Universal Music Group N.V. (UMGNF) Q1 2023 Earnings Call Transcript

Universal Music Group N.V. (OTCPK:UMGNF) Q1 2023 Results Conference Call April 26, 2023 12:15 PM ET

Company Participants

Lucian Grainge - Chairman and CEO

Boyd Muir - Executive Vice President, CFO and President of Operations

Michael Nash - Executive Vice President and Chief Digital Officer

Conference Call Participants

Adrien de Saint Hilaire - Bank of America Merrill Lynch

Omar Sheikh - Morgan Stanley

Michael Morris - Guggenheim Partners

Silvia Cuneo - Deutsche Bank

Christophe Cherblanc - Societe Generale

Richard Eary - UBS

Lisa Yang - Goldman Sachs

Operator

Good evening. And welcome to Universal Music Group's First Quarter Earnings Call for the period ended March 31, 2023. My name is Nadia, and I'll be your conference operator today.

Your speakers for today's call will be Sir Lucian Grainge, Chairman and CEO of Universal Music Group; and Boyd Muir, Executive Vice President, CFO and President of Operations. They will be joined during Q&A by Michael Nash, UMG's Executive Vice President and Chief Digital Officer [Operator Instructions].

Please let me remind you that management's commentary and responses to questions on today's call may include forward-looking statements, which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may vary in a material way. For a discussion of some of the factors that could cause actual results to differ from expected results, please see the Risk Factors section of UMG's 2022 Annual Report, which is available on its Web site at universalmusic.com. Management's commentary will also refer to non-IFRS measures on today's call. Reconciliations are available in the press release on the Investor Relations page of UMG's Web site. A supplemental historical revenue fact sheet is also available on the Investor Relations page of UMG's Web site. Thank you. Sir Lucian, you may begin your conference.

Lucian Grainge

Thank you, and greetings from Hilversum. Welcome to everyone. I'm pleased to report to you tonight on UMG's strong start to 2023. Boyd will take you through the numbers in more detail in a bit, but in brief, during the first quarter, our revenue grew 9% with Recorded Music up 10% and Music Publishing up 12%. Our adjusted EBITDA grew by 13%. Proud as I am to announce financial results as positive as these, as I said before, how UMG performs over any three month period is merely a snapshot of a moment in time and it does not, by any means, constitute the best way to understand and evaluate our business or its potential for growth or the next steps that we are taking to reach our key strategic goals. Accelerating our geographic expansion, improving the business model for streaming, leveraging new technology, including AI, as well as the many challenges and opportunities it presents will not be achieved overnight. We look at our business in multiyear cycles, so progress along quarterly time frames is not immediately apparent. But what we are confident in is that there's a new cycle of growth and that has already begun. I'll say more about our strategic initiatives in a moment. But first, I want to tell you a little about what is readily apparent, and that is our undeniable consistency around the world in breaking new artists and helping established artists reach high levels of success. This last quarter was no exception and I'll cite just a handful of highlights to make the point.

For example, UMG's Republic Records division, for the first time in the 56 year history of Billboard's 200 chart, a single label, Republic, had seven of the top 10 albums. These came from a variety of a mix of genres and emerging and established stars, namely Drake, Metro Boomin, Taylor Swift, TOMORROW X TOGETHER, Shania Twain, Morgan Wallen and The Weeknd. Another highlight is Morgan Wallen. His latest album has been a phenomenal hit. That album not only had the biggest streaming week ever for a country album but it's also had the fifth biggest streaming week for any album regardless of genre. And its lead single, Last Night, spent multiple nonconsecutive weeks at number one. Morgan also became the first country artist in history to have five tracks in the top 10 on the Billboard Hot 100. So far, this year in the US, UMG has had five of the six most consumed albums with releases by Drake, Metro Boomin, Taylor Swift and Morgan Wallen who had two. And we also had the top four album debuts, thanks to Jimin, TOMORROW X TOGETHER, Twice and Morgan Wallen again. Also making history in the US, Karol G, who is signed to our Latin division. Her latest album became Billboard 200's first all-Spanish language album by a female artist to hit number one with 11 of its tracks landing on the Billboard Hot 100.

In the UK, UMG had the number one album for 10 of the first 15 weeks this year, with a wide range of different artists topping the chart, including boygenius, The Courteeners, Lana Del Rey, Ellie Goulding, [indiscernible], Sam Smith, Taylor Swift, Shania Twain and U2. And in Japan, King & Prince continue to break records. Their latest single sold over 1 million CDs in the first week, the first time in three years that, that sales threshold was crossed. Finally, our Music Publishing division ranked number one in Billboard's fourth quarter 2022 publishers quarterly according to the Hot 100 chart data. This marked UMPG's third consecutive quarter topping the list. And in doing so, it became the first publisher to hold a greater than 30% market share in three consecutive quarters since tracking began in 2014. I could go on. Frankly, I'd like to but I think it's readily apparent. UMG's record setting performance is the direct result of how we continue to evolve and refine both the way recording artists and songwriters are signed and developed and the way their music is marketed around the world. And by around the world, I don't just mean the world's biggest music markets.

