It’s a Long Way to the Top for Music Stocks

Being a musician is a hard gig. I know because I did it for a while. The usual active time for a musician is at night. That’s when you have made a cash-for-play deal at some nightclub. You rock up at an unfamiliar venue and play to a crowd that you have no idea about. Just like in the Blues Brothers movie or Spinal Tap.

Your common place of business can be anywhere between high-end business events to red-district strip clubs. Sharing a backstage with strippers and call-girls can be a surreal experience for the faint-hearted. The dedicated bands would play festivals to a larger crowd, but being on the road can kill someone with a bad back.

If you have any energy left after all that, you may want to earn some extra cash by teaching beginner guitar to those with too much time on their hands.

So as the ACDC lyrics goes, ‘It’s a long way to the top if you want to rock and roll’. And they’re right.

I would argue it is an equally long way to the top if you want to be a successful investor. And it would almost be an impossibly long way if you buy music-related stocks.

Modern music is a tech-heavy industry. What do I mean by that? Music production uses a lot of cutting edge technology, and the music business does the same. Almost everything in music is influenced by the technology at the time. I am referring to the invention of the electric guitar, the synthesiser, the digital recording stations, digital-algorithmic sound engineering, the DJ station and the ‘beat production platforms’ (helping give rise to modern rap and pop music). That’s just to name a few.

But what investors are mostly interested in is the technology behind music distribution. Remember when music was recorded and sold on big black LPs? Those are somewhat of a rarity nowadays, and collectibles are worth a handsome dollar. Then came the cassette player. Remember the Walkman? That used to be the definition of ‘cool’.

Soon after, CDs rendered cassettes worthless. Today, music is still distributed on CDs, but that is being phased out quickly. Keeping a collection of music and shelving those CDs used to be a sweet feeling.

Everything is digital today. The old music industry was singlehandedly destroyed by the internet and the digital revolution. Pirated CDs were hot for a while, until P2P (peer-to-peer sharing) rose to the scene. CD tracks could be ‘ripped’ onto the computer’s local hard drive, then ‘shared’ on an online platform with anybody around the world.

As a result of the rise of the internet and early forms of social media, music publishers were in deep trouble. They were seeing straight declines in their sales, and they had no way of stopping the vast amount of free music that was shared online.

Then, Apple’s Steve Jobs came along. He made a deal with the music publishers and told them to sell their music on iTunes. It would be sold at a discount to a CD, distributed digitally, but difficult to pirate. History tells us now how successful this plan was.

Things have changed a lot since iTunes. Music is profitable again, and distributed digitally to our mobile devices. Technology companies have risen to dominate the music industry.

And now music is streamed to your devices at a fee. This has changed what music ownership means. In any case, we as listeners have a changing relationship with our music due to the changes in technology.

So when you want to invest into music-related businesses, you would be looking at technology companies half of the time. Here are some of the top music-related stocks:

Amazon.com Inc [NASDAQ:AMZN]

Best Buy Co Inc [NYSE:BBY]

Live Nation Entertainment Inc [NYSE:LYV]

Pandora Media Inc [NYSE:P]

Sirius XM Holdings Inc [NASDAQ:SIRI]

Sony Corp [NYSE:SNE]

Vivendi SA [PAR:VIV]

Which of these stocks actually made a great return over the last five years? Amazon brought in close to 600% over the last five years. But then again, Amazon is much more than just music. Pandora did reasonably well until 2014, scoring close to 200% at the time. Now it has given back all its gains over the five years.

Apart from Amazon, the top music-related stocks have all underperformed or roughly achieved the same return as the Dow Jones Industrial Average over the five years. That’s about 27%.

I won’t bother to go into the fundamental analysis for each of these companies, because they are very different in terms of size and business model. There is nothing that really stands out, except the fact that the music publishing industry seems to be ‘shattered’. The music distribution model is so inconsistent and sensitive to change that there is no strong contenders for investors.

The music industry has long been a hard place to be, and it still is. Will it ever be a profitable and consistent industry to invest in? I doubt it. Enjoy your music, but think hard before you put your money into it.

Regards,

Ken Wangdong,
Analyst, Emerging Trends Trader

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