MBW Reacts is a series of analytical commentaries from Music Business Worldwide written in response to major recent entertainment events or news stories. Only MBW+ subscribers have unlimited access to these articles.
What will superfan tiers of tomorrow look like?
The major music companies have been signalling that higher-priced premium tiers with superfan perks are on the way, but on Warner Music Group‘s calendar Q4 earnings call, CEO Robert Kyncl was bullish about one particular feature he believes will eventually be included: the ability to make music using AI.
“We clearly see a path to audience segmentation because creation is the ultimate expression of fandom,” Kyncl said on Thursday (February 5). “So for us, superfan tiers of the future will all include AI functionality to create.”
Kyncl revealed that WMG is in active discussions with DSPs about incorporating AI tools into anticipated higher-priced superfan tiers. “We’re already in discussions with some of them,” he said.
Elsewhere on the call, Kyncl said WMG has “deployed AI across finance, legal, marketing, HR and more,” adding that the technology enables the company to “scale our marketing efforts beyond what’s humanly possible.” He said WMG is positioned to “leverage AI across our three strategic priorities: growing share, growing the value of music and efficiency.”
But there was plenty more to digest beyond AI.
Thursday’s call also saw Kyncl and CFO Armin Zerza explain the company’s M&A strategy, with Zerza promising “exciting announcements coming in the near future” and confirming WMG plans to “deploy a significant portion” of its catalog acquisition fund by the end of the fiscal year.
Hours before the call, WMG filed an 8-K revealing it was injecting an additional $200 million in equity into its catalog acquisition joint venture with Bain Capital (known as Beethoven JV), bringing total spending power to approximately $1.65 billion. As we noted last week, the timing suggests a significant catalog deal may be on the table, with the Red Hot Chili Peppers’ recorded music rights rumored to be under consideration.
WMG posted calendar Q4 revenues of $1.84 billion (up 7.1% YoY at constant currency), with recorded music subscription streaming up 10.9% YoY and adjusted EBITDA up 22% to $463 million. Recorded music revenues hit $1.48 billion (up 6.6% YoY), while Warner Chappell‘s publishing revenues reached $362 million (up 9.4% YoY). Major sellers in the quarter included Alex Warren, Sombr, Cardi B, Ed Sheeran, and Teddy Swims.
Elsewhere on the call, WMG’s leadership team discussed TikTok, DSP pricing, and more.
Here are three things that stood out.
Credit: PhotoGranary02 / Shutterstock.com
1. WMG expects Suno to become a ‘material’ revenue driver
Warner’s executives provided their most detailed comments yet on the financial impact they’re expecting from AI music partnerships.
CFO Armin Zerza confirmed that WMG’s deal with Suno, which made Warner the first major label to strike a licensing agreement with the AI music generator, is structured on a “variable and accretive basis,” with compensation tied to consumption.
Zerza noted that Suno is “already earning multiple hundred million dollars of annual revenue” and said WMG expects the partnership to deliver “material top and bottom line growth” starting in fiscal 2027.
Suno closed a $250 million Series C round in November at a $2.45 billion post-money valuation. The Wall Street Journal reported at the time that Suno had reached $200 million in annual revenue, mainly derived from subscriptions.
“We will grow as those platforms grow and accretive because we’ll grow ARPU,” Zerza explained, adding that WMG’s deals with Suno, Udio, Stability and others were all designed with higher average revenue per user in mind, “reflecting the interactive nature of the platforms.”
Zerza, who spent a decade in gaming, drew a parallel to that industry’s transition from physical to digital: “When gaming moved from physical to a digital experience, and gamers started to interact with games more and communicate more with each other… we had the opportunity to introduce multiple different business models. And that’s what our partners are intending to do here.”
He added: “ARPU on the industry will dramatically increase.”
Kyncl also highlighted “surprisingly high” engagement from WMG’s artist and songwriter roster on AI initiatives. “A lot of artists and songwriters are curious about the future,” he said. “They hear and read about these things, and many of them want to get involved early on.”
On the call, Kyncl reiterated the “non-negotiable principles” he first laid out in a November blog post, where he vowed to “legislate, litigate, license” in the era of AI music creation. At that time, Suno remained unlicensed. A few weeks later, the deal was done.
