Universal Music Group N.V. (UMGNF) Q3 2023 Earnings Call Transcript

Universal Music Group N.V. (OTCPK:UMGNF) Q3 2023 Earnings Conference Call October 26, 2023 12:15 PM ET

Company Participants

Lucian Grainge – Chairman and CEO

Boyd Muir – EVP, CFO and President of Operations

Michael Nash – EVP and Chief Digital Officer

Conference Call Participants

Silvia Cuneo – Deutsche Bank

Lisa Yang – Goldman Sachs

William Packer – BNP Paribas Exane

Adrien Hilaire – Bank of America Merrill Lynch

Douglas Creutz – Cowen

Julien Roch – Barclays

Thomas Singlehurst – Citigroup

Michael Morris – Guggenheim Partners

Operator

Good evening, and welcome to Universal Music Group’s Third Quarter Earnings Call for the period ended September 30, 2023. My name is Nadia, and I will be your conference operator today. Your speakers for today’s call will be Sir Lucian Grainge, Chairman and CEO of Universal Music Group; and Boyd Muir, Executive Vice President, CFO and President of Operations. They will be joined during Q&A by Michael Nash, Executive Vice President and Chief Digital Officer. [Operator Instructions].

Please let me remind you that management’s commentary and responses to questions on today’s call may include forward-looking statements, which, by their nature, are uncertain and outside of the company’s control. Although these forward-looking statements are based on management’s current expectations and beliefs, actual results may vary in a material way. For a discussion of some of the factors that could cause actual results to differ from expected results, please see the Risk Factors section of UMG 2022 annual report, which is available on the Investor Relations page of UMG’s website at universalmusic.com. Management’s commentary will also refer to non-IFRS measures on today’s call. Reconciliations are available in the press release on the Investor Relations page of UMG’s website. Thank you.

Sir Lucian, you may begin your conference.

Lucian Grainge

Thank you, and thank you all for joining us today. I’m pleased and proud to report that Universal Music Group’s third quarter was our ninth consecutive quarter of strong growth since becoming a standalone public company, just over two years ago. Revenue was up 10% in constant currency and adjusted EBITDA increased by 11%. These results demonstrate that our plan to create and assemble a broad-based and strategically integrated portfolio of businesses is delivering both commercial and creative success. Expanding our revenue streams positions us to navigate the inevitable ebbs and flows in any particular business as well as to seize opportunities in new and emerging categories. Our approach produces consistent top and bottom line growth and has done so in light of the highly complex macroeconomic environment and the ever-changing shift to both technology and media consumption.

What today’s results don’t demonstrate but future ones will is how our leadership on issues such as AI, streaming economics will benefit not only UMG and our artists but the entire music ecosystem. So before Boyd presents a more detailed picture of the numbers, I’d like to talk about five key areas of our business strategy we’re especially proud of. The artist-centric approach to streaming model innovation, we are fostering with the DSPs; the positive steps we are taking both in utilizing AI and its monetization as well as in protecting against its stages; recent developments in our global diversification plans and the expansion of our best-in-class distribution partnerships; and last but definitely not least, of a continued remarkable success of our artists.

Let me begin with streaming. In January, I talked about how the streaming model needed updating to become more artist-centric. I outlined some of the core principles that we would use to dive our work with platforms to strengthen the artist-fan relationship and better reward artists for the fan engagement they drive. And I stress how important it is to address fraud and the oversupply of content that’s drowning out the real music and real artists that fans actually want to hear.

Last month, after months of collaboration, Deezer announced the launch of the first artist-centric model. This new model honors real artists by better rewarding them for music tracks and engage their fans and by protecting against bad actors who deprive artists to pay compensation. Based on its own in-depth data analysis, Deezer is integrating several major enhancements to its service that will: one, boost streams of music by what they define as professional artists as well as the songs that fans actively engage with; two, replace noise such as non-artist content; and three, implement a much stricter fraud detection system. In the words of one prominent independent label executive “For labels who invest every year relentlessly in new talent, this has to be good news.” But Deezer’s important step forward is only the beginning of this critical evolution in streaming. We are determined to bring an artist-centric approach to every DSP. This initiative will achieve many goals. It will support all artists regardless of the scale at which they’re operating and regardless of the stage of their careers. It will enhance our discovery and it will also significantly benefit the DSPs themselves by returning them to their core mission of bringing great music to fans and in the process, increasing subscriber acquisition and retention as well as reducing churn, whilst reducing costs associated with valueless content volume. We will have more announcements on this front in the near future as we work with other DSP partners.

