He bet his career on acquiring rival record label EMI in 2011, and now that deal is paying off big time.
Ricardo DeAratanha/Los Angeles Times / MCT
In 1978, when Lucian Grainge was a senior in high school, he walked out of his college-admission exam to negotiate his first record deal with a then-unknown band called the Psychedelic Furs.
Decades later, in November 2011 to be exact, just nine months after being named Chairman and CEO of Universal Music Group, Grainge's steel gut and appetite for risk surfaced again when he announced a $1.9 billion deal to acquire EMI Recorded Music. No one believed Universal, which already ranked as the world's largest record label, would receive approval to buy EMI and thus shrink control of the music industry from four companies down to three. Independent record labels, consumers, even rival major record labels Sony Music and Warner Music were against the deal. Citigroup, which took over EMI from previous owner Terra Firma Capital Partners after it defaulted on debt the bank held, had reservations as well.
The only one certain that the deal would get approval was Grainge. He was so certain, in fact, that he agreed to pay all but $200 million of the purchase price within ten months, whether or not Universal received regulatory approval, and further agreed that if the deal was rejected and Citi had to resell EMI to another buyer for a price below $1.9 billion Universal would pay the difference. Grainge wasn't just being audacious by inserting into the deal what is known in merger and acquisition parlance as a "hell-or-high-water clause." He was putting the very job he worked his entire life for on the line less than a year after being named to it — at the time Universal's parent company, Paris-based Vivendi SA, was saddled with $15 billion in debt and struggling to maintain a stable credit ranking.
Grainge's gut instincts were right. The deal was approved in September 2012, in part because he argued that EMI's sale to Universal was the only way to make the smallest and sickest of music's major labels better and thus lift the entire industry. And now Universal is not only positioned to dominate the music industry well into the future but also to grow into an extremely valuable company for Vivendi.
A representative for Universal Music Group, whose roster of artists range from Rihanna and Katy Perry to Imagine Dragons and Mumford & Sons, said Grainge was not available for comment.
Matt Jelonek / WireImage
That Grainge's EMI bet — which added such iconic labels as Blue Note, Capitol and Virgin, as well as such incomparable artists as the Beatles, the Beach Boys and Frank Sinatra to Universal's stable — is paying off is owed in part to the rise in popularity of music streaming services. (EMI's music-publishing division was sold separately, for $2.2 billion, to a group headed by Sony/ATV Music Publishing, Sony Corp.'s joint venture with the estate of Michael Jackson.)
On the surface, that claim seems laughable. After all, global music sales have fallen from their peak of $27.3 billion in 1999 to just $15 billion in 2013, a decline of more than 40%. The music industry's hopes that digital sales would eventually make up for the decline in CD sales is clearly not going to happen either, with domestic digital sales last year experiencing a 5.7% decline, the first drop since Apple's iTunes came on the scene in 2003.
These numbers, released last month by industry trade group IFPI, make it easy to cast Universal's 54-year-old leader as Lucian the Loser. They make it easy to dismiss the Grainge as another over-reaching, label-grabbing mogul who, blinded by opportunity, tried to buy share rather than play fair. To leave it at that, though, is to miss the point. And the point is global music — despite IFPI's headline numbers about its continuing swoon — is actually turning the corner. It is finding a future, and a surprisingly promising one, in subscription services of the sort already offered by Pandora, Spotify, and Deezer.
Indeed, according to IFPI, more than 28 million consumers paid for a music subscription in 2013, up from eight million in 2011. What's more, the $1.1 billion in revenue that IFPI attributed to subscriptions for streaming music in 2013 represents a year-over-year increase in excess of 51%. It's still early days, too, as market newcomers Beats Music and iTunes Radio are just now gaining traction.
Not only is a subscriber enlisted by one of these music service providers likely to stay — in the same way a Netflix subscriber is likely to stay — but in doing so is likely to become a constant and continuous source of revenue. And the recurring sales arising from this customer base haven't a thing to do with any one month's album releases or any one week's hit song.
"Once you get their credit-card number, that's it," says Brian C. Mulligan, who as an executive at Universal's former parent company helped shut down Napster's piracy operations and then joined the board once those operations were legalized. "The service is more like a utility."
Marc Geiger, the Lollapalooza co-founder who heads William Morris Endeavor's music division, predicted at a recent industry conference that music subscription's relatively nascent revenue stream would reach $72 billion a year within a decade. All it takes to get there, he said, is 500 million customers paying an average of $12 a month. And for those who think his customer count is optimistic, Geiger pointed to such platforms as Baidu (531 million users), Facebook (1.23 billion members) and Google (6 billion searches a day). "Platforms with over 500 million customers will rule the next ten years," he said.
What this means for Universal is a matter of simple math. These music services pay, on average, about 75% of their revenue for the content supplied by artists, labels and publishers, of which Universal is the biggest provider. Throw in a 50-50 split for advertising — an additional revenue stream Geiger expects to top $10 billion within a decade — and the given-up-for-dead music business is suddenly looking at a compound annual growth rate of 17%.
Add to that the fact that EMI's addition to Universal has already facilitated some previously unthinkable industry firsts. Aided by artists annexed through its EMI acquisition, Universal accounted for nine of the Top 10 songs on Billboard's weekly digital chart for Aug. 18. The same tie-up also produced ten of the top ten on Billboard's Hot 100 list for Sept. 13.
Universal's take of Geiger's "conservatively" projected industry total of $74 billion a decade from now, based on the label's 40% market share, comes in just shy of $30 billion. That's 340% greater than the $6.7 billion in revenue Universal reported for 2013. Moreover, because analysts value Universal as being worth between 1.0 and 1.3 times annual sales, its enterprise value in ten years stands to be closing in on $40 billion. In this context, at least, Grainge's picking up EMI for less then $2 billion looks very smart indeed. So, too, does his early and successful courtship of Silicon Valley, as evidenced by Apple CEO Tim Cook accompanying Grainge to a recent industry event, a community as responsible as any for music's accelerating recovery.
Even Wall Street analysts historically dour about the music industry are coming around to this point of view — no less than Goldman Sachs came out with a research note Monday on Universal's parent company, Vivendi, entitled, "Here comes the sun: Streaming drives music industry growth."
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