All right. I think we can get started. Morning or afternoon, everyone. I'm Cameron Mansson-Perrone, Morgan Stanley Music Live Events Analyst. Before we get started, I wanna note that important disclosures, including my personal holdings disclosures, and Morgan Stanley disclosures, all appear as a handout available in the registration area and on the Morgan Stanley public website. With that, I wanna welcome back to the conference Robert Kyncl, Chief Executive Officer of Warner Music Group. Robert, thanks for joining us. Thank you for having me. Robert, it's been, I think, roughly three years since you took over leadership at Warner Music. There's obviously been a lot of changes during that timeframe, both at Warner and in the industry. I'm sure you've learned a lot both about the industry and Warner and made changes to Warner. When you think about the DNA of the business and what differentiates Warner Music from your major label music peers, what do you think defines Warner? Well, I think today what defines us is our clearly set strategic priorities, which is growing our share, growing the value of music, and increasing efficiency. The entire company operates against those three priorities. Everything that we do is through the lens of those three things. It's ingrained in the company, and we've made huge amount of progress on each of those three areas. We've grown our market share by one percentage point in the last quarter, according to Luminate. Obviously, we've grown our efficiency quite recently, and very significantly through restructuring and lots of investments in the underlying infrastructure, and we've restructured our DSP agreements to increase the value of music. Those are, I would say, our defining characteristics. What sets us apart is, I think the, y ou know, I've refreshed a lot of the leadership team, and I think today we are a leadership team that has an experience both in technology and restructuring and transformation, as well as in artist development. It's an incredibly unique mix of people, and I'm just thrilled that it's showing up in our results, that this mix actually is producing, you know, the right results. Yeah. We're gonna dig into a lot of those areas more. At a high level, when you think about, you know, the growth opportunity at the industry level, how do those attributes and Warner's focus position it well to kinda succeed within the growth backdrop of the industry? Look, I think the industry. Number one, the industry is healthy. Like, if I think about the music industry, and I, you know, released the shareholder letter yesterday, and I spoke about this. I spoke about the music industry being a very attractive category, especially in today's world that has lots of uncertainty and wars, et cetera. The one thing that's constant is that people on all sides everywhere are listening to music, and it's undeterred and unchanged by what's happening in the world. It also has tremendous upside opportunity because it has not been as well as monetized as, let's say, film and TV. There's, you know, both in pricing as well as in volume and subscribers. I think according to one of your competitors, which will remain unnamed, there will be 1.5 billion music subscribers in 2035, and our revenue for the industry will nearly double by that time. That's all before the advent of AI drives further growth. I feel quite bullish on the industry. You know, we are very well positioned for that. Again, everything that we do goes against those three priorities that I mentioned. AI helps with each and every one of those. You know, our company has gone through lots of changes over the last three years, both organizational ones where we flattened the organization, we refreshed a lot of the leadership, we've simplified organizational structures, such as combining U.S. and U.K. labels together, et cetera. There are many, many more examples of that. We've also invested into underlying infrastructure of the company, which may sound kind of boring, but it's actually foundational in what is happening in AI today and to be able to take advantage of that, for instance, cleaning our data. Yeah And building infrastructure so the data is well organized. It's just a thankless task for quite a few years, but the big thanks is starting to come now as we're starting to use AI through the company. We've done a lot of the heavy lifting, without really getting credit for it in the past, but knowing where the world is headed, both organizationally as well as from infrastructure standpoint. Before we get into AI in more depth, you know, the pace of change in the music industry was already pretty quick. Yep You know, before these new platforms came out and before AI became kind of more central to the debate. You know, if you think back, how would you say the role of a music label evolved over the past five years? As you look forward into the future, like, how do you think the service offering, kind of core service offering that you provide to artists changes from here? I actually think about this quite a lot, as you can imagine, and also having come from the outside, right? I thought about it coming in. Yeah. To put it simply, the music industry was one where stars and hits really was the main job, and that's what mattered. Today, that obviously continues to be, but there are so many more things to work on. You know, the industry got much more complicated. Our biggest distributors used to be worth tens of billions of dollars. Now they're worth trillions of dollars. We used to have hundreds of millions of users. Now we have billions of users. We used to have one type of content, which was a CD or vinyl, et cetera. Now there are multiple different variations of content online, all of which are licensed differently. They're managed differently. There are takedown regimes for content. The complexity of the business has skyrocketed. There's regulatory frameworks, including the ones that we're pushing through, that we have to worry about. Obviously, there's advent of AI. What it takes is much more ambidextrous organizations than in the past, and which I was alluding to. You know, I was alluding to the changes