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The music industry is set for a radical shift due in part to generative AI, according to Goldman Sachs, which described the new technology as providing “significant opportunities” for the sector.
It named five buy-rated stocks to play the trend: Live Nation, Warner Music Group, French digital music company Believe, China’s NetEase, and Universal Music Group. All of the stocks are on its conviction list of top stocks.
“Generative AI will super-charge music creation capabilities and improve productivity,” according to Goldman’s analysts in a June 28 note. And investors’ concerns over AI-generated music, such as a track reportedly created using the technology and featuring a “fake Drake” in April, are “overstated,” they suggested.
Companies such as Deezer and Believe are using AI to detect when a music track has been created by AI, the analysts noted, while publishers are working with streaming sites like Spotify to take artificially generated tracks down.
The music industry is well set up to protect its intellectual property given that it is dominated by three large companies that own the majority of artists’ catalogs, according to Goldman.
“We believe the music industry is on the cusp of another major structural change given the persistent under-monetisation of music content, outdated streaming royalty payout structures and the deployment of Generative AI,” the analysts added.
Streaming means it’s easier than ever for people to access music, but revenue has not matched consumption, the analysts noted. “For example, we estimate that the revenue per audio stream has fallen 20% in the past 5 years and that the revenue per hour streamed of music for Spotify is 4x lower than for Netflix,” the bank stated.
Goldman likes events promoter Live Nation as it expects artists to tour more frequently due to what it calls the globalization of music. It added that younger generations becoming more aware of performers via social media will also boost the industry.
On Believe, the bank said: “We expect the company to continue gaining market share with its digital-first approach, particularly in the fast-growing emerging markets across Asia.”
WMG, meanwhile, is “one of the highest quality long-term growth compounders in our coverage group,” according to the analysts, while its competitor, UMG is on its conviction list for Europe, which comprises.
“We believe UMG possesses several competitive advantages, including its scale, clear and consistent track record in breaking artists, the depth and breadth of its catalogue, and its ability to spot new trends early, under the stewardship of an experienced management team,” the analysts stated.
Goldman chose Chinese internet company NetEase, which has a music streaming platform, for its use of AI in its music composition tools.
— CNBC’s Michael Bloom contributed to this report.