We are strategically focused on building our domestic repertoire in those music markets that possess high growth potential. Accelerating the expansion of our geographic reach through a combination of organic investment and opportunistic M&A is one of the three key strategic initiatives we are laser focused on advancing. As an organization, we never stand still. We never rest on our laurels. The result is unmistakable, the billions and billions of our artists' streams that fans across the globe enjoy 24 hours a day. That remarkable fan engagement underscores the pressing need to redefine the streaming model in a manner that appropriately rewards those artists whose music drives fans to engage and remain engaged on platforms in the first place. As I mentioned on our last call, the development of this model, what we call the artist-centric model is underway. One of the issues that this new model is designed to address is the flood that content on platforms that fans neither want nor choose to consume. Here's an example from one music platform's own publicity disclosed data. Of the 9 million content uploaders on that platform, yes, 9 million, 8.3 million, more than 92% of them have fewer than 1,000 monthly listeners and only 2% are professional or professionally aspiring artists.

As I said, the music by our artists drives meaningful engagement on these platforms. Yet the majority of content hosted on these platforms represents an insignificant percentage of what is actually consumed, and included in that oversupply is also AI generated content. Not many people realize that AI has been a major contributor to this content oversupply already. Most of this AI content on DSPs come from the prior generation of AI, a technology that is not trained on copyrighted IP and that produces very poor quality output with virtually no consumer appeal. However, the recent explosive development in [our] generative AI will, if left unchecked, both increase the flood of unwanted content hosted on platforms and create rights issues with respect to existing copyright law in the US and other countries as well as laws governing trademark, name and likeness, voice impersonation and the right of publicity. Further, we have provisions in our commercial contracts that provide additional protections. Unlike its predecessors, much of the latest generative AI is trained on copyrighted material, which clearly violates artists' and labels' rights and will put platforms completely at odds with the partnerships with us and our artists and the ones that drive success. Good platforms’ traffic in this kind of music, they would face the additional responsibility of addressing a huge volume of infringing AI-generated content. Any way you look at it is oversupply, whether or not AI created is simply bad, bad for artists, bad for fans and bad for the platforms themselves.

That's where our artist-centric model can come in. With the right incentive structure in place, platforms can focus on rewarding and enhancing the artist-fan relationship and, at the same time, evaluate the user experience on their platforms by reducing the sea of noise, better highlighting the artists and the music that customers care about most and eliminating unauthorized, unwanted and infringing content entirely. But let me be clear, as with every technological advance, it would be foolish and shortsighted to view AI as nothing but a threat. On the contrary, we do view AI, when properly developed and employed, as a powerful tool for our future. In fact, we're already employing AI in a variety of ways, identifying new audiences for our artists, optimizing the production, mixing and mastering of recording and enhancing the quality of music experiences, such as immersive sound. In fact, we hold several patents in these kind of AI applications already. I'm confident that in the service of our artists, AI will meaningfully accelerate our business in the years to come. But since unchecked generative AI, and I repeat generative AI, poses many dangers. We are also leading the industry in an effort to ensure that AI thrives as a technology that embraces rather than threaten humans' creativity, and one that will evolve as an epic space technology that protects the rights of artists, their livelihoods, the creative ecosystem system and culture as a whole.

In addition to exploring other options in this rapidly developing area, UMG is actively cultivating ethical AI opportunities by seeking to partner with leading AI music companies and by advocating with early stage AI companies as their own technology unfolds. We'll have more to announce in this space in the future. This approach is at the heart of the cross industry Human Artistry Campaign of which we are a founding member. Its membership has grown at breathtaking speed over the last few weeks. Today, it includes not only music organizations and artist groups, representing songwriters, composers, publishers, independent and major labels but also more than 80 organizations across sports, journalism, photography, voice actors and labor unions as well. Even as we work to exploit the promise of this technology, we are reminding lawmakers and governments everywhere of the critical need to protect and defend the rights of human creators in every walk of life and industry. With this rapid growth, the coalition is poised to speak authoritatively on how AI can develop in ways that give birth to new creative and commercial opportunities while strengthening the creative ecosystem. We must never fail to recognize the unique and irreplaceable role of human artistry in culture and the arts.