Next, AI. Last quarter, I said we soon have more to say about the commercial and creative opportunities that AI presents. I meant what I said. We subsequently announced that YouTube and UMG have agreed to partner in developing a commercially viable AI component within YouTube’s music and video ecosystem. As a further expansion of our artist-centric strategy, this historic collaboration underscores our belief that the best way to ensure responsible AI development is through market-led solutions. Specifically, we agreed that YouTube will embrace a set of AI principles that empower human creativity and embrace artists’ interests and a new AI music incubator co-founded alongside UMG artists and songwriters that will play a key role in developing — in the development of AI-related musical tools and products.

Let me mention just one important aspect of this historic initiative. Unlike past instances where new technologies was released into the world, and the music community was left to figure out how to develop a business model that would protect artists’ rights and compensation. Here, thanks to our close relationship with YouTube, we’re collaborating on opportunities and solutions and placing artists at the forefront. We will have more to say in the near future as our ongoing work with YouTube develops business models and products that further unlock the creative and commercial power of AI. Also, just last week, we announced an alliance with BandLab, the world’s largest social music creation platform. The alliance will advance our shared commitment to the ethical use of AI and the protection of artists and songwriters. As our AI strategy progresses, you’ll see more companies committed to responsible AI, development working with us on solutions to unlock creativity, explore new commercial opportunities for us and compensate artists appropriately.

The third key area we’re especially proud of is the accelerating expansion of our global presence. As I discussed last quarter, we are accomplishing this by signing and developing local offices outside of the established music market, providing local labels and entrepreneurs with global promotion, distribution and a full suite of artist services and post M&A that is acquiring local labels, catalog and our artist services businesses.

Here’s one example of a recent acquisition in the Middle East and North Africa, where the Recorded Music market grew 24% in 2022 to complement our current service offering and footprint in the MENA region. In August, we announced the acquisition of Chabaka Music, a UAE-based music company. Chabaka has agreements with more than 150 independent artists and local labels and specializes in digital distribution, marketing, publishing as well as artist servicing. They will become part of UMG’s Virgin Music Group, working closely with the local Virgin and UMG teams in MENA and around the world. With Chabaka’s unparalleled regional expertise and Virgin Music Group’s creative network and global footprints, the group will be uniquely positioned to reach and build the largest possible audiences for talent from the region.

Along with our M&A strategy, we’re strengthening our management teams in fast-growing markets. Last month, for example, we appointed Tim Xu as Chairman and CEO of Universal Music Greater China, which includes our operations in Mainland China, Hong Kong as well as Taiwan. A highly respected industry executive, Tim has had three decades of success in breaking Chinese artists and talents across the region, most recently, at Taihe Music Group, China’s leading independent music company. And we’ve also accelerated our artist signings in China. Two prime examples, Republic Records China has signed Chinese pop icon Hannah Rebecca Jin, and Universal Music Publishing China signed a global publishing deal with Chinese singer-songwriter, Tia Ray, the first and only Chinese singer so far to reach the IFPI’s Top 10 Global Singles chart. UMG has the world’s leading capabilities in global distribution, best-in-class technology and a flexible infrastructure to allow us to easily expand our distribution partnerships. And that’s the fourth area I want to highlight today. Our global distribution business, in particular, our newly announced relationship with BMG.

We’re delighted that BMG will be moving the distribution of physical formats to UMG, commencing in the second quarter next year, 2024. This exciting development marks the start of potential future collaborations between the two companies.

Fifth and finally, but always foremost, there are our artists, brilliantly creatively — created an enormously popular artists. I’d be remiss if I didn’t talk just about a few of the incredible success stories so many UMG artists have all had around the world during the quarter. For example, Olivia Rodrigo’s Guts, which debuted #1 in the U.S., UK, Germany, Australia, Sweden, Norway, Spain, the list just goes on and on and on. In the U.S., she became the first female artist, whose first and second album debut at the top of the album chart since Ariana Grande did nine years ago. In the UK, in its debut week has outsold the rest of the top 10 albums combined and is the country’s most streamed album of the year so far. In September, Olivia’s opening single Vampire returned to the #1 spot in the U.S. and became the third #1 song in Europe.

