When Universal Music Group swooped in to buy the Beatles’ record label EMI in 2011, the band’s longtime producer George Martin called it the “worst thing that music has ever faced.”
The move by UMG Chief Executive Officer Lucian Grainge was decried as big business conquering music’s creative soul. The $1.9 billion deal drew scorn from other labels and only cleared regulatory hurdles after a series of assets were sold.
In one sense, Grainge’s detractors were right to be concerned. UMG is now the world’s unchallenged hit machine because it is so much bigger than rivals. While some artists have rebelled publicly against its control over their careers, more have joined its roster in the belief that it will give them the best chance of becoming a superstar. Today, nearly half of the top 10 acts in Bloomberg’s Pop Star Power Rankings are signed to UMG labels.
“Universal has traded for a long time by saying, ‘We are the biggest and the best—we can do this for you,” said Mark Mulligan, an analyst at London-based Midia Research.
The formula has propelled UMG past its peers—and sent its valuation to new heights. Back in 2013, SoftBank Group Corp. tried to buy the business for $8.5 billion. Compare that with a deal currently under discussion that would value UMG at about $42 billion, including debt. And that price may actually undervalue the business, according to analysts at Citigroup Inc.
On Friday, parent company Vivendi SE said it was in talks to sell 10% of UMG to a blank-check firm backed by billionaire Bill Ackman—a step toward the music company going public later this year. Vivendi and UMG also talked to other potential investors in recent months, including private equity firm TPG, according to people familiar with the matter.
UMG has reached this point by overcoming two key challenges. The first was the industrywide slump brought on by consumers ditching CDs and getting their music from free download sites. With streaming services such as Spotify Technology SA enticing consumers to pay for music again, the industry has now seen sales climb for five straight years.
Under Grainge, UMG has successfully fended off another threat: the rise of smaller companies trying to lure musicians by offering to distribute their work without taking control of their artistic lives.
UMG has responded by embracing the disruption and playing the new independents at their own game. When Taylor Swift sparred with her record label over use of her master recordings, UMG offered her full creative control over her work. Grainge even threw in an offer to hand proceeds from the sale of UMG’s stake in Spotify to the label’s artists.
“The deal may not even have been that beneficial for Universal, but they got a flagship artist saying Universal is the place you can go to be successful and do it on your terms,” Mulligan said.
Grainge, 61, grew up in North London and started as a music talent scout after skipping college. He struck gold early on with the Psychedelic Furs, Eurythmics and the Pet Shop Boys before joining UMG in 1986 to launch PolyGram Music Publishing in the U.K. His move to take over EMI—a year after he became CEO and moved to Los Angeles—netted top-selling artists like the Beatles, Katy Perry and the Beach Boys, as well as ownership of London’s historic Abbey Road Studios.
Grainge has succeeded in part by fostering competition among his sublabels. While rivals Sony Music Entertainment and Warner Music Group Corp. have only one or two big labels under the larger group, UMG consists of a number of key fiefdoms. Interscope is the home of Billie Eilish, Lady Gaga and Blackpink. Republic releases music from Ariana Grande, Drake and the Weeknd. Def Jam, meanwhile, has Justin Bieber, Kanye West and Rihanna.
Thanks to this talent empire, UMG accounted for nine of the 10 bestselling artists in the world last year, according to the International Federation of the Phonographic Industry.
UMG is now trying to get a bigger piece of the music market in Asia, where a growing middle class is spending more on streaming. According to data from OMDIA, about half of the region is now an “addressable” market, meaning people will pay for a streaming service. That’s expected to increase to two-thirds by 2030.
With growth slowing in big Western markets, UMG is focused on new regional music markets with a local repertoire. The company also has formed a record label venture with its new Chinese shareholder, Tencent Holdings Ltd.
UMG’s scale is an asset during the globalization of music. The company can quickly pick up emerging artists in one region and then promote them elsewhere.
UMG also has been changing the music business model to adapt to the rise of streaming, said Will Page, former chief economist at Spotify and author of “Tarzan Economics.” Labels used to focus their marketing dollars on promoting an album in the first few months after its release. That model didn’t fit the streaming world, where popularity can grow over time and create “sleeper hits”—even long after the traditional 18-month cutoff when a tune is reclassified as just a “catalog” track.
Interscope Vice President Gary Kelly helped Page pioneer a new approach after Las Vegas band Imagine Dragons’ debut album Night Visions in 2012. Marketing was more spread out and focused on keeping listeners engaged over a longer period. The approach paid off. According to MRC Data, the band is the most-streamed rock act in the U.S., with more than 11.5 billion streams to date.
“Universal under Grainge led the way early on in challenging the antiquated 18-month ‘catalog rule,’ knowing it would be redundant in the digital world,” Page said. “They changed the mindset from a sprinter to a marathon runner.”