After withdrawing from a bid to buy French music group and distributor Believe in April, Warner Music Group (WMG) is searching for an alternative distributor to help it gain market share in a competitive field serving independent creators and labels, and has hired a top music investment banker from Goldman Sachs to lead the effort.
Since Robert Kyncl became CEO of WMG last year, he has said the company is open to building any technology or services it sees fit, and now he's ready to acquire them, too.
“As part of our mission to be a destination for artists and songwriters at all stages of development, we're expanding our low-touch services that so many independent artists, labels and songwriters rely on,” Kinkel said during WMG's quarterly earnings conference call on May 9. “We have clear plans to develop this area of our ecosystem, and we're looking to expand into new markets while also building our solutions in-house.” [merger and acquisition] Opportunities will arise that could accelerate our capabilities.”
On Thursday (June 6), WMG announced the hiring of Michael Ryan Southern, global head of music and live entertainment investment banking at Goldman Sachs, to the newly created role of executive vice president. Reporting to Kinkle, Ryan Southern will be responsible for acquiring companies and catalogs that will increase WMG's growth and revenue. When he officially joins the company in August, the first item on his shopping list will be an independent distribution company that is smaller in scale and costs than Believe. Inside sources say this is a “bolt-on” acquisition to gain market share in the independent distribution and services business without impacting WMG's overall profit margins.
Among the companies WMG is eyeing are DistroKid and CD Baby, two large independent distributors that are “active in the market,” but are still in the exploration phase, the source said.
A spokesperson for WMG declined to comment on the matter. A representative for Downtown, which owns CD Baby, also declined to comment, except to say that Downtown is “focused on growing our business and helping our customers be successful.” A representative for Distrokid did not immediately respond to a request for comment.
WMG made a nonbinding offer to buy Paris-based Believe in February for “at least” 17 euros ($18.60) per share. The company ultimately decided not to make a formal offer in April. Asked why it didn't pursue a bid for Believe, Kincel said on a May 9 conference call that it withdrew its offer for “a variety of reasons,” including the short amount of time it needed to conduct due diligence.
Ryan Southern is a former EMI publishing executive who, along with Aaron Siegel, Goldman's global head of entertainment investment banking, has worked on some of the music industry's biggest deals, including New Mountain Capital's acquisition of BMI and Sphere Entertainment's spinoff of Las Vegas' Sphere, MSG Networks and Tao Group Hospitality from Madison Square Garden Entertainment, which owns and operates venues in New York and Chicago, including the Garden and Radio City Music Hall. Ryan Southern and Siegel also advised Believe founder and CEO Dennis Ladegayely and a consortium with investment funds EQT and TCV on their efforts to take Believe private.
Acquiring or building something that can leverage WMG's independent distribution and services division, ADA, would help the company recruit more early-stage artists, which company executives see as key to success.
WMG launched ADA in 1993, nearly 20 years before Sony bought a stake in The Orchard and Universal Music Group launched Caroline International as a distributor for indie labels, later renaming it Virgin Music Group. Industry sources say WMG was the first major record company to enter the independent artist market, renting out the services of major labels to indies, but the market is becoming increasingly competitive.
UMG and Sony have invested tens of millions of dollars in recent years to acquire rival startups in the space. UMG, which has had a minority stake since 2006, acquired Ingrooves in 2019. In 2022, UMG announced plans to acquire Mtheory Artist Partnerships, a wholly owned subsidiary of Sony Pictures Entertainment. [PIAS]Sony completed its full acquisition of Orchard in 2015 and then acquired AWAL in 2022.
According to Luminate, The Orchard currently holds a commanding lead in the U.S. market with a 7.27% share. UMG's Virgin Music Group, which is comprised of InGrooves, M Theory and Virgin Music Label & Artist Services, currently controls approximately 3.42% of the market. ADA's current market share is 1.68%. ADA's largest client, BMG, which currently accounts for 0.94% of the market share, is in the process of exiting its distribution deal.
Fred Davis, a partner at Raine Group, said WMG needed to “accelerate” this part of the business to take advantage of the fast-growing independent sector.
“Right now, the world is divided into three categories of artists: those who are signed to major labels, those who are signed to independent labels, and those who are unlabeled independent artists,” Davis says. “Distribution platforms are proving to be a viable source of A&R for the major labels.”
Putting an increased focus on capturing opportunities for WMG's A&R, especially in genres that are just beginning to grow, was one of the main agenda items for 2024, highlighted in a New Year's Day memo Kincel sent to all staff. In April, WMG's publishing division, Warner Chapple Music (WCM), partnered with BandLab Technologies' premium artist services platform, ReverbNation, to discover and sign emerging songwriters. WCM will manage the music rights for all users who sign up for the new program through ReverbNation Publishing Administration, and signed songwriters will have access to WCM's services.
In recent years, WMG has acquired majority stakes or formed joint ventures with several distribution companies, primarily in emerging markets in the Middle East and Asia, including acquiring a majority stake in Africoli, a leading digital music distribution, music rights management and artist development company in Africa, in January 2022. In March of the same year, WMG also acquired Kanawat Music, a leading distribution company in the Middle East and North Africa.
Last year, WMG made two deals in India, acquiring a majority stake in Indian digital media company Divo and forming a joint venture with Sky Digital to aggregate releases from Punjabi and Hindi labels.
While WMG is making acquisitions elsewhere, its larger rivals are buying companies that serve the U.S. market for independents. [WMG] “It will expand distribution through acquisitions,” said a source familiar with the company's strategy.