Streaming music is either the most exciting thing in music, or in desperate need of reform, depending on who you ask.
But it’s hard to argue with the trends. Streaming music is here to stay in some form or another. All that’s left to determine is who is going to come out on top when the dust settles?
Universal Music Group, Sony, Amazon and LOEN are a good bet, according to Giasone Salati of Macquarie Research. Each of the companies holds a competitive advantage against their peers.
“We argue that the music industry is on the verge of a structural multi-decade growth period, which will likely benefit all industry players, at this early stage,” Salati said.
“Still, our stock selection is relatively narrow.”
Recorded music revenues are set to double in the next ten years, according to Salati. Streaming music is a big enabler of that growth, as the format captures a higher revenue than older media.
With other formats like CDs, hard prices don’t allow companies to optimise the revenue they receive per customer. With reoccurring subscription payments found in most streaming services, revenue has the ability to be flexible. Salati explains it like this (emphasis added):
For about a century, since the advent of commercial radio, recorded music has been monetized via physical sales and advertising revenues… Physical purchases by music fans accounted for the lion’s share of revenues, supported only by a relatively small number of buyers.
One problem with the CD pricing model for CDs is its excessive rigidity that forces all consumers to pay the same price for the same album, regardless of how much they are ready to pay. A uniform price level means that genuine fans pay less than they would and for some people the price is too high. The result is a loss of revenue at both extremes.
But streaming has the potential to merge all the existing complimentary models and create a more continuous price offering that will ultimately maximise revenues. Better segmentation of music listeners means that everybody ends up paying the price they want for the level of access they desire.
When you consider the ability to maximise revenue from each customer, it makes sense that streaming will take off.
But who will win the streaming music takeover? Read on to find out…
Music is a big part of Sony's business. The company is a giant among record labels, representing artists like Jeff Buckley, Future, and Adele.
Music accounted for 20% of Sony's operating profits last year, and the company has been investing in several big music companies, signalling the importance of music to the company, according to Damian Thong, a research analyst at Macquarie.
Sony originated in Japan, where it's music holdings rank second in terms of market share behind Avex.
On the Tokyo markets, Thong has set a price target 3% higher than Sony's current price.
The largest retailer of physical music happens to be a website.
Music is the second item Amazon began selling, after books. Now, the company holds the leading position in physical sales, is a strong force in digital downloads (second behind Apple), and is growing it's Prime Music streaming options.
Right now, Amazon's streaming service only offers around 1 million tracks to its users. But, it's strength in the area lies not in the streaming catalogue but in its strong brand integration. Amazon Prime is $99 a year, and encourages customers to shop more on the site due to a what CEO Jeff Bezos calls the 'flywheel effect.' Someone paying for the benefit of two-day free shipping is more likely to use Amazon's streaming music service, and vice-versa.
'Right now, Amazon has the best strategy in terms of customer segmentation and price differentials,' Ben Schachter, a research analyst at Macquarie, said.
Schachter expects the stocks to rise 4.6% to $760.
MelOn is a Korean based streaming service owned by LOEN Entertainment.
LOEN started in the record industry in 1978, and has built and audience since then, currently sitting at a 60% market share in the Korean streaming music market.
LOEN Entertainment is getting some help from the Korean government. The Ministry of Culture, Sports and Tourism is encouraging higher prices for the streaming service, which is projected to increase net profit by 26% in 2016 and 46% in 2017, according to Kwang Cho, a research analyst at Macquarie.
Cho expects a 48% increase in share price in the Korean market.
Some of the world's biggest artists are signed under Universal Music Group. The Weeknd, Justin Bieber, Kendrick Lamar and the Rolling Stones are all part of the group.
Because of the strength of its catalogue, Universal is well positioned to profit from the move to streaming music. The company was recently reorganized under the Vivendi name, and is now headquartered in France.
'We forecast EBITA to expand to 13% by 2018, and we see further scope for improvement once the streaming model becomes more dominant and the company is able to reduce some of the inefficiencies related to multiple cost structures (i.e. physical, download, streaming),' Salati said.
Salati has set a price target 43% higher than the current share price.
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