Whether or not Sony Corp (ADR) (NYSE:SNE) made a brilliant move by acquiring the bulk of EMI Music Publishing this is largely a matter of your opinion of the music industry’s current health. Concerns from SNE stock owners that it’s a doomed industry aren’t entirely unmerited. Yet, a closer look at the most recent metrics suggest it’s not dead — it’s just thriving in an untraditional way.
The truth? As is so often the case, it likely lies somewhere in the middle of the two extreme points of view.
Whatever the music industry is these days, or whatever it’s going to become, Sony’s mission to dominate it is at least the smartest way to take a swing.
The news broke on Tuesday. Sony, second only to Universal Music Group in terms of music revenue, reported it’s going to pay $2.3 billion to acquire EMI Music Publishing. The deal will effectively double the size of the company’s catalog of songs, and give it commanding control of the music industry itself.
SNE stock holders concerned this may be tantamount to jumping on board a sinking ship have a right to be worried. The advent of the internet has changed the music industry. CDs were all the rage in the late 90’s and early 00’s, but with broadband now commonplace and mobile broadband being the new norm, even ‘compact’ discs aren’t as compact as digitally-stored or cloud-supplied tunes available via a subscription.
It’s not just the rise of high-speed internet that’s proven so troubling for the business though. The trouble has been that the rise of the internet has commoditized music. Like any other commodity, the market ultimately turns into a price war. Artists as well as labels have suffered.
The numbers: In 1999, the global music industry generated $23.8 billion in revenue. By, 2014, the total had dwindled to $14.3 billion.
A funny thing happened in 2014 though. The business turned around.
Over the Hump
Yes, the industry’s embracing of digital delivery had much to do with it. If nothing else, executives understood it better. But, it was also around 2014 that outlets like Pandora Media Inc (NYSE:P), Spotify Technology SA (NYSE:SPOT) and even Apple Inc. (NASDAQ:AAPL) started to figure out what they were — and what they weren’t — within the music industry.
They’re still figuring it out, to be fair. Ditto for labels like Universal, Sony and Time Warner Inc’s (NYSE:TWX) Warner Music. It’s clear, however, that digital has to be the future. Streaming music revenue for Sony was up an estimated 32% last year, making it the biggest piece of Sony’s music pie. (Sales of CDs and even downloaded music fell for the same timeframe.)
The pie itself is finally getting bigger too, with the industry working with technology rather than against it.
Dominating Its Piece of the Market
The shift still doesn’t make it clear who’s going to be the breadwinner of the new era of music… the distributors, or the publishers? (It’s still unlikely to be the artists, unfortunately.) But, to the extent labels can exert control of the business, CEO Kenichiro Yoshida explained: “This investment in content intellectual property is a key stepping stone for our long-term growth.”
EMI is certainly a great place to start, if not finish, that quest. Artists ranging from Carole King to Kanye West are part of the EMI stable of stars. Add Pink, Drake and Alicia Keys to that list as well.
While it’s not accurate to say every head-turning performer is now part of the Sony family, the company will now have something of a monopoly on the supply of the songs made available via streaming or download. That gives it even more leverage now when negotiating with the likes of Apple or Spotify when it comes to establishing royalty rates.
Bottom Line for SNE Stock
It remains to be seen just how much more distribution channels — and consumers — are willing to pay for access to Sony/EMI-produced music. And, even if the company is able to widen margins, the music division isn’t exactly a huge piece of the company’s revenue pie. It only accounted for about a tenth of Sony’s 2017 revenue.
But, perhaps with more negotiating power over its licensing and royalty deals rather than being subject to popular streaming platforms, the company could squeeze more value from that still-wobbly-but-improving arm.
To that end, spending $2.3 billion to capture a bigger piece of a $16 billion market in perpetuity doesn’t seem like a bad deal at all. It’s not a reason to buy SNE stock — at least not yet — but it’s certainly not a reason to sell it.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.