Warner, the label behind Cardi B and other popular acts, plays a key role in supplying the content that Spotify users pay to access.
Photo: Theo Wargo/Getty ImagesWarner Music isn’t a streaming company per se, but the oddities of the music industry mean investors should value it like one.
The world’s third largest record label returned to the public markets Wednesday with an initial public offering that priced at $25 per share—toward the high end of its expected range. The stock jumped another 20% by the end of the day, energizing the moribund IPO market following months of pandemic-related shutdowns and weeks of growing social unrest.
Still, it is a debut that leaves room for upside. Warner Music now has a market value of about $15 billion, which is less than half the value of music streaming giant Spotify Technology SA . The relationship between the two is important. Spotify is Warner’s largest single source of revenue, accounting for 14% in Warner’s most recent fiscal year that ended in September. The two struck a new licensing agreement in April.
As the label behind popular acts such as Ed Sheeran, Bruno Mars, Cardi B, Madonna and Metallica, Warner plays a key role in supplying the content that Spotify users pay to access. And like other forms of streaming media, music has been an important salve for consumers stuck at home during the pandemic with few other entertainment options. Spotify added 6 million paid subscribers during the March quarter. It only added around 4 million in the same period over each of the last three years.
So the two have a largely symbiotic relationship. Yet, despite Warner’s strong debut, the market still values it at a notable discount to Spotify. Warner Music’s current share price places it at about 3.4 times trailing sales—some 26% below Spotify’s current multiple. It isn’t the first time investors have placed greater value on a streaming platform than on those that create much of the content on it. Netflix trades at a sharp premium to Hollywood giants such as Disney, Comcast and ViacomCBS.
But not all streaming businesses are created equal. Unlike the video market, music rights are highly concentrated at the three largest labels—Warner, Sony Music and Vivendi SA’s Universal Music Group. Todd Juenger of Bernstein notes those three control “the vast majority of commercially important recorded music.” Furthermore, music streaming royalties scale with revenue. The more Spotify makes, the more it pays.
Warner Music thus offers superior gross margins to its main streaming partner. Spotify also can’t make the same sort of play as Netflix in building up a large library of exclusive content. Musical artists and their associated labels want the largest possible audience without letting one streaming outlet get too dominant. They are therefore unlikely to give Spotify a significant edge over Apple Inc., which runs the second-most popular paid music streaming service.
Spotify’s valuation also has been inflated by its $100 million deal with podcasting star Joe Rogan. That deal—reported May 19—has helped boost Spotify’s share price by 14% and is just the latest in the company’s efforts to invest into the format as a way to add more content to its platform that isn’t tied to music royalty deals. But that initiative remains in its early days, leaving music as Spotify’s main draw.
Spotify is going to be singing Warner’s tune for a while to come.
Write to Dan Gallagher at dan.gallagher@wsj.com
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