An Open Letter to Universal Music Group and Pershing Square

Key Takeaways

• UMG’s back‑catalog generates ~2/3 of revenue and up to 90% profit
• Frontline new‑release business yields low 10‑20% margins, eroding value
• Since 2020 UMG spent €6 bn (~$6.5 bn) on advances, acquisitions, capex
• Merchandise unit produces €800‑900 m (~$870‑$980 m) at single‑digit EBITDA
• AI threatens royalty models; UMG should partner and invest in music tech

Pulse Analysis

The back‑catalog is the cornerstone of UMG’s financial strength. Songs older than 18 months, especially those beyond five years, act like a toll road, delivering recurring royalties with minimal incremental cost. Because royalty rates hover between 15% and 25%, cash flow scales dramatically as streaming subscriber bases and platform pricing rise. Analysts increasingly view this IP asset class as a quasi‑perpetual income stream, comparable to other high‑margin entertainment franchises, and it underpins the majority of UMG’s profitability.

Conversely, the frontline new‑release segment faces structural headwinds. Artists now command leverage, often opting for licensing deals that provide cash advances rather than surrendering masters. This shift forces UMG to fund advances while earning thin 10‑20% margins, a stark contrast to the catalog’s high returns. The company’s recent €6 bn (~$6.5 bn) outlay on advances, catalog acquisitions, and capex has not been matched by transparent ROIC reporting, leaving investors uncertain about the true economic impact of these expenditures.

Strategically, UMG can close the valuation gap by spotlighting catalog cash flow, imposing strict ROIC thresholds on new‑artist signings, and spinning off the low‑margin merchandise unit. Embracing AI as a partner—through licensing for training data and a corporate venture arm—could turn a potential threat into a revenue source. Clear communication of these initiatives, coupled with disciplined capital allocation, would likely lift market perception and unlock the hidden value embedded in UMG’s dual‑business model.