The Korean quintet, NewJeans, bought their first #1 on the U.S. Billboard album chart with their second EP Get Up. Interestingly, roughly 80% of first week sales were actually physical CDs, a phenomenal attributable to super-fan focused collectible packaging with 14 different iterations, individualized to members of the group with branded merchandise, including lyric books, photobooks and cards. And on Billboard’s Hot Latin Songs chart, Karol G made history as the woman with the most interest since the chart debuted almost 40 years ago. Her fifth studio landed 9 debuts on the chart, giving her a total of 60 chart appearances. So far, to top it off, she won 5 awards at the 2023 Billboard Latin Music Awards, and prudently, that included Album of the Year.

I’ll mention just one more artist success, someone who you may have heard of recently, Taylor Swift. Taylor’s Speak Now, her version launched with the year’s biggest week in the U.S. for any album. She became the first woman in history to have four albums in the top 10 at the same time. The album hit #1 in the UK where Taylor became the first artist in 59 years to achieve 6 studio albums in the top 10, simultaneously. In Australia, where the album also hit #1 to get all 5 of the top 5 albums in the country. Other #1 countries were Belgium, Canada, Ireland, Netherlands, New Zealand and Spain. On the U.S. Singles chart, Taylor became the first artist since the Beatles to have singles from three separate albums in the top 10 at any time. She is a phenomenon. This level of performance can only really be described as truly astonishing. Astonishing I suppose is an understatement when it comes to describing Taylor’s breathtaking talent, popularity and career. And of course, her version of 1989 comes out tomorrow.

Continuous worldwide phenomenal artist successes like these are one reason Universal Music keeps attracting new talent to its roster. A new talent is indispensable for our future growth and success. Our relentless leadership in pursuing progress and evolution for the industry is yet another reason why we’ve become such a powerful magnet for label and artist partners alike. It’s how we keep producing and we will keep producing remarkable results like those that we’re reporting today.

Now before I hand it over to Boyd, I would be remiss if I didn’t mention the historic event that occurred earlier this morning. And now I’m not talking just about our earnings. I’m talking about the announcement of our forthcoming releases the last Beatles song ever recorded. The song is titled Now and Then, written and sung by John Lennon and worked on by Paul McCartney, George Harrison and Ringo. We will have its global premier on November 2. The fact that more than 4 decades after its original recording, we can use the latest technology to bring this recording to fans everywhere, it’s truly remarkable and something that we’re very proud of.

And on that basis, Boyd, I’d like to hand over to you. Thank you.

Boyd Muir

Thank you, Lucian. I am pleased to be reporting on another quarter of solid revenue and adjusted EBITDA growth at UMG. As usual, all of the growth figures I will discuss today will be in constant currencies. While I recognize one-time items’ complicate modeling, they are a reality of our business and there are a couple that I need to mention regarding this quarter and the prior year. As we previewed last quarter, the third quarter of 2023 includes an accrual for a catch-up payment from certain DSPs related to the Copyright Royalty Board’s Phonorecords III ruling and Music Publishing. The accrual is larger than we had estimated when we spoke last quarter and amounted to €53 million in revenue and €11 million in EBITDA. Note that the cash receipt for this accrual is not expected until the back-end of 2024.

As disclosed last year, the third quarter of 2022 included a Recorded Music settlement from a copyright infringement lawsuit with an Internet service provider, which was included in other digital and amounted to €71 million in revenue and €52 million in EBITDA. I will present figures both including and adjusting for these items in my remarks and all the details are also laid out in today’s press release.

UMG’s revenue for the quarter of €2.75 billion grew 10% and adjusted EBITDA of €581 million grew 11%, leading to margin expansion of 0.3 percentage points. However, excluding the one-time items I just mentioned, revenue grew 11% and adjusted EBITDA grew 20%, driving margin expansion of 1.8 percentage points on an underlying basis. I will come back to this in a moment.

Our revenue growth continues to be broad-based with an expanding array of opportunities ahead of us. This drives our confidence in the outlook for the business, as we play an increasingly important role to artists at each stage of their career.

In the third quarter, Recorded Music revenue grew 5%, but underlying growth was actually 9% excluding last year’s legal settlement. Subscription revenue grew 13%, driven primarily by the continued solid growth in the number of subscribers. Subscription revenue benefited from the same price increases in the third quarter that benefited the second quarter, including those from Apple and Amazon.

It’s worth pointing out that our third quarter did not benefit from the recent Spotify price increase. We expect the fourth quarter to benefit from the Spotify and YouTube music price increases. As a reminder, each of these services raised prices in certain markets and on certain plans, not across all subscribers.

