Sony, Universal and Warner ride streaming back to growth

The nearly 20-year depression in the music business is finally over.

Beyonce is a crucial part of Sony’s resurgent music business.

The nearly 20-year depression in the music business is finally over. And while the likes of streaming services such as Spotify may have disrupted the industry, it is the long-suffering record labels who are eating their lunch.

Global music sales grew 3.2 per cent last year, the biggest increase since 1998, when people were listening to Britney Spears on CDs, according to the International Federation of the Phonographic Industry. The music industry shrank almost every year in between. CD sales and digital downloads continue to decline. But the saviours on the industry’s horizon are streaming services like Spotify or Apple Music. Revenue from streaming grew 45 per cent last year.

And the growth continues. Retail revenue in the US, the world’s biggest music market, increased 8.1 per cent in the first half as streaming sales rose 57 per cent, according to the Recording Industry Association of America. The music market is still around half what it was nearly two decades ago, but at least the industry seems to have found a way to get people paying for music. Spotify had 40 million paid subscribers as of September, doubling from June last year. Apple Music has racked up 17 million paying subscribers over the period.

That is a happy tune to the record labels, which take nearly 60 per cent of the streaming platforms’ revenue. Another roughly 15 per cent of the streaming revenue goes to songwriters and music publishers, the biggest of which are also owned by the top record labels.

And the record labels hold the upper hand in negotiations as the streaming field gets crowded. Apple Music, which only joined the fray last year, shares 58 per cent of its revenue with the labels, compared with 55 per cent for the unprofitable Spotify. Other tech giants are also in the race. Amazon and Google are going head-to-head in connected speakers, potentially broadening the streaming market from smartphones to homes.

Compared with the crowded platform market, record labels are more concentrated, with the “big three” labels — Universal Music, Sony Music and Warner Music — controlling 73 per cent of the market. They also stand to earn better margins than selling CDs since the cost to stream one more song is zero.

Since Warner Music is privately owned, this leaves France’s Vivendi, which owns Universal Music, and Sony as the only choices for investors to bet on the trend. Music accounts for around half of Vivendi’s operating profit, a higher percentage than it is for Sony. Vivendi’s television business, however, is a drag. The company’s profit in the first half fell 12 per cent, even though its music business grew by a quarter.

On the other hand, Sony’s game business, the company’s biggest segment by revenue, is doing well and has garnered the spotlight of most investors. But Sony’s music segment, anchored by the likes of Adele and Beyonce, could make up around a quarter of Sony’s operating profit this year. Goldman Sachs said it expected Sony’s recording business to grow an average 7 per cent annually over the next five years, while the margin for Sony’s broader music business is likely to improve 3.5 percentage points.

For Sony, it is time to sing a new song.