2017.08.28 - Goldman - Music in the Air

August 28, 2017

GS Music in the Air Series

And the beat goes on… Equity Research

Raising streaming forecast by 16% to $28 bn by 2030 Raising paid streaming market estimate by 16% to $28 bn by 2030 We raise our global paid streaming market estimate by 16% to $28 bn by 2030 on the back of recent positive market developments and commentary from industry players. We expect the number of paid streaming users to reach 847 mn by 2030, or 14% of the global smartphone population (from 9% previously). We refine our analysis to include subscribers and ARPU forecasts for each main market – notably, we expect EMs’ share of streaming dollars/ subscribers to grow to c.40%/60% by 2030 from c.10%/20% in 2016. Furthermore, we assess the incremental revenue opportunity enabled by the rise of smart speakers and connected cars, which we estimate at up to $8 bn (a 30% uplift to our 2030 forecasts) but do not currently incorporate.

Lisa Yang +44(20)7552-3713 [email protected] [email protected] Goldman Sachs International

Masaru Sugiyama +81(3)6437-4691 [email protected] [email protected] Goldman Sachs Japan Co., Ltd.

Heath P. Terry, CFA (212) 357-1849 [email protected] [email protected] Goldman Sachs & Co. LLC

Vivendi & Sony the main beneficiaries: Our PTs rise by 8%/2% We continue to see the major labels (Vivendi’s UMG and Sony’s SME) as the main beneficiaries of the growth in streaming, as they receive 55%-60% of royalties for every piece of content that is being monetised. While disintermediation risk has been raised as a concern by investors, we expect the labels’ position to remain intact for the foreseeable future given the current copyright structure and competition among streaming services.

Vivendi: We raise our DCF-based valuation for UMG by 16% to €19.5 bn from €16.8 bn to reflect our new industry forecasts. As a result, our 12-month SOTP-based price target for Vivendi rises by 8% to €25.2. With UMG worth 70% of its EV at the current market price (vs. 53% in our SOTP), we view Vivendi as the most attractive content story in the EU Media sector and reiterate our Buy (Conviction List); see our accompanying report Vivendi: Streaming keeps on rocking: UMG valuation up to €19.5 bn; CL-Buy . Sony: We raise our SME valuation by 12% to ¥2.16 tn from ¥1.93 tn , based on the EV/sales multiple i mplied by our valuation for UMG. Our 12month SOTP-based price target for Sony rises to ¥5,600 from ¥5,500. Music is 38% of Sony’s MV at the current market price and its second most valuable business after PlayStation. With Entertainment at 92% of MV (vs. 74% in our SOTP), we view Sony as an undervalued content giant and reiterate our Buy (Conviction List).

Piyush Mubayi +852-2978-1677 [email protected] [email protected] Goldman Sachs (Asia) L.L.C.

READ THE SERIES Music in the Air: Stairway to Heaven and Paint it Black (Oct. 4, 2016) In our Music in the Air series, we lay out the converging trends that we expect to almost double global music revenues over the next 15 years, as well as the risks that could derail our thesis.

Rising tide lifts all boats: On the distributor side, we note Amazon (CLBuy), Pandora (Buy), Tencent (Buy) and Apple (CS) as beneficiaries of the rising consumer adoption of music streaming, with YouTube (Alphabet – CL-Buy) also favourably exposed to the growing monetisation of music videos through advertising.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc.

Global Investment Research

August 28, 2017

And the beat goes on…

Contents Overview: Raising streaming forecasts and valuation for UMG/SME

3

Deconstructing subscriber/ARPU assumptions by market

6

(1) Dissecting our subscriber assumptions

7

(2) Dissecting our ARPU assumptions

9

(3) Sensitivity analysis

9

Digging into the EM opportunity

11

Connected cars & smart speakers: A potential $8 bn opportunity

14

Company implications

17

Disclosure Appendix

27

Prices in this report are based on the market close of August 25, 2017.