Let me turn to this. Universal success has been directly connected to our ability, time and time again, to harness technology to deposit to work for our artists. We've led the monetization of streaming, in subscription, in social, in health, in wellness, in audiovisual, in short form video and other categories. That's the lens by which we are working to embrace AI while simultaneously vigorously protecting the rights of our artists. As we survey the landscape, we see four basic truths from which we envision many extraordinary opportunities for growth, including first, more music is being consumed than at any time in human history. As a consequence, because our artists consistently produce the music that drives the greatest demand and consumption around the world and because of the awesome depth and breadth of our catalog and IP that goes back decades, we are the company best positioned to benefit. Second, in addition to the enormous room for growth in subscription and streaming in established music markets, we see great possibility for us in markets across Asia, Latin America, Middle East, the African continent where the populations are enormous and our global reach is expanding. Third, there are more avenues to monetize music than ever before. Just as we [pioneered] the creation of commercial opportunities in subscription with Spotify, for example, and in social media with Facebook, UMG is leading the expansion of music monetization in new and blossoming categories, such as short form video, health and wellness, gaming and yes, AI.

The fourth, the explosion of content has made the relationship we have with our artists even more essential than it's ever been. Artists need a partner that can help them cut through all of the noise and clutter and an ecosystem plagued by constant oversupply and to build a significant and committed fan base to propel worldwide success. The global organization UMG has built does just that and it does it better than anyone else out there. We have the resources to partner with artists anywhere in the world than at any stage in their careers and across Recorded Music, Music Publishing, merchandise, branding, film and television and more. And through our own direct to consumer channels with artists’ products offered for our partners, we see an opportunity for even greater monetization by dramatically growing the number and commitment of our artists’ and superfans. The deep and broad experience of our team has been invaluable as we face the challenges and capitalize on the opportunities we see before us during this next wave of growth, driving strong and consistent results on behalf of our artists as well as our shareholders. So thank you for that. And now I'd like to turn it over to Boyd to walk you through our numbers, and he's smiling.

Boyd Muir

Thanks, Lucian. As Lucian indicated, 2023 is off to a strong start. Figures are laid out in the press release but let me provide some additional color. I'd remind you that any growth rates we discuss today are in constant currency. Total revenue in the quarter grew 9% year-over-year to EUR2.45 billion with widespread growth throughout Recorded Music and Music Publishing. This broad based growth profile continues to underpin our confidence about the sustainability of the positive direction of our business. To break it out, Recorded Music grew 10% with subscription and physical revenue both exhibiting strong growth. Subscription revenue grew 10% to EUR1 billion, driven primarily by the growth in subscribers with some additional initial benefits from certain ASP price increases. It's worth noting that in the US, the world's largest music market, our subscription revenue grew 12%. Ad-supported streaming revenue declined 2% in Q1. As we have noted, this result is driven by macro pressure on the advertising market and we hope to see some improvement towards the end of the year. Engagement and activity on the platforms remains incredibly strong and we are confident that this revenue will grow as the broader market rebounds and we continue to work to rightsize some of our social media deals.

Physical revenue grew 33% over the prior year. We had strong performance in Japan this quarter with significant CD and DVD sales from artist, King & Prince. We also had strong vinyl sales in the US, the UK and Germany from artists including Taylor Swift, Bo Burnham, Lana Del Rey and U2. While we are encouraged to see superfans' willingness to spend to support the artist they love, we do continue to urge caution around sustained growth in physical sales. Physical results are more release driven than streaming and subscription and skewed towards certain genres, certain artists and certain geographies. Another area of growth within Recorded Music was in our license and other revenues, which were up 8%. This was largely driven by improvements in neighboring rights income. Neighboring rights refer to those royalties generated from a broadcast of sound recordings on noninteractive digital services, such as satellite and Internet radio, on terrestrial radio outside the US as well as on TV and in public spaces and businesses. Turning to Music Publishing. Our revenue grew 12% of the prior year quarter. This trend was driven by 19% growth in digital revenue, thanks to continued growth in streaming and in subscription activity. We also had 8% growth in synchronization while mechanical revenue was in line with the prior year and performance revenue declined 2% year-over-year as the prior year quarter benefited from a post COVID recovery.

Now that we have experienced a full year on an accrual accounting basis, this quarter's result is comparable to last year's first quarter. As a reminder, the only quarter of 2023 where this is not the case is in Q2 as the second quarter of 2022 included a catch up accrual of about EUR100 million related to prior years. While we expect continued healthy underlying growth at Music Publishing in Q2, the reported growth will be impacted by this unusual comparison. Moving on to Merchandising. Following last year's very strong rebound in post-COVID touring, this quarter faced a difficult comparison. Our Merch business, which represents over 200 artists saw many of its artists on the road in 2022. As a result, merchandising revenue declined 4% in the quarter with touring and retail both lower. This was partially offset by strong growth in our direct to consumer sales.

