Universal Music Sees Recorded Music Business Near Turnaround

DEAL OF THE WEEK: Who Wins in the $4.1 Billion EMI Sale
Valerie Macon/AFP/Getty Images

With global music revenue down by $9 billion since 2000, the hoped-for digital turnaround is still somewhat tenuous. But Nomura Securities analyst Matthew Walker says the UMG deal could be good for the company and its CEO, Lucian Grainge, potentially adding 5 percent to its bottom line.

??CEO Lucian Grainge and global CFO Boyd Muir also tout Vivendi's music unit's deal to acquire EMI's recorded music arm as "financially compelling" and immediately accretive to earnings.??

?NEW YORK - Top executives of Vivendi's Universal Music Group on Thursday said the industry was nearing a turnaround for the recorded music business, which has continued to decline in recent years.??

During an analyst meeting in Paris, which was webcast, Boyd Muir, global CFO of UMG, said:? "We are approaching the inflection point for the recorded music industry."??

While he acknowledged that it is not here yet, he predicted it would arrive sooner rather than later.? Pressed by an analyst for a more precise forecast, he predicted the inflection point could come towards the end of 2013, although "it might be a little bit sooner" or a bit later. ??Particularly signs from the big U.S. market are encouraging, Muir said.

??As the CD business has halved over the past eight years, digital growth has not been enough to offset the drop, he highlighted. That has left the recorded music business a $15.9 billion industry, down 32 percent since 2003, while music publishing has been "much more stable," he said.??

But now, the rate of decline of the CD is slowing, UMG's investor presentation highlighted. First-half 2011 global recorded music sales were down 7 percent, compared to a 2010 drop in 14 percent. ?And the U.S. is down only 4 percent year-to-date, Boyd highlighted. ??

In the investor session, which was webcast, UMG management also discussed its plan to acquire EMI Group's recorded music business for $1.9 billion. The companies had announced the deal on Friday.??

UMG chairman and CEO Lucian Grange said in Paris on Thursday: "I'm extremely excited about the opportunity."

??Boyd reiterated the company's goal of reaping at least 100 million euros in cost synergies and 500 million euros ($685 million) in divestitures of non-core existing UMG assets. Overall, he said the EMI deal was  "financially compelling" and would be immediately accretive to UMG's earnings.

??A slide he showed emphasized the idea of a turnaround of the music business again. It said that the EMI deal comes "at a likely inflection point in the music industry cycle."

??Also at Thursday's investor meeting, Grainge highlighted that given the business challenges the music industry has seen, his team is focusing strongly on building business and financial success into the creative process.? ?Margin and profit are "not dirty words," he said.??

Among key business focus areas for UMG are the need to align its cost base to reflect market reality, to accelerate the development of new music business opportunities and to maintain investment in creativity as A&R success and talent discovery are at the core of the business, management said in their presentation. ??Among new growth opportunities that diversify business, UMG executives on Thursday mentioned TV (where it has already partnered with The Voice and American Idol), Vevo (which has become the number one music video site for original artist content), strategic marketing partnerships, new businesses such as the Beats by Dre headphones, and international growth, particularly in Russia, China and India.? ?In the area of new business opportunities, executives also said that UMG encourages the adoption of subscription services, particularly online, as superior consumer alternatives to piracy.??

Grainge, who took the reins at UMG in January, also said Thursday that he has in his first year also flattened executive structures to enable the company to act more quickly. He also highlighted that he moved UMG's head office from New York to LA to be in middle of things.

??UMG Thursday also addressed concerns that the unbundling of albums in the digital age were bad for business. ?"Digital has created a massive singles market that was thought lost," Muir said. ??U.S. third-quarter digital track?sales were up 10.6 percent from the year-ago to 952 million units. And while CD sales were down 3.6 percent, digital album sales rose 19.8 percent to 74 million units, a slide showed.??

Email: Georg.Szalai@thr.com?

Twitter: @georgszalai