Goldman Sachs Global Investment Research

2

August 28, 2017


Overview: Raising streaming forecasts and valuation for UMG/SME We raise our global recorded music market es timate by 12% to $41 bn and our paid streaming market estimate by 16% t o $28 bn by 2030 on the back of recent positive market developments and commentary from industry players (see our reports Music in the Air: Streaming drives material acceleration in music growth in 2016 , April 3, 2017, and Music in the Air Conference Takeaways, June 29, 2017). Our increased estimates reflect greater assumed penetration of streaming services (14% of global smartphone population from 9% previously), slightly offset by a lower average ARPU given the dilution from faster EM growth. We refine our analysis to include subscribers and ARPU forecasts for each main market. Notably: (1) we raise more substantially our forecasts for EM, which we expect to account for c.40%/60% of paid streaming dollars/users by 2030, up from c.10%/20% in 2016. (2) Our forecast of 14% penetration of global smartphone users by 2030 is based on 32% penetration in DM and 10% in EM, compared with 10% and 1% in 2016, respectively. (3) Our average ARPU forecast of $34.4 in 2030 is based on an ARPU of $52.6 in DM and $23.1 in EM, implying a -1% CAGR for 2016-30 given the growing share of EM consumers. Within the mix, we forecast a CAGR of 1% in DM ARPU and 2.5% in EM ARPU for 2016-30. In addition, we assess the incremental revenue opportunity enabled by the rise of smart speakers and connected cars at up to $8 bn; this would represent up to a 30% uplift to our 2030 forecasts, which do not incorporate this opportunity. While the entire music streaming ecosystem should benefit from the growth in streaming, we continue to see the major labels as the main beneficiaries, as they receive 55%-60% of royalties for every piece of content that is being monetised. Although disintermediation risk has been raised as a concern by investors, we expect the top three labels’ position to remain intact for the foreseeable future given the current copyright structure and competition among streaming services. As the owners of the world’s largest recorded music companies, Vivendi and Sony are our preferred picks, and we reiterate our Buy ratings on both stocks (also on their respective regional Conviction Lists) . As a result of our higher market estimates, we raise our valuations for UMG and Sony Music by 16% and 12%, and our 12-month price targets for V ivendi and Sony by 8% and 2% to €25.2 and ¥5,600, respectively. On the distributor side, we note Amazon (CL-Buy), Pandora (Buy), Tencent (Buy) and Apple (Coverage Suspended) as beneficiaries of the growing consumer adoption of music streaming, with YouTube (Alphabet – CL-Buy) also favourably exposed to the growing monetisation of music videos through advertising.


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August 28, 2017


Exhibit 1: We raise our 2030 Paid Streaming market estimate by 16% and our UMG/SME valuations by 16%/12% New vs. old estimates and valuations; price targets have a 12-month timeframe 2016 Actual Music Market Global Music Market ($bn) Recorded Music Market ($bn) Paid Streaming Market ($bn) KPIs Paid Subscribers (mn) Developed Market (mn) Emerging Market (mn) Smartphone Penetration % Annual ARPU ($) Vivendi EBITA Margins% UMG Valuation (€bn) Vivendi Target price (€) Sony SME EBITA Margins% SME Valuation (€bn) SME Valuation (¥bn) Sony Target price (¥)

2030E New Old

Chg (Abs)

Chg (%)

$56 $16 $3

$119 $41 $28

$106 $36 $24

$14 $4 $4

13 % 12% 16 %

112 86 26 3% $38.8

847 316 531 14% $34.4

652 NA NA 9% $3 $38.1

195

30 %

5% -$4

-10%*

14.0%

23.1% € 19.5 € 25.2

20.6% € 16.8 € 23.3

2.5% € 2.7 € 1.9

16 16 % 8%

2020E 14.6% 1 14 4.2% € 16.6 € 14.9 ¥2,155 ¥1,932 ¥5,600 ¥5,500

0.4% € 1.7 ¥223 ¥100

12 12 % 12% 2%

11.7%

*Note: Reduction mainly reflects change in IFPI reporting Source: IFPI, Goldman Sachs Global Investment Research

Exhibit 2: We forecast the global music industry to grow to $119 bn by 2030 from $56 bn in 2016... Global music industry revenue ($ bn) $130 $120 $110 Other (artists, songwriters, live ex ticketing)

$100 $90

Ticketing

$80 $70

Streaming (net of royalty payments)

