Virtually anyone who knows anything about popular music is familiar with the legendary superstar Michael Jackson. His iconic album Thriller became the first record to sell 30 million copies in the U.S., according to the Daily Mail, and last December, it went on to sell 100 million units globally.
However, fewer people may appreciate Michael Jackson, the investor. That skill has finally come to the forefront, with Sony Corp (ADR) (SNE) announcing a $750 million buyout of the Sony/ATV Music Publishing venture from the superstar’s estate — a handsome reward for recognizing the critical leverage of publishing rights.
Michael Jackson initially purchased the ATV music catalog back in 1985 for a then-hefty sum of $41.5 million, or the rough equivalent of more than $90 million in today’s money. Infamously, the ATV catalog included several songs by The Beatles. Former member Paul McCartney understandably was outraged when he was outbid by Michael Jackson, resulting in a high profile collapse of their friendship.
Although McCartney has since gotten over the bitter feud, he has complained in the past about having to pay royalties for performing songs he has written.
Perhaps recognizing the limited lifespan of a performer within the entertainment industry, Michael Jackson joined forces with Sony in 1995. For the Michael Jackson estate, the Sony deal helps clean out the debt the superstar accrued later in life, and provides a financial benefit for his children.
As for Sony itself, the massive cost of the acquisition — a point of significant deliberation as revealed via the company’s data breach — is overshadowed by the priceless leverage it now wields.
In addition to ownership of works by old-school musicians like Bob Dylan, Sony now has the rights to contemporary hit-makers like Eminem and Taylor Swift. The potential of the Sony buyout was made evident through the popular AMC Networks Inc (AMCX) show Mad Men, where the media company paid an alleged $250,000 for a clip of a Beatles song to play in one of its episodes.
More importantly, the implications of the transaction reach far beyond Sony’s ambitions. The pop music industry has had a bear of a time adjusting to the new realities of how their products are consumed. Streaming services means fans can listen to a wide variety of music on demand, and are therefore less likely to purchase music outright.
The Michael Jackson deal not only solidifies the importance of music assets, it helps drive the search for breakthrough talent. On a broader scale, the music industry is far from dead — an assertion on which Sony has placed serious skin.
That’s not to be taken lightly, which is great news for music entertainment companies. Here are three music stocks that could follow in Sony’s lead.
Music Stocks to Buy: Vivendi SA (ADR) (VIVHY)
You may not have heard of French mass media company Vivendi SA (ADR) (VIVHY), but you have almost certainly heard of Universal Music Group — the leading music company in the world, according to its website.
Quite bluntly, anybody who is anybody in music — whether that be the likes of Katy Perry or more talented fare like Andrea Bocelli — is signed under UMG’s vast empire. And because UMG itself is a subsidiary of Vivendi, buying VIVHY stock is one of the few ways to indirectly share in the financial success of your favorite artist.
The Michael Jackson deal also provided a blueprint for VIVHY on how to succeed in today’s music landscape. Rather than view the digitization of music as an industry disrupter, companies like Sony and VIVHY can use streaming as a cost-effective way to distribute its music, collecting royalty charges along the way. True, the margins of the current music business model are nowhere near those of selling actual records in the pre-digital era; however, the main focus is now shifted towards content producers instead of content buyers.
Instead of relying on an artist’s fan base to scrounge up $18 to buy a physical record, the Sony acquisition shows that it’s more profitable to sell the right to utilize music assets.
The buyers don’t necessarily have to be major studios like AMCX. Instead, the exponential rise in popularity of Alphabet Inc‘s (GOOG, GOOGL) YouTube and other video-sharing platforms suggests that there is substantial demand for the right to incorporate pop music into personal productions.
As YouTube grows, so too does the passive revenue potential for Vivendi and the record-making industry.
Although it’s not a household name, VIVHY stock could turn out to be a sleeper hit thanks to its massive entertainment portfolio combined with renewed sentiment towards music specifically.
Music Stocks to Buy: Pandora Media Inc (P)
If there’s one thing about the music landscape that everyone can agree upon, it’s that the sale of compact discs is a dying relic. In 2014, roughly 20% of music consumers ceased their purchases at retailers, resulting in a 14% decline in CD sales to a record low haul of less than 141 million units.
Only two CDs were able to sell one million units or more — Taylor Swift’s 1989 and the soundtrack to the Walt Disney Co. (DIS) hit, Frozen.
But for Pandora Media Inc. (P), one door closed and another door opened. Streaming services continue to find enormous popularity, particularly among technology-savvy millennials.
More importantly, Sony’s willingness to play ball with the Michael Jackson estate indicates that big media companies and so-called disruptors like Pandora don’t have to be at odds with each other. The expanded audience resultant from streaming media means both the distributor and the content owner can make healthy profits.
In reality, it hasn’t been that easy. Pandora has had a troubled relationship in the past with the big music labels and P stock is down a whopping 28% year-to-date. However, not everyone is quite so bearish.
While P stock is most definitely speculative, investors need to look at how management is differentiating itself from its competitors. Pandora has unique data mining technologies that allow for on-the-spot customized user interaction.
Also, it is entering into the event ticketing sector, but with an eye towards serving mid-tier artists.
The renewed vision, along with a sharp discount in P stock from two years ago, makes Pandora a contrarian bet with a very real possibility of doing well.
Music Stocks to Buy: Live Nation Entertainment, Inc. (LYV)
While streaming and downloading services have effectively ended the era of selling music through a physical medium — with the exception of novelty items like vinyl — there is one aspect to the record industry that digitization simply cannot touch.
Live concerts and events have taken over as a main source of revenue for several artists. In 2009, income generated from ticket sales outpaced that of record sales in the U.K., the first time this had ever occurred.
It is that growing demand that Live Nation Entertainment, Inc. (LYV) hopes to fill.
The beauty of the LYV business model is that no matter what happens to the record industry, nothing short of nuclear war will change America’s insatiable desire to see their favorite stars in person.
Even with the aftermaths of a broad recession and a paradigm shift in pop music, the live experience continues to ring up LYV’s cash register. In its most recent earnings report, Live Nation reported five consecutive years of revenue growth, helped in large part by key acquisitions such as Ticketmaster.
Where LYV hasn’t been as successful recently is in the financial markets. After posting strong returns in 2013 and 2014, LYV was quite choppy last year. On a YTD basis, shares are down -8%.
Part of the fear is due to the shoddy fundamentals for LYV, where it looks like the company has bitten off more than it could chew. However, emerging markets represent a growing opportunity for concert events, a trend that LYV is in a prime position to exploit with its Ticketmaster asset.
Furthermore, the Michael Jackson deal could be interpreted as a confidence boost for the music business — and that translates to more ticket sales.
Although it’s far from perfect, LYV stock is ideally situated to take advantage of any news that could positively impact the broad record industry.
As of this writing, Josh Enomoto was long SNE.