that we've made inside our company to achieve that, and we have. You have to sort of walk and chew gum at the same time on many different things, and it just takes a different type of talent to do. As it relates to the value proposition, you know, we live in the world of unlimited noise and noise that is increasing. While on the one hand, democratized distribution gives everybody a voice, on the other hand, those voices are being lost in, you know, in just, in this tremendous noise. If you're an artist that wants to succeed on a consistent basis, you need a global infrastructure of people and the technology underlying to help you actually achieve that. Yeah. And stay there. I think that increasingly becomes our value proposition. That's one. Two, the other part is that in the world of AI, sorting through models, understanding how to negotiate with platforms, setting the rules for the future, and making sure that those rules are accretive to the industry, they're accretive to quality, all of that is highly sophisticated work, for which you need to recruit lots of highly sophisticated people to manage that. Yeah. Again, companies like ours have the ability to do that. I think there is, in general, and this may be a contrarian view, but I think there's return to scale. You need the scale of catalog. You need the scale to recruit people on the technical side. You need the scale to recruit people on the business development side. You obviously need to have the right people for artist development. It is very hard to achieve all of these things within a smaller company. Great. I wanna dive into the priorities that you outlined, maybe starting with the value of music. You know, I think AI is kind of central to that conversation, and the prevailing debate amongst investors, I think across the entertainment ecosystem, seems to be kind of coalescing around this question of whether or not the ability to leverage AI technology to create content is universally a risk to IP owners. As someone with experience in the video and audio world, in content and distribution, you know, what's your view of that risk or response to that perception? I've lived through quite a few of these shifts in my career, and we draw a different conclusion here. One, in the world where most people create, which is entirely possible, right? Like, that they create music, right? Because there'll be tools to do that which didn't exist before. We believe in that world, the most content and most inputs used for that will be familiar, iconic content. In that world, most value will accrue to that content because of attribution rather than market share distribution. It's helping us evolve from a market share-based royalty pools to attribution-based royalty pools, and it's rewarding quality, which is not where we've been in the market share-based world. In short, in the world where most people can create, value accrues to familiar and iconic content because of attribution, towards the outputs, which is clearly a destination where we want to be. Yeah. Obviously, we have to do everything possible to set things so that this happens exactly that way, and we're well underway to do that. This is because we believe this is the destination where we want to be, we've accelerated towards that destination. You know, we already have quite a few agreements in flight. We're working on more with our other partners. We actually are running towards that world. Yeah. We'll talk about this. Do you think there are attributes, you know, for music specifically that differentiate it in terms of AI exposure or opportunity relative to other areas of content? Yeah, I think. Think about it. Let's say, you know, I'm not talking about professionals, but I'm talking about casual users creating content, you know, using AI and creating music content. Whenever you want anything of tremendous scale, you need to get casual users, not just pro users. When you have casual users involved, they will prompt the familiar. Imagine today when you are uploading a video to Instagram and you want to attach a song. What do you do? What is your behavior? You start typing a name of a song, a name of an artist that is in your head because you like them, or you have some kind of an association or something in mind related to that video. You're not necessarily going through the recommendations of unknown artists. I think that will be a similar behavior, in terms of creating IP. I think in case of music, the IP is incredibly powerful. There are also some real opportunities for you to kinda lean in and leverage AI. You've talked about those. You mentioned some in the shareholder letter that you referenced. How are you folding AI into the, into the way that Warner Music runs, and what does it enable you to do that might not have been possible, or it might have just been much more challenging. Sure -previously? I mentioned, you know, sort of return to scale. Yeah. Obviously, catalog is part of that. We have well over a million songs to manage on the DSPs. Well, it's humanly impossible to tend to every single one of those songs and make sure that every single song has all of the metadata fixed correctly, has all the right assets, and that it's optimized for the algorithms of every single platform. In an AI world, that is possible, and that's exactly what we're working on. I look at what, you know, what is driving the most revenue and profit for the company, the catalog. That is where our efforts begin. Yeah -with AI. We need to automate end-to-end the optimization and marketing of our catalog. We're well underway of doing that. We've been working on it for a while. It's amazing to see what happens and when you start scaling this. What we do is when we build, we don't build just for catalog because then our frontline teams, when they can, they can pick and choose the tools to use that we built for catalog. It's good to be focused on one area to build and then make sure you build it in a way so it can scale across the whole company. That's one good example. The other one is revenue forecasting for the company. Now, in addition to people in the finance department doing that, we also have