Now turning to adjusted EBITDA. Adjusted EBITDA grew 13% in the quarter to EUR522 million. Adjusted EBITDA margin expanded to 21.3% compared with 20.7% in the prior year quarter. The margin expansion came from a combination of operating leverage in our Recorded Music business and EUR9 million in cash compensation savings as we roll out our equity plan. EUR9 million in savings is on track with our plan to see EUR60 million to EUR80 million in cash compensation savings in 2023 as these savings ramp up over the course of the year as more employees move into the equity plan. Adjusted EBITDA excludes noncash share based compensation expenses of EUR260 million during the first quarter of 2023 compared to just EUR1 million in the first quarter of 2022. The EUR260 million expense is on track with our previously disclosed estimate of about EUR630 million of noncash share based compensation expense this year. As is true for the margin benefit coming from cash compensation savings, we also expect our underlying adjusted EBITDA margin expansion to increase over the remaining quarters of the year. Every quarter has a slightly different margin profile depending on revenue mix, segment mix, repertoire mix and so many other factors. Hence why we encourage you to look at our business over the course of at least a year rather than any individual quarter. Our margin in Q1 2023 was in line with our expectations and we remain on track to see over a point of adjusted EBITDA margin expansion in 2023 compared to the 20.6% we reported in 2022.

Before I conclude, I wanted to note one other item with regard to our equity plan. Employee share grant settlement started in this first quarter. And instead of selling newly issued shares on behalf of our employees to cover their withholding tax, the company decided to cover the tax burden using cash of approximately EUR123 million, lessening the dilutive impact of these equity settlements by approximately 5 million shares or over 40%. You will see this when we report our first half results as it will impact cash and shares outstanding. We expect shares outstanding at midyear to be about 1,821,000,000 and expect our shares at the end of '23 to be only slightly higher than this. Overall, 2023 is off to a very solid start. We remain encouraged by the growth trajectory of the business and excited by the opportunities that lie ahead. Lucian, Michael and I, would be happy to take your questions. So operator, if you could please open the line for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today goes to Adrien de Saint Hilaire of Bank of America Merrill Lynch.

Adrien de Saint Hilaire

So I've got two of them, please. So first of all, the growth of subscription and Recorded Music slowed down a bit in Q1 versus Q4. How do you think about the next quarters for the year? And then, Lucian, on your point about generative AI, I'm just wondering if you see a potential for UMG to license your content directly to these platforms like OpenAI, for example.

Michael Nash

On the first question regarding the growth of subscription, we reported a 10.3% growth in the first quarter, which is actually a slight uptick from the 10% flat in the previous quarter. Growth was broad based and largely driven by the organic expansion of the adoption of subscription. There was also some initial benefit from price increases on two of the platforms. We also saw a very positive indication from the US market with subscription growth of 12%. There's been some speculation that developed markets might slow down on a relative basis as penetration increases. But as we've indicated before, what we're actually seeing in developed markets is a pretty significant consideration set that we expect to be in the next wave of subscription adoption. If you look at our top 13 developed markets on the basis of our consumer research, we believe that there's a consideration set of another 100 million subscribers in those markets that are ready to on-ramp. And this is because of the inherent value appeal -- value proposition appeal of subscription. So we're seeing positive indications.

With respect to our outlook, I think we're prepared to comment beyond noting that we see the extension of the megatrends that are driving consumer adoption of subscription well supported by the fundamentals, 5 billion smartphones, expectation of 20% growth in expansion of the footprint of consumers that are accessing the Internet through mobile devices, continuing increase in the attachment rate of paid plans for mobile subscribers, expansion of the overall access that's enabled through technology for people to be able to access streaming content. So all the fundamentals continue to be in place. And then in terms of outlook with respect to optimizing pricing with the very, very strong value proposition, we've been encouraged by the move of a couple of platforms. There's obviously further opportunities with respect to other platforms. So we feel very good about the subscription growth that we're reporting for this quarter, about the number of elements that I covered there. And the outlook is generally very positive in terms of our expectation for continued growth. And in saying that, I haven't really touched on the opportunity with respect to the emerging markets beyond the consideration set that I talked about. In terms of developed markets, there's obviously a great growth opportunity there. So there are many reasons to be very positive about the continuing growth of subscription.