$60

Label

$50

Publishing

$40 Download (net of royalty payments)

$30

Physical (net of royalty payments)

$20 $10 $0 8 9 9 1

0 0 0 2

2 0 0 2

4 0 0 2

6 0 0 2

8 0 0 2

0 1 0 2

2 1 0 2

4 1 0 2

6 1 0 2

E 8 1 0 2

E 0 2 0 2

E 2 2 0 2

E 4 2 0 2

E 6 2 0 2

E 8 2 0 2

E 0 3 0 2

Source: IFPI, Goldman Sachs Global Investment Research


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August 28, 2017


Exhibit 3: …with record labels a major beneficiary of the growth in streaming Global recorded music industry revenue ($ bn) and % growth $45

10% 8% 8%8% 8% 8% 8%8% 8% 8% 8% 7% 8% 7% 6% 6%6%5%6% 6%

$40 $35

4%

3%

4%

$30 $25 $20

1%

0%

1%

2%

-1%

-1% -2%

0% -2% -2%

-2% -3%

-2%

$15 -5% $10

-4%

-6% -6% -7% -7%

-8%

-6%

$5

-8%

$0

-10% 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 E E E E E E E E E E E E E E 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 7 8 9 0 1 2 3 4 5 6 7 8 9 0 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 2 2 2 2 2 2 2 2 2 2 3 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2

Physical

Download

Other

Streaming

Global market growth

Source: IFPI, Goldman Sachs Global Investment Research.

Exhibit 4: Major streaming services have continued to grow Paid subscribers by platform (mn) 60 50 40 30 20 10 0

0 1 0 2

1 1 0 2

2 1 0 2

3 1 0 2

4 1 0 2

5 1 n u J ‐

5 1 c e D ‐

6 1 r p A ‐

6 1 n u J ‐

6 1 p e S

Tidal

Apple Music

Spotify

Deezer

Tencent

Google Play Music

‐

7 1 n a J ‐

7 1 r a M ‐

7 1 n u J ‐

Napster/ Rhapsody

Source: Company data, press reports, compiled by Goldman Sachs Gl obal Investment Research


5

August 28, 2017


Deconstructing subscriber/ARPU assumptions by market We have refined our analysis t o include subscriber and ARPU forecasts by market. We have also slightly changed our calculation of ARPU and paid streaming revenue to reflect a recent methodology change in IFPI reporting, and now exclude freemium services advertising revenue from the overall paid streaming revenue. This implies a 10% dilution to ARPU calculated under the previous methodology. Our increased streaming market estimate of $28 bn in 2030 reflects a greater assumed paid streaming penetration among smartphone users, at 14% vs. 9% previously, implying 847 mn subscribers (from 652 mn previously). Our more positive view stems from recent favourable market developments and commentary from industry experts. Some speakers at our Music in the Air conference in June 2017 predicted that 1 bn paid streaming users (implying 16% penetration) and 1.5-2 bn ad-funded users could be reached in ten years, while Warner Music’s CEO likewise expected to reach double-digit paid streaming penetration over time. Our assumption of 14% global paid streaming penetration is based on 32% penetration in developed markets and 10% in emerging markets. Our DM forecast is supported by trends in the most advanced markets (namely Nordics), which have already achieved penetration rates of over 30% in the space of ten years and continue to grow strongly (Sweden recorded music market +6% yoy, Norway +12%, Denmark +8% in 2016). As another benchmark, we note that online video streami ng service Netflix reached 50% of US broadband homes and over 10% of addressable homes outside the US in 2016. Exhibit 5: Our 14% global paid streaming penetration rate assumption is based on 32% penetration in developed markets and 10% in emerging markets Global streaming subscriber penetration of smartphone users (2012–30E)

Exhibit 6: The Nordic music markets have already surpassed 30%+ penetration and continue to grow strongly Paid streaming as % smartphone owners in various markets