AI doing that. You know, and now we can start comparing who's getting closer and who's right. You know, and it just makes us better at managing our business. Yeah. So. Is it changing the way you run the frontline business at all in terms of, you know, new types of support you can offer artists that might not have been possible or any changes to kinda like deal structure when you're signing a new artist? One good example is, you know, again, for, you know, we've developed for catalog, sort of opportunity or anomaly detection model, whether it's positive anomalies or negative anomalies, because it allows you to focus your efforts, right? Again, with catalog, you automate those efforts as much as possible. In frontline, they may not be automated, but people know where to focus, right? Basically the same tool can be used for frontline and basically prioritize work. Yeah For highest impact. I think the best way to manage this is to really, again, develop for one division, but make sure it's scalable everywhere, and then you create this magnetic pull across the organization to start using the tools. Another good example is we developed an automated music video QA tool. You know, today, and to this day, we've been doing it using people. It takes time, you know, to do. Now with AI, it's, you know, 1/10 of the cost, 1/10 of the time, and it's super fast and high quality. As you do it for catalog with larger scale, different story. Teams on the frontline suddenly would have an artist who's delivering their music video two hours before the release, and there's no time to QA. like, "Oh, we saw the presentation on the QA tool with the catalog team. Let's use that". Yeah. Now you're creating, again, organic pull for people to start using the tools that you've built. We have quite a few things like this in flight, and it's fun to see the teams start embracing it. All of those basically get, you know, fraction of the cost, fraction of the time, helping us amplify the value of our catalog and providing tools to amplify artists through the frontline teams. Another big opportunity is the deals you've signed with new AI platforms. Yep Which you mentioned earlier, including Suno and Udio, both of whom you obviously previously had in kind of legal crosshairs. What moved you past litigation with those platforms, and how do you think about the opportunity that those platforms can bring to artists and labels? You know, we, I'm consistent in saying that we have a three L strategy, which is litigate, legislate, and license. The first two are in the service of the third. That's the perfect example with Suno and Udio. We've, you know, litigated first. Our calculus was simple, which is they're having traction with users, which is a very difficult thing to do, right? When you build something that has a lot of users and grows really fast, you have to pay attention. Two, they were willing to license and transition to a license model, you know, to adhere to our principles. Three, we were very happy with the economics that we achieved with them. It sets the business up well to be incremental to all of our efforts and projections that we have. When you have that, then you want that partner to succeed. The way we view it is today on Suno, according to the last numbers released, you have two million subscribers paying $300 million a year, which is $12.50 per month per user, which is more than what people are paying to listen to music. I think that is supporting our thesis about not only participating and in listening, but also growing our business through creation and participating in creation, which is incremental to our underlying growth. The opportunity to grow an audience segment and get, you know, people who are really passionate about music to start creating and spending $12.50 per month. You know, whether that remains the number for the future or not- Yeah. Is somewhat irrelevant. The point is, because a [ton of it], dollars a year, which is incredible, but it's somewhat irrelevant. The point is it's incremental to what is happening in music today, and it's growing at a rapid pace. Of course, we embrace it, and of course, we want it to succeed. You know, we obviously welcome the rest of the industry to come on board. How do you think that level of interactivity relative to maybe not, you know, fully lean back, but definitely more passive listening experience of kind of the legacy DSPs, how do you think that interactivity changes consumer behavior over time, and what does it mean for the value of music? I'll start with the last, which is the value of music, right? If you think about it, the music industry has benefited from subscription tremendously, right? The industry is 30% bigger than it was at the height of CD era. Fantastic. However, at the same time, in a inflation adjusted, we're roughly at $0.50 on the dollar to where we were on a per user basis at that time. Less users, right? But still. Yeah. We know that there were people willing to spend that kind of money per year. That is an opportunity that we as an industry have not captured to date. We only captured, you know, sort of the volume opportunity, but not the audience segmentation value opportunity. It was there then. It is there now. Suno is proving it right? With their $12.50 per month spend. Of course, it makes sense that that model also takes hold on the DSPs, whether it's YouTube, Apple, Spotify, et cetera, Amazon, et cetera, Tencent. We see this as a tremendous opportunity. For us, with those partners, you know, we have large, lucrative relationships between us, so we have to negotiate everything in context of those overall relationships for different companies, Sony, Universal, us, and others. It comes at different times because of, you know, where our deals are. I would expect or you should expect that, you know, those offerings make its way to the DSPs, you know, in not too distant future and help grow the business even past what we're all projecting today. We're encouraged by what Suno has proven, and we like to see it spread across all of the DSPs to capture the opportunity. It will delight users, which is great. Yeah. We love that, and it