Lucian Grainge

And I would just add on also part of your question. We're open to, in terms of licensing, any business solution. Obviously, you have to respect our artists and the integrity of their work. My philosophy for the company has always been, we should be and can be the hostess with the mostest. So yes, we're open for business with businesses which are legitimate, which is supportive and which we can create a partnership for growth.

Operator

The next question goes to Omar Sheikh of Morgan Stanley.

Omar Sheikh

Just a couple then for me. Maybe first on generative AI as well, maybe I could ask a legal question. If you -- could you maybe just walk us through the protections that you think you have the copyright law essentially provide to you? So if a track that's generated by an AI trained on your copyrighted material, can you take it down, does that qualify as derivative work, can you require DSPs to exclude it from their platforms or restrict it in any way? It would be helpful if you could just kind of walk us through your understanding of how the law works for you. And then what feedback are you getting from artists about their overall attitude or their initial attitude, if you like, to the use of the technology on their material? Do they want to encourage it as a potential new revenue opportunity or are they looking to you to restrict it? That's kind of a rather long first question. And then secondly just on streaming revenue. Could you maybe just talk about whether you think the first quarter streaming revenue growth is going to be the trough for the year and would you expect it to improve? I know Boyd, you said that you expect it to improve in the second half, but do you sort of expect that to, maybe Q2, to also be an improvement sequentially? And would you expect that to be driven by the pure advertising revenue that you get from YouTube and Spotify Free, or will that be driven by new platform revenues on the likes of Meta and Snap?

Michael Nash

Thank you for your questions, Omar. Let me address the questions around AI first, and then I'll hand it off to Boyd to address your streaming question. And I'm glad that you asked the question about our legal view of AI, because I do think that there's been a little bit of confusion. It's a new issue and there's been some fresh reporting on it with some recent developments. And we're happy to have the opportunity to be very, very clear about our view of the legal landscape. So let me break it down here. First of all, in terms of copyright, to reiterate our very clearly articulated position and echo Lucian's excellent summary earlier, sophisticated generative AI that's enabled by large language models, which trains on our intellectual property, violates copyright law in several ways. Companies have to obtain permission and execute a license to use copyrighted content for AI training or other purposes, and we're committed to maintaining these legal principles. Now in terms of international scope. We believe that most key markets’ copyright laws are fit for purpose right now, and don't -- we don't see a requirement for new legislation per se. But I think it's very important governments around the world interpret and enforce the existing laws correctively -- correctly and actively.

In terms of accessing of training materials for AI, let me break this down on several different levels. Copyright covers all training of AI and copyrighted music regardless of the technical means employed. We have further protections beyond copyright laws under our commercial DSP agreements. We put all of our partners on notice regarding their responsibility to ensure that no third party has unauthorized access to their services for the purpose of training generative AI. We know how critical it is to vigorously enforce our rights here and the rights of our artists regarding any such unauthorized training, and that's why we've taken some added steps to be very, very clear with our partners on this issue. Now we have other remedies beyond copyright law. There are various exploitations of generative AI, which we've seen recently that are exploitations without authorization running about a number of protections, including trademark, name and likeness, voice impersonation, right of publicity, and all these are instruments that can protect our work. With respect to voice, I think there's been some confusion here, and I want to be really, really clear on this point. We own all sounds captured on a sound recording. That is, in fact, the very nature of sound recording copyright and ownership. And here too, depending on the instance, we may also employ name and likeness, voice impersonation, right of publicity protections as well. And specifically, soundalikes which serve to confuse the public as to the source or origin, or which constitute a commercial appropriation of likeness in the form of a distinctive voice, those are all clearly illegal. So that's our reading of the legal landscape and I hope that clarified our position and helped address some of the questions that have come up in the recent past.

Now with respect to the artist community and what we're hearing, we've heard a number of ours expressing their concerns about AI being employed to create content that's training on their work without consent. And this is really content that's attempting to hijack their brand, exploit their celebrity for a moment of attention that's given to the [indiscernible], not to mention the numerous other nefarious uses of their content with disrespect and tarnish their reputation. So there's a lot of concern from the artist community there. But it's important to keep in mind that the potential of AI is much broader. And we have certainly heard from [indiscernible] creative community that are excited about this potential. As Lucian highlighted in his remarks, when technology like AI is put in the service of artists’ voice and vision, when it's directed by their artistic intent, we see great creative results being possible. And we're already working towards those kind of possibilities by integrating AI technology throughout our studio system. So the key here is for technologist to respect artists and value their work, focus on ethical approach to develop AI. When that happens, we expect many artists will enthusiastically embrace the creative innovations that AI can support.

