The music industry is a fascinating subsector of the entertainment business for investors. The industry is unusually concentrated. Just a handful of companies dominate the distribution of recorded music. Similarly, one can count on one hand all the major labels on the content side of the business.
Given that the leaders in the industry are likely to have high returns on capital, low capital requirements and the ability to grow at decent rates, we believe the leading content and leading distribution music companies (UMG and Spotify) make for interesting investment cases for investors.
Universal Music Group (UMG), Sony Music Entertainment (SME) and Warner Music Group (WMG) are the three major music labels. Those three labels in addition to Merlin, which represents hundreds of independent labels, accounted for 78% of the music streams on Spotify in 2020. Public equity investors can invest in any of the three major labels. WMG’s shares listed publicly last year. Vivendi completed a spin-off of its stake in UMG in September 2021. SME isn’t available as a standalone entity but can be invested in via shares in the conglomerate, Sony.
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