Despite the anguished reactions from musicians, fans and even the company’s chairman over the estimated 500,000 Universal Music master recordings lost in a 2008 fire, multiple analysts and experts tell Variety that the loss will have “zero impact” on the valuation of UMG — by far the world’s largest music company — and its parent company Vivendi’s stated objective to sell up to 50% of it. Universal recently has been valued by analysts at anywhere from $25 billion to as much as $50 billion.
The experts also said that although there have been rumblings from artists or their representatives about legal action over the losses, the artists may have a tough time winning lawsuits — because nearly all of the lost master tapes were ultimately the property of Universal, not the artists.
The extent of the damage that UMG’s archives suffered in the fire — which took place in a Los Angeles facility rented by UMG from NBC, and reportedly destroyed master tapes by artists ranging from Billie Holiday to Nirvana — was largely undisclosed until the publication of a New York Times article last week, which also claims that UMG executives at the time were not fully forthcoming about the extent of the losses. UMG has disputed the extent of the damage cited in the article.
(For this article, Variety spoke with two high-profile financial analysts and a senior attorney at a major label — which is not Universal — who requested anonymity because they are not authorized to speak with the media on such matters. Reps for Vivendi and UMG declined Variety‘s requests for comment.)
As for the valuation, the upshot is that investors looking at UMG will care significantly less about, say, unreleased Louis Armstrong recordings that were reportedly lost in the fire than the prospect that his hits like “What a Wonderful World” or “Hello Dolly” will continue to generate income for decades to come.
“When you look at the value of the company, it’s not based on the value of the assets sitting behind the recordings [meaning the master tapes and unreleased material] — it’s based on the cashflows those recordings will generate in the future,” one analyst said. “Nearly all of the masters were digitized and will still be monetized in the future, regardless of the fire, and for that reason, it makes no difference to the assessment the investors will make.”
While the New York Times article cites a former UMG employee recalling that the value of the lost masters was estimated at around $150 million as part of a settlement with NBC, which owned the storage facility, “That’s a very small number in the context of a company that might be valued at somewhere between $30 billion and $40 billion,” the analyst added.
Although first-generation master recordings are like gold to serious fans, researchers and archivists — not to mention the artists themselves — another analyst said that factor is negligible in the context of the entire company’s value.
“I think most people don’t care about the audio quality of music,” the analyst said. “You can see that from all the high-resolution formats staying niche, and the more-expensive high-res streaming options, such as Deezer and Tidal, not being very popular. So as long as UMG had made copy of the masters, it won’t impact the day-to-day of the business.”
The major-label attorney added, “In terms of investors, all you’re talking about is the value of being able to go back to the original masters for remastering — which is negligible, it’s probably around zero in the context of the total value of UMG. And at best, the value of what could have been exploited is highly speculative: They may not know what exactly they lost.”
Perhaps above all, despite the vast number of archival releases labels have issued since the CD boom of the 1980s and ‘90s, music remains a forward-looking business, says analyst Russ Crupnick of MusicWatch.
“Certainly, the loss is a tragedy, regardless of the scope,” he says. “However, for me the valuation of UMG is tied up in the artist roster that it supports, in its ability to develop and promote artists, and the licenses with DSPs and investments in incubating new tech for music, as well as the strength of the catalog, which has largely been digitized. UMG’s leading global reach and market share are important, and the fact that music is a growing category once again are as well. None of that is effected by the fire, nor is UMG’s ability to market music from those artists’ catalogs, or to compensate those artists.
“That doesn’t diminish the potential treasure that might have been lost,” he concludes, “but I don’t see it as hampering the ongoing operations or value of UMG.”
Last week, attorney Howard King said that he represents several unnamed artists whose masters may have been lost in the fire who plan to sue UMG over the loss. But the major-label attorney with whom Variety spoke says that because nearly all of the actual master tapes were the property of UMG — and not owned by the artists — those threats are likely made on shaky ground. (The ownership distinction here comes down to the difference between the master tape as a physical object, which in nearly all cases is the property of the label, as opposed to the copyrighted intellectual property contained on that tape.)
“The issue is: Who owns the thing that was lost?,” the attorney says. “I can’t say there is no recording agreement in history that says the physical master tape is owned by an artist, but in the vast majority of recording agreements, it’s owned by the record company. So even if the copyright in the sound recording reverted to the artist, the physical master tape is different — in almost all instances, it’s owned by the record company, and even if the recording agreement didn’t specify who owns it, because it was paid for the record company there’s a very strong argument that the record company owns it.”
The first analyst amplified that point. “The harm was caused to Universal — the fire damaged their property,” he says. “And if there are any artists whose [ownership of the masters] will revert to them in the next decade or so, they could try to seek some sort of compensation — but then I assume that in any successful claim there may be an opportunity for Universal to claw that [money] back from NBC, who owned the facility.”
In response, King tells Variety, “It would just like a major-label attorney to have the dismissive attitude that the artists have no rights in the master recordings they created. As will be detailed in our complaint, the artists have a substantial interest in the recordings they entrusted to their labels and have rights to redress for the damage done, the hiding of the damage by the record company and the failure of the record company to remit proceeds from the substantial payments they received on account of the fire damage.”
Even the giant black eye UMG has suffered for initially downplaying and then apparently not publicizing the extent of the damage — Vivendi CEO Arnaud de Puyfontaine said today that the controversy is “just noise” — will only cause so much harm, the first analyst added.
“There’s the matter of reputational risk, where artists might say they don’t want to sign with Universal because of the fire. While that doesn’t have zero value, I’m not sure it would be very big. I’ve seen a memo from [UMG chairman Lucian Grainge] where he reassures the artists about how seriously they’re taking it internally, and I think that can mitigate some potential reputation risk.”
And unless the artist owned the physical master tapes, UMG was likely under no obligation to inform the artist about the fire, the lawyer says.
“Those actions would only be viable only if it resulted in the loss of something owned by the artist,” he says. “And I would not think they would have any legal obligation to tell the artist, since the artist did not own the master.”
And while sources say Vivendi is facing challenges in its efforts to sell UMG due to its price and the lack of control a 50% buyer would have, even if some artists manage to bring successful legal action, the second analyst said, the long-term impact on UMG and its valuation will be minimal.
“Conclusion? A one-off cost that is hard to assess,” he says, “but no recurring impact.”