Boyd Muir

And then just turning briefly to streaming, Omar. I don't really think it's appropriate for us to predict a change in the macroeconomic headwinds that negatively impacted these advertising revenues. But what I would say though is that I see a couple of things. One is these advertising dollars left the ecosystem very, very quickly. And I would hope that when they do return in there and the headwinds allow that they will return quite quickly. But we're not actually seeing any real indication of that in the immediate term. Again, as I mentioned, we're still hopeful that later in the year, we'll see a change in the macroeconomics and the advertising revenues. And I think one of the things that makes us very confident about this when you actually look at the levels of engagement and the activity on the platforms, it continues to grow. I mean, the engagement is really staggering. And that really does support our confidence that the revenues will grow as the advertising spend returns to the platforms.

Lucian Grainge

I'll just say one last thing to the first part of the question of AI and the support of our office. We've seen great support in our partnership with Drake, The Weeknd, Chris Stapleton, these are just three or four of the multitude of our artists and our artist partnerships. It's not theirs, it doesn't actually affect their artistic intent. We in the music business, the North Star is artistic intent. I can't just go in and argue with an artist and any of our dozens of creative executives around, just change a mix, change of backing vocal, do a 12-inch dance mix and produce it. Artists will always hear about us supporting and backing artists vision and we will continue to do that. And I want you to understand that's one of the reasons why that that partnership with us is in order and the support that we have from not only the artist community but creative people around the world in these campaigns and these defensive work that we’re doing here on the generative AI is because it's protective of their art and their work.

Operator

The next question goes to Michael Morris of Guggenheim Partners.

Michael Morris

I have a couple of questions. First one is on pricing, and it's great that you guys have seen a couple of these DSP price increases that you referenced. But do you see a path to additional and more regular price increases from these on-demand streaming music platform partners? And is that an important goal for you as you enter into rights renewals with the platforms, how can you help incentivize or drive continued top line growth for the industry at large? And my second question is on the payouts. You mentioned that the artist-centric model is on the way. I'm hoping maybe you could provide an update. I know it's a topic that comes up on a quarterly basis but it's relatively new. It sounds like some progress has been made there. And so I'd be curious what that progress was and how far away a change in the model might be.

Boyd Muir

So I'll address your first question on pricing. As we said several times, we're really not in a position, A, to comment on pricing or to drive the agenda with regard to pricing, other than what we've continued to do historically and will continue to do is to work with the platforms and provide them with all of the features that they require to ensure that their subscribers or content will remain actively engaged on the platform. So we've always been very anxious to try and improve the feature sets of the products that the platforms provide. And therefore, that really, for us, that removes any kind of impediment or restriction with regard to their ability to increase pricing. We believe that the pricing -- existing current pricing model, which has been around for many, many years so far, it just represents incredibly good value to have all of the music you've created in the world, wherever you want on whatever device for whatever, let’s just call it, $10.99, a $10 price point, is an incredibly good value.

Lucian Grainge

We're also confident that the artist-centric model will work because it's in everyone's interests, including the platforms. The real issue of this flood of content, this oversupply will only increase with generative AI. As to the complexity of artists and rights issues, as I said, it's in everyone's interest to make sure that the platforms don't become awash with problematic content that fans and artists don't want. And we’re confident in our partnerships and in our long term joint strategic goals that we will all have the outcome that we want. Importantly, artist-centric also has the opportunity to unlock the superfan and the superfan monetization, which creates a path for more compensation for artists, inevitably higher outputs of platforms. The superfan is going to be more and more interesting to all this. So we know the value, we love the quality of our artists, of our libraries, of our catalogs, of our audiovisual rights, and we will continue to monetize those rights with all these opportunities.

Michael Nash

To add a little bit to that in terms of the question about status, Michael. As we mentioned last quarter and based on that win-win dynamic that Lucian articulated, we've been very encouraged by the early response across the industry and from our partners. We've announced partnerships with Tidal and Deezer and those are progressing well. We're engaged with other parties. We're in discussions with all of the large global DSP partners. We expect this process is going to take time, in part because we need to build platform by platform. You've got different dynamics on the platforms in terms of customer acquisition and engagement and subscriber retention. You have different metrics that provide the basis to be able to model out the shared objectives in terms of refinement of the model. Obviously, the platforms are looking for on-platform metrics, that would be the basis for model adjustments and not metrics that are developed elsewhere. And so we have to take a very careful platform by platform approach. We're engaged right now in deep data science in looking at the platform data with our partners to get the level of understanding required in terms of how we implement the objective so that we can successfully make the modifications in the model with the partners that we're working with. So we expect that we're going to be able to continue to make progress. The sleeves are rolled up. This is hard work. We have to get into the details. But we're in the details now with a number of different partners.

Operator

The next question goes to Silvia Cuneo of Deutsche Bank.

