Warner Music Group’s Metaverse Strategy
How WMG’s investments & partnerships are fueling its metaverse ambitions.
GM readers 👋,
Happy Holidays!
Over the past few weeks, I’ve found myself going down the rabbit hole with ChatGPT, OpenAI’s AI-powered chatbot. I’m sure many of you are already familiar, but if you’re not, it’s definitely worth checking out. The tool is powerful. For example, take a look at this post written by my MBA professor. ChatGPT does a pretty good job at completing several of his day-to-day tasks (generating syllabi, drafting lectures, etc.). Wild! I’ve found it helpful for brainstorming ideas and it’s been making me feel early iPhone vibes. We’ll see where this all goes, but I wouldn’t be surprised if it has a major impact in the not-so-distant future. I definitely need to get smarter on the topic.
Shifting from tech innovation to this newsletter. I am likely going to publish one more Leveling Up installment next week. It will be a shorter “Best Of” 2022 kind of piece.
Thanks again for reading. Leveling Up gained a bunch of new readers this year and the quality of the subscriber base blows me away. You folks work at some of the biggest companies and investment firms in the world. Why are you reading this random Substack? All jokes aside, I’m super grateful that each of you spends a bit of your valuable time with my thoughts on various topics. I intend to keep writing next year, so hopefully Leveling Up continues to be interesting and/or entertaining to you.
As always, I’d love to hear your feedback in the comments. And if you have any ideas for future newsletter topics, please let me know!
Now, let’s get after it!
Jimmy
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Warner Music Group’s Metaverse Strategy
“Since 2010, the growth of streaming has been a slow burn towards what we’ve seen over the last couple of years – an explosion of new business models. The uses of music will be unlimited, more interactive, and surround us in our daily lives.” - Stephen Cooper, CEO of Warner Music Group
A couple months ago I noticed a job posting for a role at Warner Music Group (“WMG”) entitled “Senior Director, Metaverse Development”. I read the job spec and am pretty sure that I said aloud, “this sounds f**king awesome!” Why? First, the business card flex appeal of working in “Metaverse Development” is indisputably high 💪😂💪! More seriously, the role combines a bunch of my passions – music, gaming, technology, strategy, and investing – at a world class media organization. Alas, I’m still happily building Alderbrook (and probably unqualified, in fairness!).
Nevertheless, I think that it’s interesting to consider how this role fits into WMG’s broader strategy and ambitions. Why does a music IP company care about the metaverse and how is WMG executing this strategy?
Taking a Swing at Defining the Metaverse
Before analyzing why Warner is investing time and capital into the “Metaverse,” let’s try to define what the term really means. A lot of people have written and discussed this new gaming and virtual world paradigm, but the concept is thrown around a lot and the definition is fuzzy at best. For example, media industry thought leader Matthew Ball published a bestselling book entitled “THE METAVERSE” this year. Personally, I like legendary game designer Raph Koster’s blog post attempt at defining the metaverse best.
In the piece, Koster explains that social online worlds, like Second Life, have been around since the late 1970s and are not metaverses. Meanwhile, multiverses, like Roblox, have multiple different worlds connected within a network where players can hop from one experience to the next. In multiverses, you can hop from one world to the next with different themes, rules, and experiences.
According to Koster, metaverses are multiverses that interoperate with the real world. This means that a metaverse blends the virtual world and the real world. For example, in a metaverse, you might attend a class with a mix of virtual and physical attendees. Koster’s concept implies that technology, such as augmented reality (“AR”), is needed to realize the vision.
McKinsey has broken down the metaverse technology stack into four core building blocks: Content & Experiences (e.g., virtual worlds); Platforms (e.g., game engines and distribution platforms); Infrastructure & Hardware (e.g., VR glasses and blockchain networks); and Enablers (e.g., digital identity / avatar platforms, security & privacy). These four building blocks consist of ten “layers” depicted in the graphic below.
In his post, Raph Koster points out that metaverse technology is “still speculative,” with many open question marks, especially around the interoperability of digital asset ownership. (Check out this great piece by Matthew Dion if you want to learn more about interoperability challenges).
Even if certain aspects of the metaverse (e.g., interoperability across platforms and devices, non-gaming use cases, etc.) haven’t yet been realized, there are some common characteristics shared between the metaverse envisioned in the future and the online worlds and multiverses of today. All three are immersive, live, interactive, and social. And many of the use cases associated with the metaverse concept – like making real money interacting in online worlds – are already occurring.
That said, I’ve been in more than one conversation with people more well versed on this topic than me, who refer to Roblox and Fortnite as metaverses. Based on my interpretation of Koster’s definition, that wouldn’t be the case, at least in part, due to limited interoperability (e.g., I can’t take my Fortnite skins into Roblox). Point being that when people talk about the metaverse, it can often feel like a poorly defined buzzword. I’m going to stick with Koster’s definition for the rest of this piece in an effort to avoid that pitfall.
Why is WMG investing in the Metaverse?