In particular, with regard to YouTube, the price increases were announced for the U.S. to start with, followed by several other markets a few weeks later. But YouTube has a particularly global subscriber base so the benefit will initially be more limited. In the third quarter, ad-supported streaming had a similar growth rate to Q2, up 5% again.

Right now, what we are seeing in our ad-funded streaming revenue is that the recovery is not uniform across all partners and our all markets. In addition, our ad-supported streaming revenue comes from a mix of both fixed and variable deal structures. So the results in any given quarter are not solely a reflection of trends in the advertising market. We remain cautious on the level of growth in ad-support and streaming in the upcoming quarters.

We do, however, continue to see opportunities for improved field terms and product innovation driving higher levels of growth in this business over the medium-term. Physical revenue grew 20%, driven by strong vinyl sales in both the U.S. and in Europe. Physical revenues in Japan also grew across all formats, including CDs, DVDs and vinyl. Physical sales came from artists, including Taylor Swift, SEVENTEEN, NewJeans and Olivia Rodrigo, to name a few.

License and other revenue declined 7% as it faced a difficult comparison against the prior year quarter that grew 30% due to live touring and stage production activities where we participate in certain markets. Licensing revenue in itself continued to grow in the quarter. Download and other revenue declined 53% primarily due to the legal settlement included in last year’s figure as well as the continued format shift away from downloads.

Moving on to Music Publishing. Revenue grew 25% in the quarter and 11% when excluding for the Phonorecords III catch-up accrual. Within Music Publishing, digital revenue grew 34% and grew 10% excluding the accrual, driven primarily by the growth of streaming and subscriptions. Performance revenue grew 22% reflecting the continued COVID recovery, particularly in Europe and in Asia, and synchronization revenue grew 4%.

In Merchandising and Other revenue increased 28%, driven primarily by the growth in direct-to-consumer sales. Touring revenue also increased, thanks to higher activity in the U.S. and the UK while retail revenues declined.

As I mentioned at the start of my remarks, third quarter adjusted EBITDA grew 11%, but grew 20% excluding the one-time items in both years. Also excluding these items, adjusted EBITDA margin improved 1.8 percentage points to 21.1% compared to 19.3% in the third quarter of 2022. Part of this year-over-year margin improvement is related to an easier comparison.

As we discussed in last year’s third quarter call, A&R expenses were elevated in the third quarter of 2022 due to timing. While the incremental A&R expense last year was €40 million, it would be inaccurate to consider this as a one-time as the amount for the nine months and for the year were not unusual. In addition to the easier comparison on A&R expense, margin expansion was driven by the revenue growth and operating leverage as well as by cash compensation savings of €21 million related to our equity plan implementation. This was partially offset by revenue mix as revenues in the third quarter of 2023 were more heavily weighted towards merchandising and physical, which carry a lower EBITDA margin than digital sales.

We saw strong growth in line with our expectations across all of our segments and especially strong growth that exceeded our expectations on our lower-margin physical and merchandising businesses. That drove strong EBITDA growth, but limited the amount of margin expansion across the entire business. Even with the mix impact from higher physical and merchandise revenue growth, we expect to meet our guidance for more than 1 point of adjusted EBITDA margin expansion in 2023.

Moving on to share-based compensation expense. The total impact was €103 million in the quarter compared to €14 million during the third quarter of 2022. We now expect our share-based compensation for 2023 to be just over €550 million, below the €630 million we anticipated when we announced the details of our equity plan earlier this year. About half of these savings are permanent while the other half are timing related with the cost likely coming in 2024.

Lastly, we are currently conducting a careful review of our cost base, which we will complete over the coming months, and we will update you when appropriate about an anticipated cost savings program to commence in 2024. We remain focused and optimistic as we continue to execute on the growth prospects that lie ahead for UMG. We see enormous opportunity for value creation, both for our artists and for the company as we advance our artist-centric initiatives and work to further capture the value of the engagement being driven by our unparalleled roster of artists and songwriters.

Thank you. Lucian, Michael and I will now take your questions. So operator, please open the line for Q&A.

Question-And-Answer Session

Operator

[Operator Instructions]. And our first question goes to Silvia Cuneo of Deutsche Bank. Silvia, please go ahead. Your line is open.

Silvia Cuneo

Good evening, everyone. My first question is related to the growth trends. And looking into Q4, in particular, since you mentioned there will be the contribution of more price increases, especially from Spotify and to some extent, YouTube in some of the markets. Can you help us think about the potential contribution of these price increases comparing to Q4 at least versus Q3, if possible?