helps grow the industry into much greater heights than we all imagined. Any takeaways from YouTube that you'd share in terms of thinking about, you know, who listens or watches relative to who posts or engages more actively? Like who differentiates the creator content, the content creators? Well, I think the opportunity and creation that I'm talking about is way bigger than what we all had imagined because on YouTube in the Partner Program, most of the successful and big creators in the Partner Program, they don't necessarily love to use our music because when we claim the music, we, you know, we cut in the revenue. Yeah. et cetera, right? It's not really used. Music could be so much bigger than what it is had we not charged for it over there, right? Which obviously w e cannot not do. Yeah. When people are creating and they're using, you know, familiar iconic IP to create, it will unleash a whole new economy, because, you know, we'll cut in on the subscription level of it, so the user won't have to worry about it individually. It will unlock a massive amount of consumption and revenue. What I know from YouTube is that music is very popular. People like to embed it in their videos. It's been that way from the early days of YouTube to early days of TikTok and Instagram, et cetera. Music makes all video better, from the shortest of TikToks all the way to the longest of Martin Scorsese movies or James Cameron movies or a Super Bowl halftime show, right? We know it's there and people want to create with that, and as long as we have the right economic model around it's an accretive, revenue stream to the industry. You've spoken in the past about how important it is that these platforms and models are opt-in structured in terms of how artists participate. I'd guess that most artists fall pretty firmly into one camp or the other as it relates to discomfort versus enthusiasm toward AI. What's your message to artists in your portfolio who may be more open or may be on the fence? What's your message to them? Yeah, I meet with, quite a few artists and talk about it, and, look, the right answer here is do what's right for you. Yeah. It's very hard to force anybody Like there's no reason to force people to do anything, right? This has to be a voluntary effort. We're there to set the rules of the road, build the rails, make sure it all works the right way, that we cut into the revenue correctly, that we help build the pie, expand the pie together with our partners, whether it's newcomers or DSP partners, and then artists, you know, either come in or they don't, right? By the way, we have both, right? Charlie Puth just became Chief AI or creative music officer at an AI company, right? Yeah. Obviously, Charlie's embracing it, right? There are quite a few others. Then there are other artists who just don't want to touch it at all, and they're purists, and they're all about human creation and nothing else. That's also great. We're agnostic about it with our artists. I recognize you might be limited in what you can share here, but any color on how rights remuneration for artists works with these platforms? Obviously, I can't go into the details, but I'll give you some of the broad strokes which are important. I think You know, for instance, today you see, you know, you see a bunch of news about news organizations doing AI deals, right? Those are done on flat fee basis. That is not the case with us. With us, it's precisely the opposite. We're done all on variable basis. The reason for that is with news, the news has a shelf life of 24 hours. Our content has shelf life of 100 years. Yeah. Completely different thing. For us, it's all about negotiating the outputs and our revenue share on the outputs, so that when our partners are growing, we're growing. When we're growing, our artists and shareholders are growing, right? It's like it ties, you know, goes directly into their royalty pool and gets paid out. For us, it's a completely different setup from other industries because the shelf life of our content is nearly infinite and, at least, you know, in the lifetime. We have to have ongoing participation in the revenue stream. You know, I think there's a question of, you know, how signing AI artists, I don't know how you would characterize that or define that. To your point, some artists are leaning into it really heavily, what, do they suddenly become an AI artist? Yeah. I'm not sure where you define the lines, but how do you think about that? Would you ever sign an AI artist? What defines an AI artist? Yeah. I don't think any of this is worked out yet. Yeah Like what defines what. Clearly, you know, we have many artists, our own artists that are leaning into AI very heavily. We do songwriter camps. Warner Chappell, our publishing division does songwriter camps that, you know, where lots of songwriters get together. Two most recent songwriter camps were very AI-focused for us. It's, you know, we're seeing what tools they're using and how they're using it, see how we can help. We're embracing it. You know, when I, again, I, you know, as a company, we see it as a value creation driver for the industry in general and definitely for Warner Music Group. On the artist and songwriter level, it has to be purely voluntary. Yeah. Right? We have to be agnostic that way. Here, we're biased to use it as a driver. Here, we're agnostic with them, and that's it. You know, again, we gotta walk and chew gum at the same time and execute against that. What's exciting for me is that as the company is growing, we now have a additional new growth driver that we've uncovered and that is starting to support the thesis that we have around audience segmentation. Some people be going to spend way more money on music than they had the opportunity to do so far, and we want to grow that. Yeah. You talked about it on your last earnings call, made for the broader audience. How do you think about the AI's influence or how it impacts your agreements and relationships with your legacy DSP partners? Look, I'll go back to my YouTube experience. When I joined, we were in an ad-supported business on a desktop. Yeah. We needed to go to mobile, we