Thursday, June 27, 2019

The Universal Music fire may be ‘heartbreaking’ – but don’t expect much impact on the music biz story of the year | Music Business Worldwide

“Even though that event happened more than a decade ago… one thing is clear: the loss of even a single piece of archived material is heartbreaking.”

The most surprising thing in the music business this month wasn’t an eye-popping exposé in the New York Times revealing that Universal Music Group master tapes, carrying up to 500,000 songs, were destroyed in a 2008 fire.

It was the consequent show of contrition, and personal regret, from UMG’s Chairman & CEO, Sir Lucian Grainge – who wasn’t even in situ at the top of the company when the incident took place. (Grainge’s predecessor, Doug Morris, who went on to run Sony Music and now helms indie label 12 Tone, was in charge of Universal when the damage was done.)

If you care about music’s cultural posterity, and you haven’t yet read Jody Rosen’s riveting The Day The Music Burned article, it’s definitely worth 10 minutes of your time. Rosen tells the story of a fire which broke out on an NBCUniversal Studio backlot in Hollywood eleven years ago.

The blaze destroyed a cornucopia of Universal master tapes – i.e. original, physical studio recordings. Rosen cites a 2009 UMG memo which puts the number of ‘destroyed assets’  (individual tapes) at 118,230 – but there remains a major question mark over how many of these records were salvaged by being digitized or copied into other formats first.

Rosen’s follow-up piece, published this week, revealed the names of 700 artists whose master tapes were damaged in the fire. They include everyone from The Who to Joe Cocker, Snoop Dogg, Cher, Elton John, Aretha Franklin, Tom Jones, Chris Rock, Sting and Spinal Tap.

In 2009, despite having publicly played down the extent of the fire, Universal sued the owner of the lot, NBCUniversal (a company with a similar name, but separate ownership). The two parties settled in 2013.

Now, UMG is facing its own lawsuits: the likes of Soundgarden and the Tom Petty Estate are leading a class action suit which claims that the artists affected by the fire held “an expectation that under their recording agreements with UMG there will be a 50/50 sharing of revenues derived from [the masters]”.

Ironically, this class action suit cherry-picks from Universal’s own 2009 legal action against NBCUniversal, when it was in the music company’s best interests to make out this was a commercial catastrophe.

The new artist lawsuit against UMG is seeking, in damages, up to half of the $150m sum it claims that Universal obtained via a combination of insurance payouts plus its 2009 settlement with NBCUniversal. In addition, the suit is claiming half of any additional losses.

What the breadheads of the music industry are asking today: how will all of this affect the biggest music biz story of the year – the part-sale of Universal Music Group? UMG parent Vivendi is seeking to sell up to 50% of Universal, which has been valued at anywhere between $30bn and $50bn in recent months. 

Despite initially seeming to indicate that it wanted a deal wrapped up by Q1 2020, more recent updates from Vivendi suggest it’s in less of a hurry – with an expectation that the preliminary stage of the formal sale process will now only begin in the second half of 2019.

Over the past week, a chorus of leading Wall Street and global analysts from some of the world’s biggest investment banking and funding houses have chimed in on Universal’s potential sale – and the potential impact of the New York Times’ sensational revelations about the 2008 fire.

Some of these analysts have gone on the record in their own company investor notes, while others – all media experts who are observing the Universal case closely – have spoken to MBW under the condition of anonymity.

The view of these fiscal experts, in unison, is that while the UMG fire might well – to borrow Sir Lucian Grainge’s phrasing – be culturally “heartbreaking”, and might also cost UMG a pretty penny in court, it won’t actually have any material influence on the music company’s market worth.

A research note from Morgan Stanley issued Thursday (June 27) stated: “It is not clear to us that the fire in the LA storage facility should have any impact on either the valuation of UMG or the sale process. The fire destroyed master recording tapes, which had already been digitized, so the content will continue to be monetized in future (and as it has been since the fire occurred).”

It added: “We spoke to Vivendi on Friday, and at that point there was no change to the timetable for the planned sale of a stake in UMG.”

Similarly-themed updates from Goldman Sachs and BNP Exane suggest both of these investment groups were left equally unruffled by headlines related to the fire. 

“It is not clear to us that the fire in the LA storage facility should have any impact on either the valuation of UMG or the sale process.”