And the second question is on the margin. Like you mentioned during the remarks, you are still comfortable with the full year guidance of over 1 percentage point for the full year. In the first nine months, you delivered 95 bps. Can you please tell us about the areas of improvement in Q4, probably coming from the price increases drop-through? But just wondering if you could say any more thoughts about this? Thank you.

Boyd Muir

Thank you very much. I mean, just firstly, kind of turning to price increases. As I mentioned a few minutes ago, our Q3 did not include any price increases from Spotify, nor from YouTube, and we expect to actually see those price increases falling into Q4. But I would like to point out that the price increases impact different geographies and different plans in a way that, for giving you sensitivity right now, is not really going to be particularly helpful. I mean we are encouraged by the price increases. The value proposition for music is an incredibly compelling one. So we are encouraged by the developments that we are actually seeing with regard to price increases. And clearly, as the platforms are communicating, the level of churn is de minimis, which is also very, very encouraging.

Just turning to your question on margins. Our guidance for more than 1 point of adjusted EBITDA margin for 2023 still stands. However, I would like to point out, as we continue to see revenue growth beyond our expectations and guidance, which is what we are seeing, the revenue growth is beyond our expectation and guidance. The revenues that are incremental to our expected growth are actually coming from lower-margin areas of our business, for instance, merchandise and physical.

In Q3, 75%, three-quarters of our revenue beat compared to consensus came from merchandise and physical. These incremental revenues are not substitutional to our core revenue growth. They are EBITDA accretive, but margin dilutive. But they are business segments that we must pursue. And so I’m going to encourage you to focus on absolute growth rather than solely focusing on margin improvement.

Operator

And the next question goes to Lisa Yang of Goldman Sachs.

Lisa Yang

So two questions as well. Just on the artist-centric model, I think Deezer has implemented it, I think this month in France. Could you maybe share the sort of initial impact you are seeing on your market share in France? And also comment on the discussions you’ve had with other players? I think you announced a deep data partnership with Spotify. There’s been some press reports that they might also be looking to move to the artist-centric model. So that’s the first question.

And the second one is on your potential cost cutting program for next year. Just wondering what’s sort of triggering this sort of review of the cost base, how meaningful this could be, will the savings be reinvested? And is that also part of the ambition to meet your midterm margin target of mid-20%?

Michael Nash

Lisa, thank you for your questions. Let me tackle the question regarding artist-centric. So it’s a little too soon with Deezer having announced that they were rolling out the artist-centric model at the beginning of the month for us to have any readout from the implementation itself. But as Lucian discussed, we’re very encouraged by the approach that’s being taken there. The three different buckets that they’re going after in terms of rewarding real artists, authentic and engagement with the plan to boost qualified artist streams and active engagement artist streams. We see the platform’s push to reward real artists and the fan engagement associated with that content being elevated above anonymous content that’s being sorted up by an algorithm being an excellent approach that embraces the artist-centric core tenant around rewarding real artists authentic fan engagement.

And then the moves that they’re taking to remove noise and clean up clutter and to attack fraud I think are very important complements. And so taken together, we think that this is an excellent example of a model that embraces the principle. So we’re looking forward to following the progress of the implementation as they take on additional partners and as they move from France to more broadly roll the model out. The CEO of Deezer in public remarks talked about their ambitions to scale their implementation into and through the end of 2024. So I think it will be important to enable the implementation of the model to give us the readout in terms of the results. But with respect to embrace the principles around artist-centric, we’re very encouraged by what Deezer has done.

Lucian Grainge

And I think that what you’re also hearing is that the DSPs have shared interest in addressing full and the further content that adds sort of value to fans.

Boyd Muir

Lisa, just to touch base on cost cutting. This is something that we do from time to time. So this is a good time for us to look at our cost base.

And I think in particular, we’ve added resources and to really position us to capture the opportunities that we’re seeing in the marketplace. And I think really what we do need to look at now is to look at perhaps those resources that are more focused on the legacy business in order for us to actually ensure that we actually do have the right level of resources to execute and benefit from all of the opportunities that we see ahead. So it’s just a heads up for now. We’ll come back to you when we’ve got something with greater specificity a little bit later on.

