Universal's real problem is its shaky growth pitch
14/04/2026 09:59
The author is a Reuters Breakingviews columnist. The opinions expressed are her own. By Jennifer Johnson LONDON, April 14 (Reuters Breakingviews) - Music taste is subjective: one person’s catchy earworm is another’s sonic nightmare. Record companies are similarly divisive. Hedge fund tycoon Bill Ackman is convinced Amsterdam-listed Universal Music UMG.AS is an underrated gem. He wants to buy it, overhaul the capital structure and have its stock trade in the U.S. to unlock a richer valuation. Yet the 34-billion-euro ($41 billion) label's share price reflects legitimate concerns about slow growth and artificial-intelligence disruption. Just before Ackman's mostly share-based offer, Universal traded at 16 times forward earnings, which is some way from Ackman's target multiple of 25. Bridging the gap means convincing investors that the label's top line prospects are buzzier than analysts think: forecasts gathered by Visible Alpha imply 6% compound annual revenue growth in dollar terms between 2026 and 2030 for Universal Music, compared with 11% for Swedish streamer Spotify Technology SPOT.N. A big chunk of the major labels' revenue comes from licensing deals with streamers. Now that Spotify and other services are so widely used, the key questions are whether the platforms raise subscription prices – and how much money they share with Universal Music and its ilk. This became a bone of contention after Spotify added audiobooks to its Premium tier and hiked subscription fees in 2023. Previously, users paid a flat rate of, say, $10 a month for music. In return, rightsholders like labels received a cut of roughly 70% historically. But when Spotify turned the subscription into a pricier bundle, it earmarked the additional revenue for audiobooks. This meant that the labels’ royalty payments were calculated on a smaller pot of music income, and not the increased subscription fee of, say, $12 a month. As a result, Universal Music and its peers then lobbied for a shift towards so-called wholesale pricing, which guarantees payment per subscriber rather than on the smaller music pot. Though the terms aren’t publicly available, analysts reckon deals brokered by all three major labels at the end of last year include a wholesale pricing component. Yet it's unclear whether this is an incremental gain or a material improvement in label economics. It's notable that Spotify’s gross margin hit an all-time high after bundling began, as did its share price, implying that the streaming group's investors do not expect major extra payments to labels. AI also threatens a key change. Label optimists, including Ackman's Pershing Square PSHP.L, reckon technology could improve music recommendations and labels' cost-efficiency. Equally, it could allow artists to write, produce and distribute their own music at a lower cost and without a label acting as an intermediary. It’s also easy to imagine a world in which streaming platforms get flooded with AI-produced songs, meaning demand for label catalogues falls. That's one reason why investors have pressed skip on Universal Music, whose shares fell by a third in the six months before Ackman's overture. Sometimes record shops' shelves contain an overlooked masterpiece, but at other times the vinyl is gathering dust for a reason. Follow Jennifer Johnson on Bluesky and LinkedIn. CONTEXT NEWS Billionaire hedge fund manager Bill Ackman’s Pershing Square on April 7 offered to buy Universal Music for about 56 billion euros ($65 billion) in cash and shares of a shell company. Under the terms of the deal, Universal Music shareholders would receive 9.4 billion euros in cash and 0.77 shares in the new company for every existing share. Pershing Square funds, its SPARC vehicle, and affiliates would provide 2.5 billion euros of the cash, while the rest would come from new debt and the sale of Universal Music's stake in Spotify Technology. Bollore Group holds nearly 19% of Universal Music and Vivendi owns more than 13%. Pershing Square holds about 5%. Analysts think Spotify's sales growth will keep beating the labels https://www.reuters.com/graphics/BRV-BRV/dwpkylgaopm/chart.png Spotify has a fast-rising gross margin, while the music labels do not https://www.reuters.com/graphics/BRV-BRV/lbpgyzroxpq/chart.png (Editing by Liam Proud; Production by Streisand Neto) ((For previous columns by the author, Reuters customers can click on JOHNSON/Jennifer.Johnson@thomsonreuters.com))