“Our partners must commit to license models; the economic terms must properly reflect the value of music; and artists and songwriters must have a choice to opt in to any use of their name, image, likeness and voice in new AI-generated recordings,” Kyncl said.
Photo Credit: ElenaR/Shutterstock
2. WMG is about to go on a major catalog spending spree
WMG and Bain have each made an additional $100 million equity commitment to the JV, bringing total equity to $700 million ($350 million each). With the existing debt-to-equity ratio maintained, that $200 million in fresh equity unlocks proportional additional debt — hence the $450 million increase in total firepower.
Zerza said the expansion was driven by a “robust and growing pipeline” of opportunities, and promised “exciting announcements coming in the near future.”
“We plan to deploy a significant portion of the JV’s total capacity by the end of this fiscal year,” he added.
The focus will be on “high-quality, accretive catalog acquisitions” across both recorded music and publishing. Zerza also noted WMG is looking at opportunities to “acquire capabilities to accelerate some of our business,” including in distribution and direct-to-consumer.
Zerza was bullish on the opportunity set: “As I travel around the world, there are opportunities everywhere in every corner of the market.”
He also emphasized the strength of WMG’s partnership with Bain, noting that the private equity firm’s team “has experience in the industry to identify opportunities and working them together, which gives us really a competitive edge relative to some of the other partners that are out there.”
Zerza framed the catalog push as part of a broader capital allocation overhaul at WMG. “We have moved from basically looking at individual deals to looking at our entire deal portfolio,” he explained. “We do thousands of deals a year. So it’s really important for us to understand what deals are the best ones for us to put our money behind.”
The company has established a dedicated deals office that tracks opportunities across multiple years, allowing WMG to “prioritize the best deals” and gain “much better visibility of what the impact of those deals are on future revenue… future growth and share growth and future margin and future cash flow.”
Zerza added that catalog M&A would be one of several drivers of margin expansion, alongside DSP pricing increases and “accretive AI revenue.” He reiterated WMG’s target of reaching margins in the “mid- to high 20s” over time.
Credit: Isaac C.P. Wong/Shutterstock
3. TikTok deal renewed — but Kyncl played down its significance
Kyncl confirmed WMG has renewed its licensing agreement with TikTok, describing the new terms as an improvement on the previous deal.
“We’re very happy with our partnership with TikTok in general,” he said, noting that “many of our artists are extremely popular on TikTok” and that the platform is utilized heavily for new releases.
The new agreement “contains structural changes that better reflect the value of music,” Kyncl said, while declining to disclose specific deal terms. He added that WMG’s negotiations with partners are “never just about money” but also encompass “data promotion, insights, and all the things that can help advance our business overall.”
But Kyncl was quick to temper expectations about the deal’s financial significance.
“As a percentage of revenue, it’s in the lower single digits for the company,” he said. “So it’s not like material to our fortunes every day.”
“As a percentage of revenue, it’s in the lower single digits for the company. So it’s not like material to our fortunes every day.”
The comment serves as a useful reminder that, despite the noise generated by licensing disputes with social platforms — including UMG’s high-profile removal of its catalog from TikTok in early 2024 — they remain a relatively small part of the major label revenue picture. UMG itself said at the time that TikTok accounted for “only about 1%” of its total revenue
When asked whether there were other similar deals on the horizon where WMG could advance its negotiating position, Kyncl said there was “nothing immediately on the horizon.”
Instead, he said the company’s focus remains on “advancing our AI initiatives across the board” and working with existing DSP partners to increase the value of music “on a consistent basis” — including “adding AI into the mix to further accelerate that.”
On DSP deals more broadly, Kyncl said WMG is “now seeing the impact of the deals we’ve reshaped with the DSPs last year,” adding that “these agreements are finally shifting the industry toward price-driven growth that better reflects the ever-increasing value of music.”
Kyncl also noted that WMG has now locked in rate deals with four of its top five DSP partners, and welcomed recent price increases at Spotify and Amazon. “Whenever we see a price increase, obviously, we’re happy,” he said.