35%

35%

30%

30%

25%

25%

20%

20%

15%

15%

10%

10%

5%

5%

0%

0%

Total

DM

8 0 0 2

9 0 0 2

EM

0 1 0 2

1 1 0 2

2 1 0 2

3 1 0 2

4 1 0 2

5 1 0 2

E 6 1 0 2

Sweden

E 7 1 0 2

E 8 1 0 2

E 9 1 0 2

E 0 2 0 2

E 1 2 0 2

E 2 2 0 2

E 3 2 0 2

E 4 2 0 2

E 5 2 0 2

Western Europe

E 6 2 0 2

E 7 2 0 2

E 8 2 0 2

E 9 2 0 2

E 0 3 0 2

Global



Exhibit 7: Netflix subs have already reached c.12% penetration of eligible homes outside the US (50% in the US) NFLX penetration (% of broadband homes) and paid music streaming penetration (% of smartphone users)

Exhibit 8: Streaming in music accounts for a higher share of consumer time vs. video Average streaming minutes in music/video streaming

80%

300

70%

) s n250 i m ( y a 200 d r e p150 n o i t p100 m u s n o 50 C

60% 50% 40% 30% 20% 10% 0% 2 1 0 2

3 1 0 2

4 1 0 2

5 1 0 2

6 1 0 2

7 1 0 2

8 1 0 2

9 1 0 2

0 2 0 2

1 2 0 2

2 2 0 2

3 2 0 2

4 2 0 2

5 2 0 2

6 2 0 2

7 2 0 2

8 2 0 2

9 2 0 2

0 3 0 2

Paid music music stream streaming ing penetr penetrati ation on %

148 31%

p

60% m u s n

50% o c l a t

40% o t

%

s 30% a

78

g

n 20% i

m a 10% e r t S

0

0%

Music

NFLX US penetra penetrati tion on %

Streaming C on on su su mp mp ti tio n

Source: IFPI, Digital TV Research, C ompany data, Goldman Sachs Global Investment Research


n

o 70% i t

214

Video NFLX NFLX US penetr penetrati ation on %

80%

69%

254

T ot ot al al Consumption

%

Source: Nielsen, Variety, Company data, Goldman Sachs Global Investment Research

6

August 28, 2017


As a sanity check, our new estimates imply that music revenue as a percentage of entertainment spend will rise to 6.4% in 2030 (previously 5.6%) from 4.2% in 2016, which is still below the level of 7.6% attained in 1998. As a percentage of consumer spend, this implies music’s share will rise to 0.17% in 2030 (previously 0.15%) from 0.13% in 2016, which is also well below the 1998 level of 0.30%. Exhibit 9: We forecast music revenue as a % of entertainment spend to increase to 6.4% by 2030, still below the 7.6% attained in 1998… Global music revenue as % of entertainment spend (entertainment includes: Recreational and Cultural Services, Newspapers, Magazines, Books and Stationery) 8.00%

Exhibit 10: … and music revenue as a % of consumer spend to increase to 0.17% compared with 0.30% in 1998 Global music revenue as % of total consumer spend

0.30%

7.50% 7.00%

0.25%

6.50% 6.00% 0.20% 5.50% 5.00% 0.15%

4.50% 4.00% 3.50%

8 9 9 1

0 0 0 2

2 0 0 2

4 0 0 2

6 0 0 2

8 0 0 2

0 1 0 2

2 1 0 2

4 1 0 2

E 6 1 0 2

E 8 1 0 2

E 0 2 0 2

E 2 2 0 2

E 4 2 0 2

E 6 2 0 2

Source: Euromonitor, Goldman Sachs Global Investment Research

E 8 2 0 2

E 0 3 0 2

0.10%

8 9 9 1

0 0 0 2

2 0 0 2

4 0 0 2

6 0 0 2

8 0 0 2

0 1 0 2

2 1 0 2

4 1 0 2

E 6 1 0 2

E 8 1 0 2

E 0 2 0 2

E 2 2 0 2

E 4 2 0 2

E 6 2 0 2

E 8 2 0 2

E 0 3 0 2

Source: World Bank, IFPI, Goldman Sachs Global Investment Research

(1) Dissecting our subscriber assumptions To derive our forecast of 847 mn paid subscribers (652 mn previously) by 2030 we have used the following assumptions: 





Global population rising to 8.5 bn in 2030 from 7.4 bn in 2 016, as per World Bank projections; Smartphone penetration rising to 72% in 2030 f rom 47% in 2016, implying 6. 1 bn users by 2030 (based on our hardware team’s projections for major economies); and Streaming penetration among smartphone users rising to 32% in developed markets and 10% in emerging markets, from 10% and 1% in 2016. This implies global streaming penetration rising to 14% in 2030 from 3% in 2016. Our previous forecast of 9% penetration by 2030 implied roughly 27%-32% in developed markets and 4%-5% in emerging markets.


