* What's changed
The music industry business model is evolving from ownership to access
given the proliferation of streaming services like Spotify and Pandora. We
see attractive structural growth prospects as music consumers continue to
migrate online, driven by: (1) a more attractive royalty structure for digital
music consumption when compared to terrestrial broadcast; (2) continued
strong growth of high-margin subscription services in developed markets;
(3) declining headwinds from physical formats with digital accounting for
half of global music sales and nearly two-thirds in the US; and (4) new
addressable markets given higher smart phone penetration in emerging
countries. Additionally, our case studies of Sweden, the Netherlands and
the US highlight improving piracy trends, with all three markets showing
declines in illegal downloading following the launch of free, legal
alternatives. As a consequence, we see the music industry returning to
growth of 5% within three years after nearly two decades of declines.
Vivendi will generate 41% of sales from music assuming the completion of
the announced SFR and Maroc Telecom disposals.
* Implications
With an improving industry outlook, we lift our average 2014-17E revenue
growth for UMG from 1.9% to 4.0%. We see growth, primarily driven by
streaming, coming with minimal incremental costs and forecast EBITA
margins to expand 600 bp to 16.5% by 2017; our average 2014-17E EBITA
for UMG rises 15%. We also revise our SFR numbers for higher depreciation
* Valuation
We are currently Not Rated on Vivendi and therefore update our estimates
but not our UMG valuation or Vivendi price target.
* Key risks
Faster-than-anticipated physical format declines, continued deterioration
in recorded music sales in Japan, cannibalization of digital download by
streaming services, FX movements.