Silvia Cuneo

My first question is on the potential changes to the music streaming monetization model. A follow-up regarding the superfan monetization. Can you please share some thoughts around what could be more likely to change? Is that content segmentation, something like we've seen at Apple Music with the launch of Classical, for example, or additional pricing tiers that you're thinking about? And then the second question is a follow-up regarding generative AI. What are your views regarding the potential to perhaps open up a new revenue stream in a way that still protect artists and [user of] intellectual property as well, something that could be added in contract negotiations, for example, that could be royalties around the use of the singer’s voice? Just wondering about other scenarios around the topic.

Michael Nash

So with respect to the first question, as I understood it, in terms of the opportunity around the superfan and what form it would take. What we know right now is that we've had tremendous growth in the adoption of subscription as a basic across the board, all access, all consumers price the same model. And I think that level of simplicity was necessary to get us to the point where, according to the IFPI, we reached nearly 600 million subscribers last year on our journey to 1 billion subscribers. Over the course of time, growth continues to be important. But with all the consumers value the same, clearly, we went behind the monetization we enjoyed for more valuable bands during the digital download era, where your most valuable customers as a group were 3 times more valuable than your average customer. What we've seen is that in many markets, 15% of the consumers may be responsible for 35%, 40% of the spend. Our consumer research says that among subscribers, about 30% of those subscribers are superfans of one or more of our artists. So we have a clear indication of a significant opportunity. Now how does that relate to artist-centric? When you start to focus on the artist-fan relationship, those high value relationships that are driving the economic model of the platform, so you're segmenting around high intent, high integrity artist-fan relationships. You're starting to move the platform towards a deeper level of engagement with fan bases and then the opportunity to monetize ability, we think, flows very naturally from that.

So as the platforms start to work on the adjustment of the economic model to look at high value relationships between artists and fans, we think that there is an opportunity at the level of platform scale to build in various kinds of offers that could target the superfan. And it's interesting when you would point out in terms of genre and that's the way you think about it. And you can also think about it in terms of provisioning unique digital goods, game buying, the fan experience and badging fans creating access to unique experiences with artists, virtual briefs, live streams, things like that. As you can tell, I'm not the product guy so these are kind of rudimentary concepts. But we believe that collaboration between our labels and the platforms once you start to focus more on artist-fan relationship that naturally leads into an opportunity to go after the superfan with the platforms at a level of scale. Now I think in terms of your second question with respect to how we're looking at the AI model and what value we can potentially unlock, I think it's a little bit too early to get into any specifics there. I think that the first step here is really establishing the foundation, which is the rights of our artists and the interest of our artists, making artists really the central nexus of the dialog of the conversation, focusing on their interest first. I think that as we start to look at the ethical development of AI, as we start to look at what licensing relationships could mean as a part of that, we'll start to get a clearer idea. But I think as I understand your question, it's a little bit too early to get into any specifics about what kind of model would make sense.

Operator

The next question goes to Christophe Cherblanc of Societe Generale.

Christophe Cherblanc

I got two, first one was on the artist-centric new model. Can you give us what's your best estimate of the share of the pool, which is today going to what you would call a problematic or lower quality content versus higher quality content that you have at UMG, just to give us a sense of the potential upside? And the second one was on catalog acquisition, that market has gone very quiet, which should be good for you. What do you see there, is the market frozen, do you see opportunities, do you see any upside? Any indication would be super helpful.

Michael Nash

In terms of artist-centric and what that could potentially mean in terms of share shift, obviously, you're going to see various platform by platform, it comes down to the model itself. It's hard to address your question. I would point to the fact that there are industry estimates that the range of fraud on the platforms could potentially be in the mid to high single digits, perhaps more in some instances. And you've got platform data that gives you a sense of the scope of this very low value, long, long tail kind of non artist content, what Lucian was referring to before, when he talked about only 2% of 9 million uploaders being artists by the definition of the platform, all this non-artist content on the platforms. So I think if you were to look at the buckets of that content and fraud, you may be start to get a sense of how you could enrich the royalty pool that would be shared by all artists, then the question of how that impacts individual companies would flow from there.

Boyd Muir

On catalog acquisitions, we still see quite a lot of activity in all fairness. I mean, your comment is a well made one. You would expect to see with the interest in -- increase in interest cost that, that would curtail the activity in some way, shape or form. I think what the reality is what we're seeing, there's still quite a lot of undeployed capital that's chasing after IP and acquisitions. And really, the reality is that we're only -- we're very, very -- I've used the words before, very opportunistic, very selective. It's only the best of the best. And I don't think really in terms of valuations, there's been any kind of lessening of the valuations is the best of the best, but there's definitely less opportunity coming to the market.