Lucian Grainge

Also I would add to that. But as a management team, we’ve got decades of experience in executing cost cutting programs in the various cycles of the industry back to the piracy days and the file sharing days. And we’re seeing a change in the business, which, as Boyd said, in terms of, there’s not only legacy costs, we’ve always had a program called where we cut to grow and cut to grow is we will cut overheads in order to grow elsewhere. And we do have experience in managing the business and managing the teams and the businesses within that make up the group. And we’ve got a plan.

Operator

And the next question goes to William Packer of Exane.

William Packer

So two, please. So firstly, you’ve been actively communicating your perspectives on AI regulation. And we saw the UMG General Counsel spoke before the Senate Judiciary Committee. And I suspect you’ve been in active dialogue with European and UK legislators and regulators. So could you outline the areas you see most important in this first stage of generative AI regulation? Is it governments confirming LLM training data need this copyright on permission and remuneration? Or is it carving out AI created music for copyright? And then as a follow-up, how do you think the regulators are responding to your priorities? And when should we expect to hear about new rules in the EU and U.S.?

Michael Nash

So with respect to our view on AI and the role of government, government obviously does have an important role to play. I think, first and foremost, effective enforcement of current copyright law is at the top of the agenda. We believe that, generally speaking, in those territories, copyright law is fit for purpose with respect to our interest in terms of AI, as it implicates copyrights and the work of our artists. And I would emphasize all your question is really kind of focused on the role of government.

Our core philosophy on AI we hope becomes the vantage point from which various governmental oversight is considering the issues. Our perspective is, focus on artists to bend their interests and protect their rights and from that basis, establish market-led solutions that enable us to establish new commercial opportunities and the development of new tools. And you see an example of that approach with what we have announced with YouTube that Lucian outlined in his remarks.

I would note that there are issues with respect to improper exploitation of artists’ name and likeness, what has been characterized as right of publicity. And we do think that some shoring up in terms of law, especially current legislation being considered in the U.S. with respect to a federal right of publicity could be very helpful in addressing the sort of fake artist AI issues that materialize. Because, by and large, more anonymous content that provides very low value to the services is not going to impact market share for the artists that are driving the business model to the platforms. But when that content makes a false association by invoking the name or likeness of the artists in the metadata confusing consumers, you have a problem. And so that’s why we would call out right of publicity as an area of important consideration. But again, the top priority is working on effective enforcement of current copyright law.

Operator

And the next question goes to Adrian Hilaire of Bank of America Merrill Lynch.

Adrien Hilaire

Thank you very much. I have got two questions then. So maybe my interpretation was wrong, Boyd, but it sounded like you said that the price increases by Spotify or YouTube would not have a particularly helpful impact in Q4, but maybe I heard this wrong.

And then maybe a question for Michael or Lucian. We have seen a lot of price increases in the video world recently. Do you think the cadence of price increases in the streaming audio world will increase going forward, i.e., we are going to see perhaps more price increases around a shorter window of time compared to the previous cycle?

Boyd Muir

Adrien, it’s Boyd. We are going to see a benefit in Q4. Sorry if I didn’t make that clear. All that I was really trying to say is that the impact that we will see in Q4 is not across the entire subscriber base for both YouTube and for Spotify. So we will see a positive impact in Q4.

Michael Nash

And then, Adrien, with respect to your second question, regarding the cadence. It is important, first and foremost, to emphasize that pricing is up to the retailers. We don’t control retail price. And so those decisions are being made by the DSPs with respect to the question on the recent subscription price changes. We are, of course, encouraged to see these pricing books. We think that they are a recognition of the incredibly compelling value proposition of streaming subscription. We have previously cited estimates that suggest that at a cost of $0.10 per hour of premium content consumed, that music subscription is dramatically underpriced with respect to, for example, online video or online gaming or other forms of entertainment. So we believe these pricing moves are a recognition of the compelling value proposition of music being underpriced.

With respect to the question on cadence, we don’t currently foresee calendar-driven price increases. We think the price increases are most likely to be based on individual platforms’ decisions to optimize customer value, and we see them potentially tied to product offerings in the future.

The last point that I would make to your question is it’s encouraging to hear from the DSPs that have increased prices that they have not experienced any material churn. So I think that, that suggests that the moves that have been made have been thoughtful moves and the benefit of those moves is playing out in the marketplace reaction.

Operator

The next question goes to Douglas Creutz of Cowen.

Douglas Creutz

I saw an article last week that you guys have launched a subscription service, which is a claims free service allowing content creators access to some of your catalog of music and sound effects. Can you talk a little bit more about what’s the driver there? And what kind of opportunity do you see with that?

