Music Industry Stability Amid Economic Uncertainty
Amid tariff wars and various uncertainties in the global economy, the music industry stands as a beacon of stability, indicating potential income growth in upcoming quarters.
This perspective is shared by analysts at the New York Investment Bank TD Cowen, who recently released their preliminary outlook on music revenues.
“Typically, we view the music industry as a safe haven given the current politically and economically turbulent climate,” analysts Dag Kreutz and May Lun Kvach stated in a report published on Monday (April 14).
“Digital goods are insulated from tariffs.”
They highlighted that a significant portion of revenues from Universal Music Group, Warner Music Group, and Spotify comes from subscription streaming, which “is unlikely to experience a significant downturn,” even if the economy enters recession.
The resilience against potential recession stems from the “high cost/price” of music, especially when compared to other entertainment options. The fundamentals of music should remain strong irrespective of macroeconomic turbulence.
Growth Potential and Consumer Spending
Like many sectors, TD Cowen analysts noted that music costs have considerable room for growth: “Consumer spending on recorded music as a percentage of total personal consumption remains less than half of the levels achieved during the peak years of the 1990s, before the industry was disrupted by digital distribution,” the analysts explained.
“Not only is music still relatively affordable, but it has also benefitted from a significantly enhanced consumer experience, with streaming services providing access to nearly all music in easily portable formats.”
Moreover, people have deep emotional connections with music, which become even more significant in stressful times. While (UMG, WMG, and Spotify) do derive some income from advertising, this accounts for less than 20% of their total revenue,” they added.
Historically, the live music business has also shown stability during recessions, likely due to the audience’s affinity for music, along with the “limited” nature of concerts.
“We generally view the music industry as an attractive hedge against the current exceptionally dynamic political/economic climate.”
TD Cowen
Consequently, the concert giant Live Nation typically carries less risk compared to average businesses that rely on discretionary spending, the analysts noted.
They rate Sony, UMG, WMG, and Live Nation as a “buy,” while providing Spotify with a less favorable “hold” rating.
“We are less optimistic regarding the aggregator (i.e., streaming) component of the music value chain due to high competitive intensity and the power wielded by content owners,” the analysts stated.
Market Reactions and Future Predictions
According to TD Cowen, the control exerted by content owners is shifting towards more lucrative transactions for rights holders on Spotify.
Analysts indicated that Spotify’s rapidly growing margins, coupled with a slowdown in label streaming revenues, have sparked the creation of a “new transaction structure” between DSPs and record companies, highlighted by a recent agreement signed between Spotify and UMG.
“We believe the new structure includes contractual floors, enabling labels to secure revenue growth independent of DSP pricing decisions,” they noted.
“Not only is music still relatively inexpensive, it has significantly improved consumer experience, thanks to streaming services that offer access to nearly all music libraries on easily portable devices.”
TD Cowen
These recent deals involved direct licensing agreements between Spotify and UMG, as well as WMG’s publishing rights, addressing Property Rights (Pro) and their industry standard rates.
“We anticipate these shifts will lead to payments that are closer to what publishers earned before Spotify implemented their complex offerings,” analysts added.
Spotify’s decision last year to reduce mechanical royalty payments in the U.S., due to its music service now being “tied” to audiobooks, raised eyebrows in the music industry and led to legal disputes. Although the lawsuit concluded with a win for Spotify, the company’s payment decisions likely triggered new agreements between publishers and streaming platforms.
“The impact of these new transactions may not become fully apparent in financial metrics until 2026. However, we believe the presence of these agreements should assist labels in achieving higher multiples,” the analysts wrote.
Meanwhile, the situation is markedly different for YouTube Music, which TD Cowen analysts noted is “the fastest-growing music service,” though with a caveat that the “vast majority” of YouTube Music subscribers are tied to YouTube Premium, which provides more than just music.
“It’s crucial to point out that, based on our discussions with record labels, they are currently not fully involved in pushing for price increases for YT based on existing contractual language,” the analysts remarked.
“We expect this to be a topic of discussion in the upcoming contract negotiations between Google and labels, likely starting with UMG.”
The analysts estimated that total consumer spending on music streaming will grow by 12% year in 2024, and will sustain growth rates of +10% year expected in 2025 and +9% year in 2026.
Presented below are the investment theses from TD Cowen’s analysts regarding selected large music companies, alongside key points from their preliminary outlooks:
Warner Music Group (Rating: Buy)
Investment Thesis: “Generally, we believe sound recording labels are undervalued, as they can exert pricing power against DSP music and sustain double-digit profit growth…”
Preliminary Revenue Outlook: “We are making some adjustments to our estimates, factoring in currency exchange impacts. Our revenue projection for FY25 has been decreased from $6.50 billion to $6.49 billion, and our AOI forecasts reduced from $1.40 billion to $1.39 billion.
Universal Music Group (Rating: Buy)
Investment Thesis: “Similar to WMG; we slightly favor WMG over UMG, considering UMG’s current EBITDA for 2026E is at a higher range that we deem fair, around 2X-3X.”
Preliminary Revenue Outlook: “In Q1 FY25, our revenue estimate is €2.78 billion ($3.15 billion at current exchange rates), which aligns closely with consensus, while our adj. EBITDA estimate is €646 million ($731 million), slightly below the consensus of €652 million.”
Sony (Rating: Buy)
Investment Thesis: “We view Sony’s music business positively, much like WMG and UMG.”
*TD Cowen did not provide a revenue outlook for Sony as its results are reflected in the investment bank’s reports on the video game sector.
Live Nation Entertainment (Rating: Buy)
Investment Thesis: “2025 is anticipated to be a significant year for stadium concerts, and Live Nation should benefit from this accelerated growth, maintaining its unique position as a dominant player in live entertainment.”
Preliminary Revenue Outlook: “We modestly reduced our revenue forecast for FY25 from $26.0 billion to $25.8 billion, mainly to reflect a more challenging mix of smaller and local events (festivals/clubs) during winter months in North America. Our AOI forecast for FY25 remains unchanged at $2.41 billion.
Spotify (Rating: Hold)
Investment Thesis: “We expect profitability margins to continue at least for a few more quarters, despite ongoing competition from DSPs like Apple and Amazon. However, we anticipate margin expansion will be more subdued in 2025 than in 2024.”
Preliminary Revenue Outlook: “We slightly lowered our gross profit forecast for the year (primarily in Q2/Q3) and adjusted our social cost estimates due to recent market declines. Our revenue forecast for FY25 remains at €18.0 billion ($20.4 billion), while our operational income estimate adjusts from €2.40 billion to €2.38 billion ($2.69 billion), and our EPS estimate changes from €10.16 to €10.09.
