Goldman Sachs restates picks as music industry works to shift into new tune
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The music industry is set for another heavy structural change as the decade plays out, Goldman Sachs says, and that will call for a "coordinated and collaborative response" from the main players to hold on to sustainable growth and capture new opportunities.
The 2030 growth outlook remains strong, and it will get more broad-based, says a team including analysts Lisa Yang, Eric Sheridan, Stephen Laszczyk and James Tate. The group expects global music industry revenues will grow at 7.1% year-over-year in 2023, vs. 2022's growth rate of 8%.
They also upgrade their compound annual growth rate expectations for 2023-2030 to 7.3%, from a previous 7.1%. And as part of that, streaming music should continue to grow at 11%.
There are four major debates for the industry ahead, Goldman noted: music undermonetization; the need for a new platform payment model; the onset of generative artificial intelligence; and shifts in market share.
"The fall in the barriers to distribution and creation of music content has led to a surge in the number of songs released and consumed; yet the monetization of music content has significantly lagged consumption (as well as other forms of content) due to the (i) lack of price increases, (ii) dilution from bundles and (iii) lack of customer segmentation," the analysts said.
Revenue per audio stream has fallen about 20% over the past five years, for example, and revenue per hour streamed at Spotify (SPOT) is four times lower than the same measure at Netflix (NFLX), they said. Price increases (such as those at Apple Music (NASDAQ:AAPL) and Amazon Music (AMZN)) are encouraging, and there are opportunities to drive greater monetization of "superfans" -- a $4.2B potential revenue opportunity, according to Goldman.
Meanwhile, a new streaming payment model would help address fraud and "realign payouts with the value created by an artist or a song for the platforms." The market needs to be segmented, rather than treating all streams the same, they said -- and some gaming of the system now means most anyone's 31-second song (beating a 30-second measurement cutoff) is treated the same as a superstar's 3-minute tune.
As for alternatives, a "user-centric" model would distribute the payout from each user's subscription based directly on that user's own listening breakdown (rather than pooling all users), and an "artist-centric" model is more flexible and aims to distribute payouts based on the value an artist provides for a platform.
In share shifts, while Universal Music Group (OTCPK:UNVGY) and Sony Music (NYSE:SONY) broadly maintained market share in recorded music in 2022, gains by independents were almost entirely driven by share loss at Warner Music Group (NASDAQ:WMG), Goldman said. Still, the major labels dominate the landscape with 71.6% share, with Universal leading at 31.1% (vs. Sony's 22.6% and Warner's newly lower 17.9%).
And generative AI offers "significant opportunities" to boost creativity and productivity, but "the industry will need to be aligned in controlling its deployment to ensure IP and user experience are preserved."
As for its sector recommendations, the group recommends a Buy on Universal Music Group (OTCPK:UNVGY), which is also on its European Conviction List, noting the company has a number of competitive advantages. It also has a Buy on Warner Music (WMG) despite its recent share loss, saying the company is "well positioned to benefit over the coming years from strong secular tailwinds in the music industry, including growth in subscription & ad-supported streaming and new licensing opportunities created by emerging multi-media and technologies."
The group also has Buy ratings on Live Nation (LYV) -- "strong supply- and demand-side tailwinds in the live events industry" -- as well as NetEase (NTES) and France-traded Believe Music.
It has Neutral ratings on the third of the big three labels, Sony (SONY), as well as on Spotify (SPOT) and Tencent Music Entertainment (TME).
And the analysts save their Sell rating for Sirius XM (SIRI): "In particular, we see risk that growth in Sirius XM's satellite subscription business will slow as streaming services like Spotify (SPOT) and Apple Music (AAPL) become more popular and increasingly offer a more robust array of content (e.g. music + talk + news + sports) that is more comparable to Sirius XMâs premium offering."
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