The music industry is proving to be an oasis of stability amid the global economic uncertainties, according to analysts at New York-based investment bank TD Cowen. They view the music industry as attractively defensive due to the dynamic political/economic situation. Digital goods are unaffected by tariffs, and the majority of revenue at Universal Music Group, Warner Music Group, and Spotify comes from subscription streaming, which are unlikely to see meaningful increases in churn even if the economy goes into recession.
The resilience to a potential recession is thanks to music’s high value/price proposition, particularly compared to other entertainment options. Music fundamentals should generally remain strong regardless of macro turbulence. Consumer spending on recorded music relative to overall personal consumption expenditures remains at less than half the level reached during the peaks in the 1990s, before the industry was disrupted by digital distribution.
Live Nation’s fundamentals have less risk than the average business that depends on discretionary spending. They rate Sony, UMG, WMG, & Live Nation as a “buy” while giving Spotify a less attractive “hold” rating. The analysts are less bullish on the aggregation portion of the music value chain due to high competitive intensity and content owner bargaining power.
Spotify’s rapidly rising margins, combined with a slowdown in streaming revenue growth at record labels, has spurred the creation of a new deal structure between DSPs & record companies. They singled out the recent deal inked between Spotify & UMG, which includes step-ups in contractual floors, allowing the labels to secure revenue increases that are independent of the decisions of the DSPs to raise (or not raise) prices.
The situation is somewhat different at YouTube Music, which the TD Cowen analysts believe has been the fastest growing music subscription service. However, a significant majority of YouTube Music subscribers are subscribed through YouTube Premium, which offers more than music. The analysts expect that the labels are not currently participating in YT Premium price increases due to the current contractual language.
Overall consumer spending on music streaming grew 12% YoY in 2024, and will sustain a high single digits/low double digits rate with +10% YoY expected in 2025 and +9% YoY in 2026.
TD Cowen analysts have made investment theses for major music companies, including Warner Music Group, Universal Music Group, Sony, Live Nation Entertainment, and Spotify. Warner Music Group is rated buy, with investors believing record labels are undervalued due to their ability to exert pricing power and sustain double-digit earnings growth. Universal Music Group is rated buy, with investors marginally preferring WMG over UMG due to UMG’s high 2026E EBITDA multiple. Sony’s music business is also rated buy, with investors liking Sony’s music business as much as WMG’s and UMG’s. Live Nation Entertainment is rated buy, with investors expecting accelerated growth in stadium concerts in 2025. Live Nation’s FY25 revenue estimate is lowered from $26.0 billion to $25.8 billion, reflecting a heavier mix of smaller and indoor venue events during the winter months in North America. Spotify’s analysts expect margin gains to continue for at least a few more quarters, along with continued DSP share take from Apple and Amazon. The analysts have adjusted their gross margin forecast and social cost estimates for the recent market downturn. The FY25 revenue estimate remains unchanged at €18.0 billion, while the operating income estimate goes from €2.40 billion to €2.38 billion, and the EPS estimate goes from €10.16 to €10.09.