Michael Nash

Douglas, to your question. So yes, we were happy to announce Universal Music Group’s Production Music Company has developed a special offer for creators. So they’re enabling creators to utilize sync music for the purposes of the content that they create. I think that is an important and interesting market segment for us to address and our Production Music Company has been very creative and innovative and looking at market opportunities for their business. So we appreciate you pointing that out, and we think that, that is a positive indication of the innovation in that area.

Operator

And the next question goes to [Ben Kanter] of Barclays.

Julien Roch

Hello, this is Julien Roch for Barclays. We’ll probably mix the code with Ben, sorry about that. My first question is coming back on the cost savings program. Both Boyd and Lucian said that the philosophy was that you had a lot of resources, but you needed to capture the opportunities so you wanted to maybe cut the resources on legacy business to be able to grow in the new opportunities, and Lucian mentioned cut to grow. So that cost savings program, will it result in net savings and higher margin? Or it’s just basically cutting the kind of lower growth business to invest into the faster growth business and the net impact is not too much on marginal cost? That’s my first question.

And then the second question is, I know we don’t have any cash flow data on this call, but you spent €95 million on net content investment ex Capitol in the first half, now in the Q3 numbers. So could we have some indication of the spend for full year ’23?

Boyd Muir

I mean just to — it’s Boyd. Just to deal with your first question, yes, the cost savings program will lead to an improvement in margins. It will be real cost savings. The comment that we made about cut to grow is just really about how you align the business to be best placed to execute and capture all of the opportunities that we see in front of us. But it will actually lead to real savings. And then just really on the — on Capitol, we don’t actually disclose that information on Q3. But just by way of background is that there was very little activity in Q3 to bring to your attention.

Operator

And the next question goes to Thomas Singlehurst of Citigroup.

Thomas Singlehurst

The first one, you made the point very loud and clear that some incremental revenue just comes with incremental profit, and we shouldn’t be obsessed about the margin, which makes perfect sense. Just wondering with the BMG distribution deal kicking in from 2Q next year, I know this is a ’24 comment. But I mean, should we just steal ourselves for the idea that margins won’t move an awful lot next year? Is that something that is possible as we see you sort of broaden the array of things that you do in particular with respect to distribution? That was the first question.

And then the second question, some of the peers don’t appear to be quite as positive about the Deezer artist-centric model. And I’m just interested in — I suppose, really why that is. It doesn’t seem obvious. It’s something that one should sort of disagree with. But the question is if there isn’t sort of consensus amongst the industry, is that something that can go ahead without all stakeholders and all your competitors buying into the same model?

Lucian Grainge

Before the team provides a little more color. On margin, maybe I am a little old fashioned, profit is profit. And we will always pursue businesses with various and varying margin profiles based on fair value to the business and also the strategic value, very often in an industry like this where networks are crucial. The relationships with artists, I suppose, labels, entrepreneurs, et cetera, evolve over time.

Some of the most profitable partnerships we’ve had today started as lower-margin deals in one form or another, whether or not they were distribution deals or ventures, et cetera. And entrepreneurs, labels, artists see the value that UMG bring to their table. And we are extremely positive about how we together, over periods of time, expand those relationships with us across multiple businesses and rights. And it’s at that point that the margin grows.

So we’re fomenting an entrepreneurial culture where long-term network relationships with partners is crucial. And that’s how we will always see our business and the things that we do with some of our distributed labels and partners, Disney included, HYBE is another example, where we invest and JV and partner in new opportunities, in new markets as business opportunities evolve. And it’s something that we will continue to do. If you want to add anything else, Michael?

Michael Nash

Yes. Specifically with respect to the receptivity to the Deezer model, to amplify the comments that Lucian made about the virtues of the model, we really see the model benefiting professional artists and their music kind of across the board at the expense of fraud and clutter. And we expect as it receives close examination and careful consideration, that is going to receive widespread support from all professional content owners, whether major label or independent. Deezer has made public statements about their expectations to gain support. In fact, they subsequently announced signing up a major French indie Wagram earlier this month and an artist-centric cooperation with SACEM.

We have been looking at this just from the standpoint of some of the commentary. I think it is really clear that this model is going to benefit all artists who are engaged with fans at different scales of audience at different stages of their careers. The model is artist-centric because it’s really supporting the interest of artists and the high integrity, high-value artist-fan relationships that they foster.