needed the rights, so we had to add that. We wanted to build a subscription, so we had to get those rights. We wanted to get into Shorts, we had to get those rights. Each time, you know, with innovation and product evolution, the rights needed to expand, and each and every time we had to go to our partners and figure out how we expand the right set. This is just another one of those steps. It's nothing new. It's a process that, you know, I use YouTube as an example, but same thing holds true for Spotify. You know, first, you know, there was subscription, then they added advertising. It was kind of like the opposite of YouTube, right? Now they added video, right? It's like each of those things keep on evolving, and we're used to that. Like, that is our job to do. Yeah, this is just another step in value creation for both sides, by the way. Yeah. Yeah, we just have to grow the overall pie and grow the incremental pie and life will be great for everybody. You talked at the top about, you know, the success that the industry's seen from a volume perspective. Mm-hmm. As we think about that other side of the equation, the rate question. Mm-hmm What can Warner do to support an ecosystem where rate's moving in the direction that you'd like to see it? Look, Again, this goes to the opportunity, right? On a inflation-adjusted basis, we're way below where we should be. Yeah In general. At the same time, we're incredibly grateful that we're 30% bigger on aggregate than we had been before. It only points to the opportunity. I think instead of having, like, an adversarial tone to it's all about how do we maximize this industry? How do we, you know, grow faster, create more incremental revenue streams? You know, I spoke about the increasing complexity of the business. Yeah, it's also going to increase on the retail side. There is more slices that we can offer in order to satisfy people who want to spend more money on music. We have to be, A, very determined about it, and two, flexible in many other ways to allow different partners with different objectives to achieve their objectives. At the same time, we have to be fair to all of them to make sure that all partners are on equal footing with their pricing, et cetera. It's, again, this is, this is not a rocket science. It's not a, it's not a new and super unique thing to our industry, but it's one that, you know, we need certainty around rates. Going forward, we decided that a year and a half ago, started to put into place about a year ago. It's all in flight. Certainty around rates is important, and how they evolve into the future, and I'm really pleased that that's what we've achieved, and we'll continue on that path. At the same time, we've also achieved artist-centric, right? Which has been very, strategically very important thing to do. Now we have to focus on evolving that with the evolving landscape of the music industry. It's kind of like two prongs, which is certainty around rates and artist-centric and moving the floor up. I wanna make sure to hit on your other priorities. Your second one is increasing share. I think we've seen in streaming revenue growth over the last few quarters, evidence even externally of some real momentum on that front. Yeah. What would you point to in terms of the drivers of that success? Then as investors think about that outlook going forward, you know, what gives you confidence in kind of the stability of that momentum over time? Yeah. One, the market share growth actually is pretty broad-based, both catalog as well as new releases, and within that, across geos. We have a bit more work to do in Asia, but in general, everywhere else in the world, we've done quite well. The broad-based part is very important, right? That it's not just like a little rays of sunshine somewhere. It's like actually the sun is shining all around pretty much. Yeah. That's one. Two, we've tightened our capital allocation much more focused on the highest impact opportunities and taking more of a repertoire potential lens rather than a market-based lens to things. Three, we have a very strong initiative pipeline, whether it's on A&R or on M&A, and we're executing against that with high speed and tenacity. All of those things start showing up. At the same time, we managed to, you know, kind of jump to the third priority, cut cost. Yeah And become much more efficient while we're accelerating the business. Right? To me, this is like another one of those things that I think differentiates us from many other companies because everybody was telling me, "This is not possible. You're gonna start cutting costs, you're gonna decelerate." We've actually achieved the opposite. I think the resilience of the team, you know, the dexterity that I was describing before is showing up here. I think, you know, for any company to start cutting costs and accelerating their revenue and increasing the value of their underlying product, it's, you know, it's a great feeling. Yeah. To follow up on that last efficiency priority, you know, you mentioned at the top the organizational changes that you've made. You also called out on the last earnings call this idea of kinda always on marketing- Mm-hmm and the ability to leverage AI to do that and resurface your catalog. Mm-hmm. At the same time, we've seen pretty strong operating leverage from sales and marketing. What is it the org changes? Is it technology? What's allowing you to execute on the efficiency so well? It's, you know, I wish I could say that there's like a silver bullet and one thing that enables it. It's a series of, i t's the compound impact of a lot of different changes. Talent is definitely one. Measurement is another, right? You know, we built a lot of different ways to measure our impact and our outcomes, which we didn't have before. It's cadence of operations, you know, that contributes to that. No silver bullet, but to simply said, great management team combined with much more strengthened infrastructure and a clear vision for the future on what to do in marching against it as one team. Yeah. Great. Robert, that brings us to time. Thanks for joining us. Thank you so much. Thank you for your support.