Every time a Peloton instructor cues up Bad Bunny, a TikTok teen lip‑syncs Olivia Rodrigo, or a Netflix trailer taps into ‘70s music nostalgia, one constant happens in the background: Universal Music Group gets paid.

Okay, maybe it’s not that much each time, but these royalties add up(!)

With control of more than four million tracks, including roughly 30 % of all recorded music and publishing rights worldwide, UMG has turned one of the most universal human values, a shared love for music of all types, into a lucrative toll road.

Digital music streaming never sleeps and makes it easier than ever to discover past hits, helping “catalog” music age like wine, and delivering a stable base of annuity-like royalty payments over time as people listen to music in all forms.

This is the story and valuation of the world’s largest music‑rights empire, and my pitch to Daniel for why we should consider owning it in our Intrinsic Value Portfolio.

— Shawn

Universal Music Group: What It’s Like to Own 1/3 Of The World’s Music

UMG Is Stuck in My Head

I first nibbled on UMG stock personally in July 2024 after a one‑off earnings miss sent shares skidding almost 20%, outlining the thesis for the company on our previous Millennial Investing Podcast show. The sell‑off pushed the stock down to roughly 20× earnings, which felt more than fair for a business that converts 85% of operating profits into free cash, has a relatively passive and consistent income stream from music-royalty monetization, and a song catalog comprised of the most talented artists globally (both past and present).

More than twelve months later, the stock is modestly less cheap than it was, but the thesis hasn’t changed: Universal looks less like a hit‑driven casino and more like a regulated utility, where the essential product being delivered is music instead of electricity. Yet, despite a utility-like business model with constant and ever-growing demand, Universal isn’t actually a regulated monopoly(!), meaning that it can grow and compound its earnings power to an extent that energy giants aren’t regulatorily permitted to.

Daniel likes to joke that I finally found a “utility stock for pop culture,” and he’s not wrong. UMG sits at the epicenter of digital life, with every short‑form video, livestreamed concert, or sports‑highlight remix being another avenue to monetize the same IP. Yet the beauty of the model is its capital lightness.

UMG doesn’t need to build streaming apps, manage server farms, or worry about subscriber churn — those headaches belong to the Spotifys, YouTubes, Apple Musics, and TikToks of the world. Universal simply licenses the masters and collects a check.

It’s an incredible passive income stream given that, globally, we spend over 18% of our waking hours listening to music on average, and 71% of people say music is important to their mental health. That engagement transcends geography and demographics.

As such, with this wonderfully high-quality business, it isn’t trading at a distressed valuation. At about €23.50 per share, we’re staring at just a decent expected return (more on that in the Valuation section below), but with far less business risk than your typical compounder. The question, then, isn’t “Is it cheap?” so much as “Do we want to own a bond‑like royalty stream backed by Taylor Swift, Drake, and The Beatles?” That’s how I’m thinking about it, at least.

The answer starts with a century‑long origin story that reads like a Hollywood biopic, because, in many ways, it is. Frequent followers of this newsletter and corresponding podcast will know that Daniel and I are suckers for some fascinating corporate history, so let’s explore UMG’s:

From Decca Records to a Dutch IPO

UMG’s lineage begins at Decca Records in the early 1930s. Decca would later split into separate U.S. and U.K. entities, but the focus remained on discovering and distributing popular music. The iconic globe logo, still spinning atop Universal’s branding today, nods to a sisterhood with Universal Pictures, even if the movie studio now sits inside Comcast (that’s a story for another day) while the music side charts its own course.

Through a cascade of mergers, Decca’s U.S. operations morphed into MCA Records, which itself was swallowed by Canadian beverage giant Seagram in the late 1990s. This corporate mash‑up sounds odd (whiskey meets rock ’ n’ roll, literally), and, well, it was.

A few years later, Seagram’s media assets, including the music side of things, were eventually folded into French conglomerate Vivendi. Under Vivendi’s umbrella, UMG consolidated power during the chaotic Napster era of the early internet, betting on digital distribution even as piracy ravaged CD sales.

At the time, management doubled down on owning both types of music rights: the master recordings and the publishing rights. (Master recordings are the original recording file that gets streamed, while publishing rights are royalties paid to the songwriters & producers who ‘publish’ a song and get paid when, for example, other artists release covers of their music.)

To unlock value buried inside the sprawling conglomerate that is/was Vivendi, the company spun out UMG on the Euronext Amsterdam stock exchange. Vivendi kept a roughly 30% stake, controlled through the Bolloré family, while Bill Ackman’s Pershing Square swooped in to purchase more than 10% of the new company’s stock at the IPO price. After nearly a century, the music titan finally stood on its own, free from conglomerate accounting and armed with blue‑chip backers.