I think it is equally important to note that there has been some commentary about thresholds for rewarding artists. I think that those have been very thoughtfully constructive. But keep in mind that there is also a lot of effort here in terms of decluttering the platform and addressing fraud and that enables artists’ discovery on these platforms. And I think that that’s a little bit of a forgotten consideration with respect to the full benefit for artists.

If you look at recent statements by key leaders of the independent label community, including PIAS, Beggars, Secretly and Because and they indicate growing support for an artist-centric approach as to model innovation. So we believe that upon close review and careful consideration, this model because it clearly benefits everyone that’s investing in real artist development is going to receive widespread industry support.

Lucian Grainge

Also, what we have seen, to add to that, is the adoption of artist-centric has moved faster than we anticipated. And there is a reason for that, and it’s simply that it’s good for artists, it’s good for the platforms and it’s good for fans. You mentioned peer groups, those peer groups — and I have a reputation for being blunt, so I will be blunt. Those groups have ever expressed the concern about artist-centric are unsurprisingly those whose business model is based on being merchants of garbage. Sorry, I can’t really think of another word for content that no one really actually wants to listen to. So if you are committing fraud or funding the platforms with content that has absolutely no engagement with fans doesn’t help churn, doesn’t merchandise great music and professional artists. Then I suppose you are not going to be in favor of artist-centric. So it is an opportunity for us to call them out. And I suppose that’s where we are. It is an approach. It is a set of principles, and the idea is that it can be implemented on each platform in a bespoke way with all sorts of different platforms and DSPs and companies and improve over time.

I have been in this business my entire career, and if you like The Beetles or the Rolling Stones, which are two critical releases for us this week or if you think that Taylor Swift is one of the most significant generation of artists for the last 40 or 50 years, or you believe that the performance on Olivia Rodrigo as one of the artists that we’ve signed recently and delivered worldwide. If you like listening to Eminem, if you believe in Elton John, if you enjoy Queen, then these are professional artists and they are not vacuum cleaner sounds or rain on a pane of glass, [gaming the system]. And as you may hear, I believe passionately in this, and I believe passionately in what we’ve been doing. And I believe passionately in any one and anyone within a peer group is not in the same business as we are.

Operator

Our final question today goes to Michael Morris of Guggenheim Partners.

Michael Morris

Two questions. First, following up on some of these artist-centric comments on an earlier question. There has been press that Spotify is looking to change their loyalty model starting in the first quarter of ’24. It looks on the surface, at least like an artist-centric or artist-fan model. Is that something they are doing in collaboration with you? And could you comment on any places that, that proposed change may fall short of what you think the model should look like?

And then secondly, can you provide a little bit more detail on Recorded Music subscription streaming revenue? I guess my specific question would be, is your on-demand music revenue growth within that line keeping pace with the overall number. How you think about that relationship and of the non-on-demand music partnerships? What are some of the drivers there as we look forward? Is that accelerating? Is it lapping tough comps? How should we think about that?

Michael Nash

Michael, thank you for your questions. So with respect to the first question on the Spotify press, we can’t comment on press speculation, and we’re certainly not going to discuss specific terms of our agreements with individual partners. I think that it’s important to reflect back on what we noted on our last earnings call. But as part of our recent renewal, we were pleased that Spotify agreed to work on addressing a number of our concerns in the existing royalty model and are engaging to explore solutions. Beyond that, we can note that we’re very supportive of their stated focus on advancing platform integrity. And I think we really should leave it at that.

Then in terms of subscription growth, we’re very pleased that we were able to deliver 13% year-over-year subscription growth in this quarter without really having the opportunity to realize the most recently announced pricing benefits. We think that that’s a strong performance as indication of continuing expansion in the market.

Our consumer research suggests that in the developed markets there’s a consideration set of over of $100 million in terms of the total addressable market, in established markets that are the consideration set that could constitute the next wave of subscription adoption in the developed markets. And then we see in developing markets, a significant increase in the adoption of subscription which is very encouraging. This is the first year where there’s actually been more new subscriber additions in the developing markets than in the developed markets. And we think it’s an indication of the monetization opportunity. And then reflecting back on Lucian’s comments about how we’re looking to develop repertoire, some of the M&A moves that we’ve made in these fast-growing emerging market regions. We’re encouraged by what we see. So I hope that, that general outlook addresses that second question.

Operator

Thank you. That’s all the questions that we have time for today. This now concludes today’s call. Thank you all for joining. You may now disconnect your lines.