Lucian Grainge

I'd like to add actually that we do not suffer from something called FOMO, it’s fear of missing out. Never suffered from it. We'll see.

Operator

The next question goes to Richard Eary of UBS.

Richard Eary

Just sort of three questions from myself. Just firstly on sort of economics between digital and streaming. Boyd, maybe can you sort of help talk through sort of gross margins on those products to get us a better understanding of how the mix shift between physical and streaming impact margins on a quarter-by-quarter basis, so you can get a better understanding of that, that would be helpful. The second thing is just on the streaming numbers, you talked 10% at a group level. There were some pricing benefits in there. Can you just break out maybe what was volume, what was price and also do that for the US so we can get some understanding? And then lastly, Lucian, just can I ask a sort of hypothetical question, is that back in 2017, there was some seeding of economics to DSPs at that point in time. Would you contemplate seeding any more economics for price increases in the future?

Boyd Muir

Let me perhaps talk for the economics of streaming subscription. There's no one answer that applies across the board. It's all very, very different. And by the way, again, I just want to point out, I don't look at this on a quarter-to-quarter basis. It really -- I would really, really encourage you to take a longer term near term view on that. So at the highest possible level, it's clear that there are certain economics in the digital world that are different than the physical world. The obvious ones that there's no physical manufacturing of a physical product, there's no distributing of that physical product from the point of manufacturer to the point of retail. So that's all true. It's not the case that in the digital world that there is zero cost of the digital equivalent of manufacturer, the digital equivalent of distribution. So there are still some costs attached to digital. But clearly, there is a benefit migrating from a physical format to a digital format. But please, I would encourage you just to look beyond the quarter by quarter, which there will be items that happen on that short term basis that will kind of confuse the overall direction.

Michael Nash

On the second question regarding the growth in subscription, the 10.3% number and a breakdown, we're not prepared to make that kind of a breakdown. But I would say that the growth's largely been driven by the organic expansion of the subscription marketplace, the continuing manifestation of the megatrends that I talked about that are driving consumer adoption, that's the largest factor by far.

Lucian Grainge

And on the third part, obviously, I'm not going to speculate about what we would do or could do in the future. You referenced 2017. Our entire goal is to achieve the best economics and the best outcomes for everybody, the artists, ourselves, platforms. I'm obsessed with growth. I like 2 and 2 equal 7 scenarios. And in the spirit of our partnerships with all of the platforms and everyone who we've ever done a deal with and anyone who we'll ever make a deal with, I like win-win.

Operator

And our final question goes to Lisa Yang of Goldman Sachs.

Lisa Yang

Only a few left. Firstly, on the margin. Boyd, I understand there's some volatility on a quarterly basis and we should be looking at the full year. But just sort of like help us model the rest of the year. Could you maybe talk about how you expect the [state] of the margins to evolve? I think Q3 becomes [particularly] difficult because of the settlement last year. So is it fair to say that we should see really meaningful like well above 100 basis points improvement in Q2, Q4, and what are the main drivers of that? And the second one is on merchandising. Obviously, I understand you're facing extremely tough comps given how strong last year was. Do you expect to see any sort of improvement from the sort of [magic streak] that we saw in the first quarter based on the touring schedule and your investments into DTC or think it's going to be challenging to grow merchandising this year?

Boyd Muir

Lisa, on margin expansion, the margin expansion that we saw in Q1 was basically in line with with our expectations. So again, we are committing to over a 100 basis point increase in margins for 2023. It comes really from two aspects. It comes from operational leverage as the business grows and the cost base remains relatively, in part, fixed, we get the benefit of that operational leverage. And then secondly, there is the benefit that we are getting from the rollout of our equity plan. We anticipate EUR60 million to EUR80 million of cash savings in 2023 from the rollout of the equity plan. So those two items combined will lead us to having a margin expansion of 100 basis points. Merchandising, turning to that just for a second. One of the things to bear in mind about merchandising is it's a physical product. In many ways, it's not release driven but it's tour driven, it's activity driven, it can be quite volatile. And so again, caution on quarter to quarter. Nothing to read into Q1 at all in relation to the reduction in touring income compared to last year. We still see quite a very active touring schedule for the rest of the year. Q1, funny enough, is the quietest quarter for touring. It happens much more towards the summer and to the back half of the year. So again -- and again, if you look at this with sufficient long term lens, we definitely see growth for considerable future for our merchandising business and with the build in the direct-to-consumer, which is an important initiative to us which we see that.

Operator

Thank you. That's all the questions we have time for today. This now concludes today's call. Thank you so much for joining. You may now disconnect your lines.