UMG is now barely four years into its life as a public company after IPOing in 2021, and for investors, that means peeling back fresh financials twice a year (due to the semi-annual results required of public companies in the Netherlands rather than the quarterly reporting on Wall St) for a cultural institution that is still in the early innings of life as an independent compounder.

Business Model

With that backtory catching us up to the present day, let’s linger on the three pillars of Universal’s revenue:

1. Recorded Music

As mentioned a few times, UMG controls the master recordings for recorded music, meaning that they own the actual sound wave to songs like Hey Jude playing through your earbuds.

Any time the master is streamed on Spotify or an album is bought on iTunes, a slice of revenue flows back to Universal. Roughly 80% of all sales come from recorded music, and because the marginal cost of another stream is close to zero, much of every incremental dollar falls through to profit.

Of course, these royalties get split with artists, but the labels recoup their initial investment (advances paid to artists) and then divvy up the ongoing cash flows according to the deal in place with a given artist, with UMG typically taking a 40-50% cut. Naturally, proven stars can command more favorable payout structures, while artists signing their first record deal are going to get a smaller slice of the royalty pie, so the company doesn’t have a set take-rate.

2. Music Publishing

To touch on this again, too: Separate from the master recording is the composition, including the lyrics, melody, sheet music, etc.

So if someone does a cover of a Beatles track or remixes an R&B hit belonging to Universal, UMG Publishing earns a cut, which they split with the writers, producers, and composers behind a song. 

Also, when music is broadcast on radio stations, TV networks, and even at bars and restaurants, those businesses pay for that privilege, and U.S. copyright law dictates that those royalties go to the publishing rights holders, not recording rights holders. Same with live concerts, royalties from touring go to the owners of publishing rights.

As such, publishing makes up about 18% of UMG’s revenue and provides inflation‑linked royalty streams that can last for decades.

A key difference between publishing rights and recording rights is that recording rights seem to be more economically resilient. Covid lockdowns, for example, stopped music tours and closed bars worldwide, taking a chunk out of the publishing industry’s revenues. Yet, streaming only gained in popularity as people were trapped at home. It’s probably the same in less extreme examples, too. 

If there’s a recession, people may cut back on spending to go to concerts, which would hurt publishing rights holders, but they’re less likely to stop streaming music altogether. If anything, they might stream music more to make up for not being able to afford to see live concerts. I’m sure not being able to buy tickets to Taylor Swift’s Eras tour only boosted the number of people listening to her music, fantasizing about going.

3. Merch & “Other”

The rest of UMG’s business comes from merch via a segment called Bravado that produces and sells apparel on behalf of artists, as well as things like special‑edition vinyl records, experiential fan events, and whatever new monetization frontier pops up next (NFTs today, maybe hologram concerts tomorrow).

While this is a small part of the business and yields much lower margins comparatively (just 5% “EBITDA” margins — don’t ask how that’s defined), it reflects how Universal is increasingly monetizing superfans who consume a disproportionate amount of content and are most likely to see an artist on tour.

How UMG Creates Value For Artists

Owning both sides of songs (masters and publishing) plus merchandise & fan experiences creates a vertical stack no independent label can match, reinforcing UMG’s bargaining power with artists and platforms alike while enabling it to monetize nearly every touchpoint we collectively have with music.

This is because music labels essentially are in charge of managing the ‘business’ of being a music star for artists, while artists focus on producing music and performing. Generally speaking, labels take on risks like funding everything upfront for recordings in a professional studio, marketing new songs/albums, building an artist’s social media brand, collecting and distributing royalty payments (this can be complex!), planning tours and fan meet-ups, and so much more.

And the more business a label can drive for artists in different forms (like Bravado helping artists sell merch), or the time they can save artists by taking on these behind-the-scenes tasks, the more value is created for both sides.

Despite the bad press that labels often get for appearing as parasites on the music industry, there’s good reason why the world’s top talents continue to sign record deals that tie them into the Universal ecosystem.

I’m biased, but I can appreciate why UMG deserves, and has the leverage to demand, a sizable cut of lifetime royalties.

Artists are artists, and very few have the interest or capacity to try and run the business & operations that underlie their success. Labels, then, provide legitimately valuable services to them that make or break their stardom while also taking on the financial risks of betting on specific artists.

If UMG pours $10 million into a new artist and helps them develop and promote an album, and it’s a complete flop, UMG is the one who eats those losses, not the artist, and as such, they’re also entitled to some of the upside, too, without the transaction no longer being mutually beneficial.

The Economics of Streaming

Before I get carried away arguing on behalf of the major labels, which probably won’t win me many friends at a cocktail party, let’s zoom in on streaming, given how much it has upended the entire music industry.

