A music industry trade group recently announced that music sales rose for the first time in over a decade. After being pummeled by technology, particularly the Internet, it seems that a digital business model may finally be taking hold. That could mean good times ahead for music companies.
Digitization
We’ve come a long way from the giant vinyl disks that spun on a phonograph. While those nostalgic items are still available, the compact disk was the big turning point in the music businesses’ decade long tailspin. The CD made music digital, digitization meant that music was just a computer file. Computer files are easy to copy and share. No more mix tapes, just copy and paste.
Apple Inc. (NASDAQ:AAPL) sped the decline with the introduction of the iPod. The first truly mass market digital music player. This created a reason to go digital. When the iPod music player morphed into the iPhone, music became even easier to port around and further increased digital music demand.
Selling music
The first big battle for the music companies was the illegal copying and sharing of music. Clearly, if one person buys a CD and posts the digital files online for anyone savvy enough to find them, the music industry loses out on sales. The industry went into attack mode, suing people who were sharing music. That effort turned into a publicity nightmare and did nothing to help falling music sales, though many illicit music sharing sites did get shuttered.
Along with the iPod, Apple Inc. (NASDAQ:AAPL) created iTunes to sell digital music downloads. This created a complete ecosystem around the iPod, giving Apple the enviable position of controlling its customers’ entire music experience. And it gets a piece of every transaction. This is a benefit that still underpins Apple’s various products and helps it to maintain its market share. It is also a reason to start looking at the shares again after the recent sell off.
The big benefit for the industry was that iTunes got customers used to paying for downloading music.
Streaming music
Selling music, however, isn’t the only way that music companies make money. They also earn royalties from the use of music. So radio stations, movies, and television shows that include music all pay for that privilege. Web sites that stream digital music quickly popped up. These sites, like Pandora Media, Inc. (NYSE:P), are similar to radio stations except that they allow interaction with the music.
Pandora Media, Inc. (NYSE:P), for example, has created a proprietary database of interconnections between different music. So, when a customer requests one song or artist, the site automatically creates a “station.” This exposes users to new music that they otherwise may not have heard and does it in a way that is familiar and, hopefully, keeping within the customer’s tastes.
Typical of this model, a free service is ad supported with a subscription level being ad free. While it remains to be seen if Pandora Media, Inc. (NYSE:P) has a successful business model, the change in listening habits is notable.
The Savior?
The combination of downloading music and streaming, which did so much damage, may also be the industry’s saving grace. The International Federation of the Phonographic Industry recently reported that digital revenues increased 9% in 2012 and now account for just over a third of the industry’s top line. Additionally, the number of subscribers to streaming music services grew 44%. That’s huge growth and shows that people may again be willing to pay for music if they can consume it the way that they want.
The turnaround
With the slight uptick in sales in 2012, the music industry may be at the point of turning its fortunes around. While this could be a good time for more aggressive investors to jump aboard, the industry’s dark winter brought with it consolidation and privatization, effectively removing pure play music companies from the market.
However, Sony Corporation (ADR) (NYSE:SNE) and Vivendi both have large music arms. Sony, unfortunately, has been struggling to compete with its high-tech gadgets. A too heavy focus on televisions has been a notable mistake in recent years. So a music business resurgence would likely get lost inside the broadly diversified company. This stock is probably best avoided for now and isn’t a great option for a music rebound play, anyway.
Vivendi, however, has a much tighter focus around providing services, notably including distributing entertainment of various types. Music is the third largest division at the company based on revenues. The recent acquisition of EMI also shows the company’s commitment to the space and puts it in position to benefit even more from a potential upturn.
Buying in
Investors interested in participating in the music industry’s potential turnaround should consider Vivendi shares. However, it might also make sense to keep an eye out for music related stocks coming back into the market, as private entities might like to sell into a music business resurgence.
The article Is This The Music Industry’s Rebound? originally appeared on Fool.com and is written by Reuben Gregg Brewer.
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