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Music companies strike a chord

Technology has transformed the music industry, drowning out incumbents and clearing the stage for a new generation of rock stars. Investors - and aspiring moguls - can cash in on their success
January 15, 2016

Compared with 40 years ago, the modern music industry is unrecognisable. Vinyl records and CDs have given way to digital tracks and online streaming. Companies such as Apple (US:AAPL) and Spotify have changed how songs are produced and distributed as well as how we listen to them. Longstanding entertainment providers caught off guard by the new paradigm are fending off a new wave of technology companies, creating lucrative opportunities for challengers and their investors.

Legal digital music entered the mainstream in 2002/03, when Apple succeeded in signing up the major record labels and introduced both its iPod digital music player and iTunes, its online music store and library. But the era of consumers paying 99¢ (69p) a song proved shortlived: Spotify launched its music-streaming service in 2008, offering access to a huge range of tracks in exchange for a monthly membership fee or regular interruption by advertisements. The Swedish company, which now has more than 20m subscribers and 75m listeners, was recently valued at over $8.5bn.

  

A tale of two Apples

Other companies want a piece of this fast-growing market: US music fans streamed 164bn songs in 2014 - a 50 per cent increase from the previous year - while downloads of both albums and individual track sales fell. Apple recently changed its tune with the launch of Apple Music, which has amassed 10m subscribers in six months - a milestone that took Spotify six years to reach. French rival Deezer has racked up more than 6.3m subscribers, while Tidal - owned by hip-hop kingpin Jay Z - reportedly has north of 1m paying users. Even e-commerce titan Amazon (US:AMZN) offers a similar service to loyal shoppers.

 

Video-streaming websites YouTube - owned by Alphabet (US:GOOGL) - and Vimeo have targeted another niche: they've effectively superseded MTV as the home of music videos. Another indicator of the technology's widespread appeal is that The Beatles' back catalogue was recently released on streaming sites. But a major downside of digital distribution and free-to-play music is compensation: artists receive fractions of a penny each time their songs are played, making it extremely difficult for lesser-known musicians to become established.

 

UK music spend by category

 

There are several options for UK investors seeking to tap into the sector's growth. Focusrite (TUNE) supplies music and audio products that help both professional musicians and amateurs to produce, record and distribute high-quality music. Its directors have appropriate credentials: chief executive Dave Frocker is a rock guitarist, while executive chairman Phil Dudderidge was Led Zeppelin's first live sound man.

The Aim-traded group is gaining ground in both the enormous US market and the electronic dance music (EDM) business through its Novation brand, which allows musicians to make electronic music using synthesisers, keyboards and computer-enabled technology. Focusrite launched 19 products in 2015, including audio interface Clarett Thunderbolt and grid controller LaunchPad Pro - which costs more than $500, marking the group's entry into the premium market segment - as well as RedNet, an audio networking product that brought it into the live and broadcast markets. Focusrite is now drumming up demand with Circuit, a 'groove box' that combines traditional synthesiser and modern launchpad technologies in a mobile music-creation device.

 

Music-streaming and kit for sale

Gear4music (G4M) is the leading UK-based online retailer of musical instruments and music equipment. The group, which listed in June 2015, stocks more than 30,000 products from well-known names such as Fender and Gibson, as well as its own brands. New products include deluxe ukuleles, digital drum kits and lightweight instruments for children. The company cashed in on buoyant demand for microphones and PA systems last year, reflecting the resurgence of live music in UK pubs and clubs and the popularity of music festivals in the summer.

Investors with a taste for digital music might consider InternetQ (INTQ). The mobile marketer offers Akazoo - a music-streaming service with more than 1.4m subscribers - to mobile operators in less competitive emerging markets. But it might not remain a part of the group for much longer: private equity investors Toscafund and Penta Capital shelled out €17m (£12.8m) for a 31 per cent stake in the business last summer. As part of the transaction, Akazoo also integrated music recommendation and user profiling technology group R&R Music.

  

Rights and back catalogues

Another option might be 7digital (7DIG), a digital music and radio services company that provides infrastructure and global music rights to broadcasters, brands and mobile carriers seeking to create music-streaming and radio services. It's currently in the process of acquiring Snowite, a distressed French music-streaming service that promises to boost annual revenue by more than a tenth and boasts major French clients such as electronic goods retailer Fnac and Vivendi, owner of Universal Music.

Several minnows also offer exposure to the music industry. For instance, One Media iP - which exploits the rights to music and video - recently acquired the Alan Peters Music Masters Catalogue, giving it control of the famed violinist's archive and hours of classical music from the Royal Philharmonic Orchestra. Producer and distributor DCD Media (DCD) recently sold the rights to Miley Cyrus: Bangerz Tour and Depeche Mode: Live in Berlin to broadcasters around the world. And event marketing and media agency Parallel Media (PAA) served as the underwriter for pop superstar Ariana Grande's two concerts at the Saitama Super Arena in Japan in December 2015.

  

  

IC VIEW: There are plenty of enticing opportunities in the production, distribution and consumption of music. But investors should be aware of the significant risks involved: many companies have enjoyed monumental success in the sector only to be undone by its shifting rhythms. We recommend our readers keep an eye on which private companies are flourishing or floundering and the latest technologies for hints of the industry's future direction, to avoid being caught unaware when the tides turn again. Most of the music companies we've discussed are still finding their footing, but investors who get in early could walk away whistling a happy tune.