Morgan Stanley

Elsewhere, an informed insider at one of the world’s largest investment banks told MBW: ‘I can’t for the life of me see a way in which this makes any material difference [to UMG’s value]. [A potential acquirer] would be paying for the future growth, on which the loss of these master tapes will have literally zero impact.”

Another responded: “In the context of the Universal sale, this is an utter-non-story. It happened a decade ago;  if it had any negative effect on on [UMG’s strength as a business] since then we’d have seen it in the company’s numbers.”

But what of the class action lawsuit, which could potentially see Universal on the rack for a nine-figure damages or settlement fee?

One top investment media analyst commented: “Lawsuits against Vivendi which get to a likelihood of judgment, will then have a value attached to them which is declared [to shareholders]. I’ve read that the potential for damages here would be around $100m – $150m.

“If that’s correct, for a company like Universal – currently worth north of $30bn, perhaps $40bn – you’re talking about a very small potential risk which I just can’t see bothering [potential buyers] like Apple, Alibaba, Google or Tencent too much.”

“You’re talking about a very small potential risk which I just can’t see bothering [potential buyers] like Apple, Alibaba, Google or Tencent too much.”

media analyst at leading investment bank

Morgan Stanley’s note summed this up rather more brusquely: “A lawsuit has been filed in the last week against UMG by various artists, but the amount claimed ($100m) is not material when compared to our valuation of UMG ($30bn).”

There is one serious risk factor from the lawsuits for UMG’s future that certain analysts do recognize, however: Universal’s reputation in the artist community, and whether its carelessness in 2008 will damage how superstars view the company today.

This threat is exacerbated by UMG’s seeming duplicity on the issue 11 years ago, which is certain to come under scrutiny in the new artist lawsuit.

For example, in 2008, Billboard reported the following, based on the quotes and testimony of a (since departed) official Universal spokesperson, under the headline, ‘Universal Music Group Masters Unharmed in Fire’:

Contrary to online reports, “thousands of original recording masters” from the Decca, MCA and ABC labels were not destroyed in a fire on the Universal Studios lot in Los Angeles over the weekend. “We had no loss, thankfully,” a Universal spokesperson tells Billboard. 

Yet just a year later, in its lawsuit against NBCUniversal, according to the New York Times, Universal was peddling a different tale. Rosen reports: “Rather than minimizing the fire’s impact, the company sought to prove the gravity of the event and the loss incurred.”

This conflict is likely to prove troublesome for UMG’s modern-day leadership – including Sir Lucian Grainge, who, according to his note last week, prides himself on having an honest and upfront relationship with the firm’s artists.

“Even though all of the released recordings lost in the fire will live on forever, losing so much archival material is nonetheless painful,” said Grainge. “These stories have prompted speculation, and having our artists and songwriters not knowing whether the speculation is accurate is completely unacceptable.

“[Let] me be clear: we owe our artists transparency. We owe them answers. I will ensure that the senior management of this company, starting with me, owns this.”

Weighing in Universal’s favor is the fact that, for eleven years, the fire has largely been seen as a non-story by both the artist community and UMG/Vivendi investors. And, commercially speaking, it remains an industry footnote.

Record labels have been digitizing their catalogs since the early 1980s, and, due to the explosion of the CD format, then into downloads and now streaming, these labels have been commercially driven to ensure that their most valuable music has already long been copied from original masters – and widely distributed.

“[These] masters were lost in a fire but nobody, including the artists, have noticed they were missing for more than 10 years.”

JPMorgan research note

According to BuzzAngle’s 2018 annual report, 98.5% of album sales and 92.4% of all audio streams in the US last year were derived from just the top 500,000 titles in the market (including new releases). As one industry source told me this week: “The fact is, so far, no-one has been able to name a single recording that has been lost in this fire.”

This explains why the analyst community isn’t exactly sweating over the controversy now being whipped up over the 2008 incident.

In an update from JPMorgan to investors this week, its analysts matter-of-factly commented: “[These] masters were lost in a fire but nobody, including the artists, have noticed they were missing for more than 10 years.”

So long as Universal’s financial figures keep moving in the right direction, it seems, Wall Street isn’t shedding any tears.Music Business Worldwide


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