The Music Industry: From Piracy To Profits

[Len]

Streaming is bringing money back to the music industry and affecting many related areas.

After being crushed by piracy for almost two decades, streaming is allowing users to have the experience they want at a price they can afford. Though music industry revenues are still below the peak levels of 1999, the past two years have been the first years of material growth since the peak with an increase in industry revenues of 16.5% in 2017.

To provide some background, the music industry has had a long battle against piracy, which dealt the recorded music business a tremendous number of setbacks. To this day, Napster has had the fastest user growth of any company in history, primarily due to the fact that they were illegally assisting in giving away a premium product for free. This caused nearly unstoppable piracy en masse, and within 10 years, revenues from the recorded industry saw a massive decline.

The labels tried to fight back by suing illegal platforms and illegal users. Apple was then the first company to start helping the industry rebuild with legal music downloads, but it was hard to compete with a free product.

The concept of music streaming not only shifted the consumer mindset away from ownership of music but also was able to battle piracy at the same price point: free. Streaming competes with piracy by providing a more organized and curated product with a better user experience -- usually through a free ad-supported tier or a premium subscription.

Now that streaming is helping the music industry make revenues again, how can an investor include music companies and music-related companies in their portfolios?

First and foremost are the major streaming platforms, while another opportunity comes from investing in music labels. Other sectors that are reaping the benefits of streaming are smart home devices and ticketing services, which are growing as live performances grow.

Investing in the music companies and music-related companies makes sense right now because streaming has not even scratched the surface of penetrating potential users and using their influence to create revenues in other areas.

In fact, only 2% of smartphone owners were paying for music streaming as recently as 2015, according to Goldman Sachs. Emerging market nations like India and Mexico still have a 90% piracy rate, which means there is are a lot of music listeners who could still potentially turn into music streamers. There are so many services on the horizon that will capture more users like family streaming plans, student discounts and music-enabled products aimed specifically at kids.

As our younger generations grow up with streaming music, smart home technology and a deep connection with artists and performers, easy access to music will continue to become more ingrained in our way of life.

In the past 15 years, social media has changed our world, and music streaming is doing the same. Just as social media was able to change the way we interacted with those around us and consume information, streaming seems to be having that same effect on users with music. The way users consume music is different, as is the way listeners connect with artists and find out about live shows. Streaming companies can potentially find out everything about their users' musical tastes and preferences and target anything related to those tastes towards that user.

Streaming is bringing money back to the music industry, and it is surely a sector to watch in the coming months and years.