Music stocks in the United States, including those offering streaming services, were buzzing all through the pandemic year of 2020 on the back of windfall gains from higher subscriptions and ad revenues, among others.
Stay-at-home customers downloaded and paid their due for using more of such apps, and businesses rushed to advertise on such platforms to cash in on their popularity and reach. Stockholders of these companies were rewarded with healthy returns during the period as well.
Returns chart of major U.S. music stocks from 2020 until Now
The chart indicates stellar returns for investors of Spotify (SPOT), Tencent Music (TME), Sony (SNE), along with Big Tech players such as Apple (AAPL) and Amazon (AMZN). The iPhone maker’s Apple Music and the Jeff Bezos-led firm’s Amazon Prime Music are marquee names in the music streaming segment. Along with streaming companies, music stocks consist of record labels that own the work of several artists by striking music-ownership deals or royalty-sharing agreements with them. Warner Music Group (WMG) is an example of such a setup.
The sector is buzzing again following the news of an initial public offering (IPO) by the world’s largest music label later this year. In late-January, French media conglomerate Vivendi said it planned to spin off Universal Music Group (UMG) through an IPO by the end of this year. UMG has popular artists such as Taylor Swift, Lady Gaga, The Rolling Stones, Billy Joel, and Coldplay, among others, under its umbrella.
While the company would likely be listed on the Euronext NV exchange in Amsterdam, the development has brought the spotlight back on these shares.
Why are investors optimistic?
- Growing market: As per a Statista report, total revenue of the global music industry was around $53.77 billion dollars in 2018. It is expected to surpass $65 billion in 2023, reflecting the big sales potential for music companies. Within the segment, streaming is likely to take charge of the growth story. The global music streaming market, valued at $20.9 billion in 2019, is seen expanding at a compounded annual growth rate of 17.8% between 2020 and 2027.
- Increasing paid users: More users are opting for subscriptions and paid services of such companies, especially in the streaming segment. Spotify and Tencent Music have both reported jumps in paid music subscriptions. In fact, a report by the Recording Industry Association of America showed paid streaming services in the U.S. adding an average of more than one million new subscriptions each month.
- The role of tech in music: Investors are betting on the use of emerging and modern technologies in the music industry, ranging from augmented and virtual reality (VR) to hologram and artificial intelligence. For instance, VR music platform MelodyVR has a collection of live shows that are recorded for streaming on VR headsets such as Oculus Go.
- The rise of internet and smartphones: Global smartphone sales have skyrocketed in the recent years, giving ample opportunities and markets for music companies to target new customers. Estimates further suggest that more users are likely to turn to their phones for music and entertainment options. As per this report, the proportion of people who stream their music on their smartphones in developed markets is seen touching 37% in 2030 from 18% in 2018. In case of emerging markets, this is estimated to be 10% in 2030 from just a mere 3% in 2018, reflecting potential growth in customer additions and downloads for the music industry.
What are the Risks?
- Among the major worries for the music industry has been the existence of piracy practices. While streaming and paid subscriptions have eased these concerns, piracy and security-related issues continue to hurt the industry. Amplifying troubles are the severe hit to businesses from the COVID-19 pandemic that could resurface these issues. Piracy analytics company Muso’s data showed the frequency of music-related visits to torrenting platforms boomed during COVID-19 quarantine. In the U.S. itself, music visits to torrent sites grew by 15.62% in the period between the last week of February and the last week of March in 2020.
- Another key factor likely to weigh on such stocks is the increase in prices by streaming services, higher payouts to artists and the emergence of independent music labels and platforms for musicians to showcase their talent. Additionally, streaming giants also face the threat of an exodus of users if major labels or artists withdraw their work from such platforms.
Given the innovations in the music space and the absence of signs of an easing in the pandemic, the sector is likely to be on investors’ radar for some time. The fundamentals and business models of such companies will be under scrutiny as well in an ever-changing preferences of consumers. Time’s right to take your pick — plug in or face the music.