Traditional radio, CDs, and even digital downloads are going the way of 8-tracks and cassettes. It’s an on-demand, customized culture, and consumers have no patience for anything less than around-the-clock access to their favorite artists and entertainers.
A variety of online music services have stepped up to meet changing expectations, and listeners now have multiple options for accessing personalized channels that match their preferences. These new services mean new opportunities for investors, but the trick is choosing a company that will deliver reliably over time.
The Pros of Investing in Online Music Services
An entire generation grew up on pirated music and free downloads, which decimated profits in the music industry. With the introduction of digital file sharing services like Napster, CD sales dropped, leaving the music industry scrambling to identify alternative sources of revenue. The decline started in 1999 and stretched through 2014, at which point music sales were down by 40 percent. Companies like Apple (NASDAQ: AAPL) tried to make up the difference with pay-per-download files, but these sales didn’t come close to the days before digital.
According to the International Federation of the Phonographic Industry, streaming services like Sirius XM (NASDAQ: SIRI) and Spotify (NYSE: SPOT) are directly responsible for the recent uptick in music sales.
Consumers have demonstrated their willingness to pay for entertainment under very specific conditions, as evidenced by the more than 176 million users who subscribed to streaming subscription services last year.
In 2017, streaming subscriptions made up 38 percent of total revenues for recorded music, which is an increase of 9 percent over 2016.
Overall, total sales of music streaming services increased by 41 percent year-over-year. This compares favorably to the sale of physical recordings, which dropped by 5 percent, and the sale of digital downloads, which dropped by 20 percent.
The beauty of streaming services is that they can reach new markets that have traditionally had limited access to physical recordings. Countries in Latin America and China are making much larger contributions to total industry revenues, which is driving some of the overall growth.
This upward trend is a promising sign for investors, and it appears there is still plenty of room to expand. After all, even with the new streaming service revenues, the music industry is only at 68.4 percent of what it was in 1999.
The Cons of Investing in Online Music Services
Of course, there are negatives to investing in streaming services.
One of the biggest drawbacks is that there is still a significant gap between what consumers are willing to pay and the value that music producers and artists put on their work.
In fact, this issue came to a head in early 2018, when US copyright authorities mandated an increase in the amount of revenue music streaming services will be required to share with songwriters and music publishing companies.
This change, which is scheduled to take effect gradually over the next five years, will decrease profits and increase subscription fees for consumers.
Another major challenge for music streaming services is the stiff competition for market share.
Unlike video streaming services like Netflix (NASDAQ: NFLX) and Hulu, music streaming services do not have exclusive and original content. Each music service has a similar library, which means some of the players in this crowded area are likely to fail.
Should You Buy Sirius XM Stock?
If you have made the decision to invest in music streaming stock, one of the first companies you will examine is Sirius XM Holdings (NASDAQ: SIRI).
It has been around for nearly 20 years, and it has been tried and tested along the way. Sirius has what amounts to a monopoly on satellite radio, and it has created lucrative partnerships with automakers that no other service can match.
Sirius has another important advantage over other industry leaders.
Though the company’s growth isn’t keeping up with newer additions to the music streaming family, Sirius reliably turns a profit. In fact, the company is approaching 10 consecutive years of positive gains, and year-to-date the return is a whopping 32 percent, significantly beating the market averages.
Spotify (NYSE: SPOT), on the other hand, is operating at a loss, and analysts don’t expect the company to see a profit until 2020. Nonetheless, investors have responded favorably to the company’s April 2018 IPO, and shares have since risen by 4 percent.
Is Spotify Stock Worth Buying?
Spotify (NYSE: SPOT) has an amazing 180 million monthly active users, which dwarfs Sirius’ 33.5 million subscribers.
Perhaps more important for future prospects, Spotify is currently available in 65 different countries and territories – and there are more on the horizon. By contrast, Sirius is strictly limited to offering service in North America, due to the limitations of its satellite technology and related regulations.
The Bottom Line: Sirius XM Vs. Spotify
Both companies have plenty to offer investors and narrowing your decision to one stock is a tough call. Your decision depends on your investment goals and your level of comfort with risk and uncertainty.
Sirius has a proven record of success, and you can’t go too far wrong with a company that offers a steady increase in share prices year after year. While Sirius is past the point in its lifecycle where you can expect runaway growth, there is every reason to believe the company can adapt to changing market conditions and consumer demands, ensuring future profitability.
Spotify has yet to deliver a profit for investors, but its rapid growth and expanding reach shows promise. If you can tolerate the risk of a sudden change in the company’s prospects, there is potential for massive future profits.
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