thorn in their side as a shareholder – unlike some folks – but being a shareholder, no matter how small, might make them slightly more likely to give my solutions the consideration they deserve, if it means it can maximize their share price.
And to echo what I said, similarly to Spotify realizing that the labels were sometimes not the easiest partners to work with and ventured into podcasts, we will be launching more audio-centric programming (including podcasts). To hear more about it, watch my interview on episode 1 of Innersleeve, where we set the stage and talk about everything from ContentID, to how we decided to honor Eddie Van Halen after his passing this year (some jump cuts listed below)
Jump directly to:
11:26 Copyright Battles
15:26 Content ID
19:43 WatchMojo vs The Music Labels
25:39 Warner Music
31:56 Eddie Van Halen
p.s. Ah, maybe one day I will publish that episode of the FU show (which again stands for Fair Use) and we dissected the impasse with Warner Music… one day. But if you are dying to see it, who knows, email me at dmca [at] watchmojo dot com.
Disclaimer: Nothing here should be misconstrued as investing advice. I am NOT licensed to give any advice. These writings are intended as entertainment to put into context how a media entrepreneur and investor thinks, given my unique time horizon and risk profile. Educate yourself, read up on mistakes others have made and speak to a licensed professional who can help you based on your investment profile and time horizon. The majority of my holdings are in safer, value stocks and managed by professionals. My direct investments portfolio represent riskier investments that make sense for my time horizon.