Armed with a basic understanding of what the metaverse means, let’s look at why and how WMG is focusing on this trend. Over the past few years, the company has made a number of partnerships with and investments in businesses that are aligned with the building blocks of the metaverse. Here are a few examples:
In January 2021, WMG announced a $10+ million pre-IPO investment in the UGC game platform Roblox.
In April 2021, WMG announced a partnership with digital identity / avatar technology company Genies to help WMG’s artists to create and distribute their own avatars and digital collectibles.
In May 2021, WMG announced an investment in and partnership with virtual concert start-up Wave to develop virtual performances, experiences, and monetization opportunities for WMG’s artists.
In February 2022, WMG announced a partnership with blockchain game developer Splinterlands to give WMG artists opportunities to create blockchain games.
In September 2022, WMG announced a partnership with NFT marketplace OpenSea that gives WMG artists improved discoverability, customized landing pages, and other benefits on the marketplace.
Clearly, Warner is experimenting with several metaverse building block verticals. But why? Ultimately, WMG is a for-profit publicly listed company with a goal of creating value for its shareholders. That said, there appear to be several considerations driving its metaverse strategy. These likely include:
A desire to serve as a differentiated, value-add partner to artists. Warner Music Group’s business model depends upon attracting and developing the best artists and songwriters. At the same time, the music industry is intensely competitive with WMG constantly vying with other large music companies (like Universal and Sony) for market share. By offering unique metaverse insights and opportunities, WMG can differentiate from its competitors when pitching artists on WMG. In addition, the company hopes to better serve its existing roster of artists. WMG’s Chief Digital Officer Oana Ruxandra highlighted this driver in a recent interview: “My team exists to build value for artists and songwriters...we want to make sure that we have the capabilities, the partnerships, and the best practices to enable our artists and songwriters to reach their audiences on those platforms…We’re digging in deeply with these partners to build really cool experiences.”
Demographic trends suggest video games are taking up a larger share of young consumers’ entertainment time and wallet share. Different demographics spend varying amounts of time with each media format. A recent Deloitte survey on media trends captures this dynamic well. For example, video games are becoming increasingly mainstream as Gen Z finds it their favorite entertainment activity. The chart below shows how Generation Z spends ~12 hours per week gaming across the five countries Deloitte surveyed. In addition to high engagement, gamers tend to monetize more on a per-user basis. For example, while IFPI estimates global streaming revenue per paid subscriber at only $30 per year, Newzoo estimates that the average gamer spends $65 per year. Consumers are spending more time and money immersed in a variety of media formats, with Gen Z ranking gaming as their favorite. Zooming on a success case study, Sony Music artist Travis Scott’s 10-minute virtual concert in Fortnite reportedly generated $20+ million (compared to $50 million for his full live tour). Meanwhile, on the cost side, gaming industry analyst David Taylor suggests that launching Roblox games is one of the best ways that brands can engage consumers. Taylor estimates that a 30-second Super Bowl ad costs 5 centers per viewer compared to a branded Roblox game costing 1.5 cents per 10 minute gameplay session. As a result, WMG is highly incentivized to enable their artists and IP to meet fans where they are and engage with them as much as possible. In short, gaming can be a super cost effective marketing channel. (If you’d like to read up more on this topic, check out this piece we published on HYBE earlier this year.)
Metaverse market size forecasts are massive. Blue chip investment banks and consulting firms are measuring the future size of the metaverse in the trillions! For example, McKinsey estimates that consumer and enterprise use cases could generate up to $5 trillion by 2030. If McKinsey’s guesstimate sounds like a huge number, investment bank Citi says “hold my beer.” Citi forecasts that the metaverse economy could reach $13 trillion by 2030. As a reminder, the global recorded music market reached an all-time high at ~$26 billion in 2021. If metaverse forecasts are even directionally accurate, it has the potential to significantly benefit the music industry meaning the costs of missing out are high. Along these lines, Warner Music Group’s “Emerging Platforms” revenue – which includes sales from gaming, social, and video streaming platforms – increased ~35% year-over-year to ~$370 million in fiscal 4Q 2022. This growth rate is meaningfully higher than WMG’s company-wide 12% growth rate in fiscal 2022.
A desire to avoid being caught off guard by new technologies and business models. The music industry has not done the best job of capitalizing on technological innovation in the recent past. In a recent piece, I explored how and why the music industry was slow to adjust its business model to the internet, which enabled file sharing applications like Napster. As a result, the industry’s growth materially lagged other media verticals like gaming (as depicted in the chart below). Streaming has enabled the recorded music industry to return to growth, but WMG and other music rights holders still butt heads with streaming services over pricing and royalty payouts. These experiences are likely driving WMG’s strategy to invest in and partner with certain companies even before there is mass market adoption. By taking a bit more risk, WMG can learn, get their arms around new metaverse-related business models, and more easily influence how the revenue pie is ultimately split. Ruxandra seemed to suggest this angle in a recent interview: “That is one of the things we’re focused on at Warner. That we are there at the beginning [of new technologies]. So that we can build the business models and capabilities in the right way for artists and songwriters. And that we’re not surprised by new tech and aren’t subservient to new tech once it’s already being built.” Along these lines, Web3’s decentralized blockchain networks pose a potential threat of disintermediating the flow of funds between consumers and artists. WMG has sought to carve a place in Web3, with CEO Stephen Cooper explaining how the company wants to provide the “connective tissue” that helps artists navigate the complex Web3 environment to effectively connect with their fans. The company has experimented with Web3 technology via investments in Layer 1 blockchain Dapper Labs and partnerships with NFT marketplaces OpenSea and LGND Music. It’s worth noting that WMG’s Web3 partnerships are with companies that unsurprisingly fall on the more centralized end of the spectrum.
