Warner Music Group (NASDAQ: WMG) is home to some of the most iconic record labels, including Atlantic Records, Warner Records, and Parlophone Records, with artists including Ed Sheeran, Bruno Mars, and Cardi B.

The company made the bold decision this year to move forward with a initial public offering (IPO) in the midst of the COVID-19 pandemic. The IPO was successful and the deal raised around $ 2 billion at $ 25 per share. Some investors have speculated that Warner’s decision to go public this year had something to do with rival Universal Music Group (UMG), ceding 10% of his business To Tencent Music Entertainment.

In fact, this may have been the perfect time for Warner Music to go public. The company experienced strong growth with the boom in music streaming and was even able to make a profit.

Technology behind a resurgence in the music industry

Ever since Napster disrupted the music industry, much of the investment community had left the industry for dead. However, music labels have learned to embrace new technologies and now with the increase in streaming revenues they are back on the path to growth and profitability.

Record companies make money from recorded music and music publishing. For recorded music, the record company handles the entire process of recording and marketing an artist, while in music publishing, the artist records the music independently and the record company itself. occupies only promotion.

From 2015 to 2019, the entire music industry grew its sales at a rate of 9%, peaking with industry-wide revenues of $ 20.2 billion in 2019. The industry generated $ 5.6 billion in music publishing revenue in 2019, a 2% growth from the previous year. . Record companies make more money with recorded music because they have more control over the artist and can derive better economic conditions from it.

Warner Music is the rights holder of all music published on its label, and the company pays royalties to artists when their music is released online, purchased digitally or physically, or used in movies or commercials. Every revenue stream is growing, mainly due to the increased penetration of digital distribution. As more and more people stream music to services such as Spotify, Warner Music is paid more in royalties.

Today, digital music accounts for 64% of recorded music and 42% of music publishing revenue. The digital mix has grown steadily, with streaming revenue growing at a compound average growth rate of 42% over the past four years. While the current digital music penetration rate is healthy, expect it to represent an even bigger slice of the pie in the years to come.

Warner Music’s finances are healthy

Despite the rapid evolution of the music industry, Warner Music has demonstrated a strong ability to grow its revenues in a profitable manner.

Data source: Warner Music Group SEC archives.

As the table shows, Warner Music has grown revenue at a double-digit rate in recent years as the company has positioned itself to focus on genres that have the most commercial and streaming appeal, such as hip hop and pop. Streaming is playing an increasingly important role in the way Warner selects and develops artists. For example, the massive success of Lil Nas X’s “Old Town Road” was in part due to the song’s short duration, which forced fans to replay it over and over again, racking up royalties for the artist.

One future growth opportunity will be Warner Music’s expansion into global niche markets. The company has drawn up a plan to open additional offices in new developing countries where it can position itself as a leading label in geographies that other labels have overlooked. Specifically, Warner Music has identified China, Indonesia, Poland, Russia and South Africa as markets where it sees strong growth opportunity.

Getting noticed in the music industry just got easier than ever. The ability to bring your music to the public is just one click away, and Warner Music has capitalized on its ability to recruit the best musicians and make their music financially viable.

Welcome to the machine

As legendary rock band Pink Floyd once said, welcome to the machine. There is no denying that technology has made music more profitable. Consumers have more songs and artists to choose from than ever before, and music consumption has reached an all-time high, allowing Warner to benefit from the growth of the music industry.

As music media have shifted from hot vinyl records to non-static CDs and now compressed audio files on smartphones, Warner Music will continue to grow its business and remain a leading record label.