The streaming revolution has unleashed a wave of disruption across the global music industry. But stock investors could reap longterm gains by buying shares of four major players positioned to dramatically grow in size and reap rich profits. That will happen as the streaming market nearly triples in size to $45 billion over the next two decades, according to a report by Goldman Sachs. The big winners may include Vivendi, with a market value of $31 billion, Sony Corp. (SNE), at $64 billion, Spotify, at $29 billion, and Tencent Holdings, at $24 billion, as music listeners switch from free to paid services, Goldman says in a story by Business Insider outlined in the story below.
Streaming Takes Off
Analysts' optimism stems from faster-than-expected adoption of paid streaming services like Spotify Technology SA (SPOT) and Apple Inc.’s (AAPL) Apple Music. Goldman now expects the recorded music space to grow more than previous forecasts, roughly two and a half times from the current size at $19 billion. Analysts attribute the upbeat outlook in part to positive revisions to profit forecasts for industry leaders such as Universal Media Group, Warner Music and Spotify.
While competition in the music streaming market is heating up with new entrants, Goldman says a handful of companies will thrive.
Major Labels and Publishers
Vivendi and Sony, which control two of the world’s largest record labels and music publishers, are the best positioned. “Over the near-to-medium term, we forecast the major labels and publishers to continue receiving 60-70% of royalties for every piece of content monetized," Goldman says.
Goldman sees extraordinary growth potential in Tencent’s still emerging music business, which serves a China market with a population of 1.3 billion. "We believe Tencent Music has a unique opportunity to capture the growing demand for online music in China and leverage the massive user base on its social media platforms to drive traffic to its music services," wrote Goldman.
Analysts expect Tencent’s “significant scope to drive greater monetisation of music content over time with only 4% of its user base currently paying for music content."
Spotify as The Netflix of Music
Global market leader Spotify is feeling the heat from tech giant Apple, but Goldman is confident that it can maintain its dominant position. Analysts attribute Spotify's strength to its “scale, ecosystem, content and technology,” with the ability to tap a massive global user base. That includes a $28 billion radio advertising market and a $32 billion concerts and events market.
Spotify, dubbed by some as “the Netflix of music," is favored because of its “fast-growing, youth-focused, cloud-operated, subscription-based music streaming service,” as noted by Barron’s. Plus, the company is expanding podcasting, a business expected to see sales grow over 100% in the three-year period ending 2020.
To be sure, investors will have to weather short-term disruption, and short-term losses, for some of these companies. The company's profit margins are falling, and analysts have more than doubled their estimated loss for the company in 2019. Over the long run, Spotify bulls are confident that it can reboot margins through steps including new services such as selling data to labels and artists.