How is WMG investing in the Metaverse?
With these drivers in mind, let’s look at how WMG has been implementing its metaverse strategy. In the graphic below, we’ll highlight several of WMG’s partnerships and investments. In doing so, I’ll borrow from McKinsey’s four building blocks of the metaverse technology stack to frame the discussion.
At first sight, WMG appears to be spreading out its bets across the metaverse technology stack rather than focusing on specific verticals or companies. WMG also seems to be working with companies in a variety of stages – from seed stage to public. In my opinion, this high-level strategy makes sense while WMG tests, learns, and adopts best practices. The Content and Platform buckets are drawing the majority of activity, which is likely due to the natural synergies with WMG’s IP portfolio.
Of course, a somewhat “shotgun” investment strategy means that bandwidth can become more easily strained and the number of failed projects will likely be higher. WMG seems to be mitigating the latter risk by leveraging its world class IP portfolio to enter into low/no cost partnerships. Almost half of WMG’s deals listed above are partnerships. In my opinion, this is a smart approach to experimentation. Meanwhile, the company’s metaverse investment budget is likely less than $100 million annually. WMG spent ~$500 million on business acquisitions and investments in fiscal 2022 but 80% of that figure likely stems from the 300 Entertainment deal. With over $580 million of cash on hand and a business that generates hundreds of millions of free cash flow annually, WMG seems to have appropriately sized its metaverse investments.
From my perspective, Warner Music Group has been ahead of the curve among its major music peers when it comes to really focusing time and capital on the metaverse trend. For example, whereas Universal Music just hired an executive to lead its metaverse efforts, WMG has been investing in the space for several years now, with its pace of activity really accelerating in 2021. That said, going forward, a challenge for WMG will involve scaling its current approach. Based on the job spec, it looks like WMG is partnering with third party design and development studios to create artist focused games, experiences, projects, etc. within their metaverse investments/partnerships. As the project load builds, I wouldn’t be surprised if WMG sought to create its own internal development studio or acquire one (a similar strategy to South Korean K-pop label HYBE).
At the same time, WMG may need to shift from a shotgun investment/partnership strategy to a narrower focus over time. This is especially true if the company continues to take a more hands-on collaborative approach (e.g., helping to create virtual concert experiences across multiple platforms, developing artist-focused gaming projects, etc.). WMG may be forced to make choices between exploring new technologies and business models or trying to scale existing bets that are promising but may no longer be at the peak of Gartner’s Hype Cycle. There is always a risk in tech of getting locked into FOMO. As one example, my VC Twitter feed has largely shifted from posts about Web3 to posts about AI in the past 3 to 6 months.
One tool to help enable easier scaling might include developing a focused investments/partnerships framework. For example, WMG has a lot of optimism around Web3 technologies, investing in blockchain companies throughout the technology stack. The Metaverse Development leader will likely want to set a thoughtful framework around which Web3 projects to collaborate with. Developing a successful Web3 gaming framework may prove challenging because the market arguably hasn’t seen a sustainable success yet. This is especially true in blockchain virtual worlds like the Sandbox and Decentraland, which haven’t been able to attract or engage users at any meaningful scale yet and likely have overvalued token prices relative to Web2 peers (see the graphic below). Even still, a Web3 framework with key gaming variables – such as management team experience, MAUs/Community totals & trajectory, transaction volume totals & trajectory, thoughtfulness of the game design, etc. – could help WMG screen between projects and allocate resources in a focused/intentional way.
Final Thoughts
Warner Music Group has shown a growing interest in the metaverse over the past several years. While cynics may view this as a superficial marketing ploy for shareholders, the number of investments and partnerships announced suggest that WMG is genuinely pursuing this trend. In my opinion, the company’s interest is driven by a desire to play both offense (e.g., to provide artists value-add services and to capture a piece of a potentially massive market) and defense (e.g., to avoid being caught flat footed by a disruptive technology). At this time, the WMG’s approach involves spreading out its bets across a large number of ventures, rather than focusing on a few targeted opportunities. It remains to be seen if the metaverse pie lives up to expectations. And in a success case, it will be interesting to observe if WMG’s approach to scaling adjusts.
Thanks to Hannah and Adam for the feedback, input, and editing!
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