Streaming didn’t just save the music industry; it flattened UMG’s revenue curve from spiky album cycles to an almost 24⁄7 annuity-like structure; revenues from streaming now comprise over 2/3 of total sales.

The math is elegant:

• Fans pay $10–20 a month to Spotify/Apple Music for premium subscriptions, or stream music for free with ads

• Roughly 70% of these funds are then sent to music rights holders — first labels, then artists

• Spotify and the like keep the roughly 30% of the remaining revenues for themselves to cover their costs and earn a profit

Digital streaming has made consuming music on demand easier than ever, and as such, we all listen to music more often, even more than we used to as a society. Per capita music consumption continues to trend up, and at the same time, it’s easier than ever to explore and discover new music. In the past, to listen to an album, you’d have to shell out $15 without knowing whether you’d actually like it.

For most, that was a pretty good reason to stick to what they already knew they liked, reducing music discovery and listening. And with radio stations, you were at the whim of someone else’s music selection, without always knowing what a song is actually called or who the artist is.

But now, with streaming, the incremental cost of ‘trying’ new music is virtually zero. Nearly every album ever produced is available at your fingertips, driving folks to albums across decades and niches in ways that weren’t really possible before, which is great for the value of UMG’s catalog assets.

Case in point: Over 70% of all music streams are more than 18 months old. That means a track like Dreams by Fleetwood Mac can explode back onto the charts the moment a man goes viral for skateboarding and sipping cranberry juice to the tune on TikTok (yes, that did really happen).

Catalogs don’t always age and depreciate linearly; social media recommendation engines are effectively free marketing that can push dormant IP back into heavy rotation.

On top of that, penetration of paid music subscriptions in India, Brazil, and Indonesia is still in the low single digits.

Less than 5 % of India’s 1.4  billion people pay for music, for example. As GDP per capita rises globally, there’s good reason to suspect that music consumption habits will mirror developed markets, as a growing percentage of people are willing to pay subscription fees for downloadable, ad-free music on demand.

If so, this could unlock millions of new Spotify subscriptions annually, driving higher paid music consumption and thus royalties with virtually no incremental cost to Universal beyond splits with artists.

Looking At The Competition & Moat

With Taylor Swift, Drake, BTS, Queen, and the Beatles’ masters, Universal owns the soundtrack to the last six decades of pop culture. TikTok’s user exodus during UMG’s brief takedown last year proved that platforms need Universal more than Universal needs any single platform.

On that point, you might wonder why streaming platforms like Spotify are willing to send 70 cents of every dollar they earn to music labels and artists, and the answer is that the music-rights holders have significant negotiating leverage over them.

Spotify represents a huge chunk of Universal’s business, but certainly not all of it, and UMG could, in a nuclear scenario, pull its catalog from Spotify for an extended period of time as part of negotiations and live to fight another day.

Spotify, though, would likely face a mass exodus of users given the now-common expectation that music providers offer the entire world’s music catalog in one place. If you could no longer listen to Drake, Taylor Swift, and the Beatles (and 1/3 of all music, really) on Spotify, how long do you think it would take people to switch over to Apple Music? My guess is not that long.

Don’t get me wrong, both sides need each other. But Spotify cannot exist without Universal’s music catalog, while Universal has existed for most of its life without Spotify, and even now, Spotify is just one of a few major streaming platforms that make up a portion of the company’s revenues.

Point being, owning music rights is a wide moat, giving UMG considerable negotiating leverage over big tech platforms, Hollywood movies, video games, and anyone else who wants to license music, as well as leverage over the artists themselves.

They also have a scale advantage, too. Universal is basically a holding company for music labels, and they own music labels in every corner of the world, holding the rights to every type of music imaginable. They can either retroactively buy catalogs of popular music, which is a legitimate part of their playbook, or they can focus on spotting, signing, and developing emerging talent that’ll be tomorrow’s stars (providing decades of royalties).

On that latter point, as the largest player in their industry (followed by Sony and Warner Music Group, then the independent labels), Universal has the most resources to invest in signing and spotting top talent. This is effectively an oligopoly: the big 3 own the rights to 98% of the top 1,000 singles; that’s how dominant they are over mainstream music.

UMG’s global A&R teams sign promising artists early, fund debut albums, and then amplify them across dozens of countries, creating a positive feedback loop. Top artists sign with UMG because it has the most resources to support them and can negotiate the best terms on their behalf, attracting more talent, adding to their scale and negotiating leverage.

Capital Allocation, Financials, And Valuation

Let’s talk numbers, though, because I think we’ve got a good feel for the qualitative. Last year, revenue came in at nearly $12.3 billion, with around $2 billion of that converting into operating income, so that’s a 16.4% operating margin, and then about 85% of that converted into free cash flow, which is pretty solid.

The company has committed to returning capital to shareholders by way of dividends, paying out at least 50% of adjusted earnings annually to shareholders. This is possible because Universal isn’t a fast-growing or resource-intensive business, so only so much capital can be reinvested into the business productively, meaning there’s leftover cash to send to shareholders.

I actually don’t have any issues with this, because with a business as stable as Universal’s, it’s nice to know that dividend payments are indexed to earnings and will effectively rise over time without management or the board needing to do a thing.

At today’s prices, the stock offers a 2%+ dividend yield, while the company has compounded revenues at a 9% CAGR since 2022, and generated a 46% average return on equity over the last 5 years, yet it trades at <23x expected FCF/share over the next year.

Compared to Warner Music Group, the only other pureplay music label company that trades public (Sony Music is wrapped up in the broader Sony conglomerate), Universal trades at a slight premium as a multiple of free cash flow, but Warner Music Group is less profitable, has historically grown slower, and lacks the same scale advantages as Universal as the 3rd biggest player in the industry, so I think it’s very reasonable to pay a modestly higher multiple for UMG.

Between the dividend yield and profitable growth tailwinds for the industry generally (more people paying for music subscriptions, and streaming platforms raising subscription prices faster than inflation over time), it’s not very demanding to model a 7-9% total shareholder return annually at current prices for UMG.

There’s no reason the business can’t continue to grow a few percentage points a year, while margins stay relatively flat, and dividends compound for shareholders. Clearly, I’m not pitching a multi-bagger here. This isn’t some genius idea that no one else can foresee. It’s a simple bet on claiming a share of the ever-growing royalty stream that Universal is entitled to and hoping to do so at a fair price.

As mentioned, the valuation looks very reasonable, not obviously cheap but not too expensive, either, while we’re not taking on much business risk.

I know with very high certainty roughly how much music will be consumed this year, next year, and honestly, five years from now, and that number keeps growing, thanks to platforms like Spotify and TikTok. We also know the economics of how Universal monetizes different forms of music consumption, and this only seems to be moving in their favor as well (more people globally moving to paid subscriptions on streaming platforms that are more profitable than ad-free subscribers, and streaming platforms raising prices over time while still being required to send roughly the same percentage cut to music rights holders.)

Normally, Daniel and I target a 12% minimum rate of return annually over 5 years or so to consider an investment, but that partly reflects the higher degree of uncertainty these businesses face. Even our holding, Alphabet, arguably the ‘safest’ bet in our Portfolio, faces some legitimate uncertainty about its future given the rise of ChatGPT, but it’s hard to make the same arguments against UMG. Yes, we could go down the AI-music rabbit hole, as Daniel and I did in our podcast about UMG together, but for the sake of brevity, I really don’t see any serious risks on the horizon for this company.

That’s why I felt using a lower discount rate than normal to estimate fair value (7% rather than 8% or more) was appropriate, nor did I feel a margin of safety was needed:

Not to say Universal faces no risks: Sure, AI music is something to think about, and maybe their take rates from streaming platforms will decline over time as Spotify & Apple Music gain more power over labels, but for the most part, music rights are a kind of boring, black-and-white asset class.

While the music industry has had its ups and downs, for the foreseeable future, it’s hard to imagine Universal’s business shrinking, and if anything, it should continue to steadily grow as it signs more artists, purchases more catalogs, and as more people globally pay to consume music.

So I pitched Daniel on a technicality: Making an exception to our hurdle rate for new positions in the portfolio, because Universal doesn’t come with the same risk profile as any other company we’ve ever looked at (besides VeriSign, which ‘owns’ web domains and gets paid by every website ending with .com in the world. That’s hard to beat, but that business is much more mature than Universal’s music-tollroad business.)

This would be a more bond-like bet, helping us to hopefully earn returns that are a few percentage points better than cash for a chunk of our Portfolio.

As such, Daniel and I agreed to add Universal Music Group to the Portfolio with a 5% weighting. But once we allocate the remaining cash portion of our Portfolio, if we find opportunities with even more attractive risk/return profiles, Universal would likely be one of the first candidates to trim to fund new positions.

More below on our Intrinsic Value Portfolio, recommended content, and our Quote of the Day.

Weekly Update: The Intrinsic Value Portfolio

Notes

• Daniel and I have been in Montana together for the first-ever TIP Summit the past few days, so no significant updates on the Portfolio for the time being, but enjoy some pics from our trip together!

  
  

  

  Big Sky, Montana

Quote of the Day

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

— Warren Buffett

What Else We’re Into

📺 WATCH: Why Wall St Loves Oracle Again

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You can also read our archive of past Intrinsic Value breakdowns, in case you’ve missed any, here — we’ve covered companies ranging from Alphabet to Airbnb, AutoZone, Nintendo, John Deere, Coupang, and more!

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