7

August 28, 2017


Exhibit 11: We forecast streaming subscribers to account for 14% of smartphone owners by 2030 versus 3% in 2016 Smartphone ownership and paid streaming subscriber penetration by country/region Smartphone O wn ers (mn) T otal

2012 1, 5 8 6

20 13 13 2,077

20 14 14 2 ,6 97

2015 3,1 48

2 016 3, 3 , 50 8

2017 E 3, 801

201 8E 4, 0 7 2

2019E 4,292

2020E 4,506

2 02 1E 1E 4, 656

20 22 22E 4, 807

20 23 E 4 ,9 59

2 024 E 5, 11 3

202 5E 5, 2 6 8

2026E 5,4 25

2027E 5,583

2028E 5, 742

20 29 29E 5 ,902

2 03 030 E 6 ,1 0 1

DM USA UK Sout h K orea Germany France Japan DM ex List

644 216 37 37 47 38 72 197

720 246 44 47 55 45 80 204

7 86 275 50 51 62 51 86 211

821 286 54 52 68 55 89 217

8 44 295 54 54 52 69 56 92 226

862 30 306 55 51 69 69 56 56 95 230

874 311 56 49 69 57 97 235

886 316 56 49 69 57 99 240

898 318 57 51 70 58 100 244

908 321 58 51 71 59 101 248

9 19 323 59 51 71 60 102 252

9 29 326 60 51 72 60 103 256

939 328 61 51 73 61 104 260

94 9 331 62 52 74 62 104 264

959 333 63 52 74 63 105 269

969 336 64 52 75 64 106 273

979 338 65 52 76 65 107 277

9 89 340 66 52 76 66 107 281

999 343 67 52 77 67 108 285

EM China India Brazil Mexico Russia Ex BRIC S+Mexic o

942 281 59 32 19 25 526

1,357 525 92 53 32 38 616

1 ,9 11 824 155 79 48 54 752

2,3 26 1,039 238 96 59 65 829

2, 2, 66 5 1 ,080 314 100 61 73 1,037

3, 002 1, 1,097 4 03 10 103 63 78 1 ,258

3, 2 6 3 1,116 497 103 64 83 1,400

3,471 1,130 587 104 65 85 1,500

3,608 1,145 638 111 69 87 1,558

3, 747 1,159 689 118 74 90 1,618

3, 888 1,172 741 125 79 92 1,679

4 ,0 30 1,185 793 131 83 95 1,741

4, 17 4 1,198 847 138 88 97 1,805

4, 3 1 9 1,211 901 145 93 100 1,869

4,4 65 1,223 956 152 98 102 1,935

4,613 1,234 1,011 159 103 105 2,001

4, 762 1,246 1, 1,067 166 1 08 107 2,069

4 ,913 1,257 1, 1,123 173 113 109 2,137

5 ,1 0 3 1,267 1, 1,180 180 118 112 2 ,2 4 5

2012 1%

20 13 13 1%

201 4 2%

2015 2%

2 016 3%

2017 E 4% 4%

201 8E 5%

2019E 6%

2020E 7%

2 02 1E 1E 8%

20 22 22E 9%

20 23 E 9%

2 024 E 1 0%

202 5E 11 11%

2026E 12 12 %

2027E 12 12%

2028E 13 13%

20 29 29E 13 13%

2 03 030 E 14 14%

DM USA UK Sout h Korea Germany France Japan DM ex List

2% 3% 4% 5% 1% 3% 0% 2%

3% 3% 5% 6% 1% 3% 1% 4%

4% 3% 6% 8% 2% 3% 2% 5%

6% 5% 9% 9% 4% 5% 3% 9%

10% 1 1% 17% 10% 8% 7% 4% 12%

1 3% 15% 20% 1 3% 1 1% 10 1 0% 7% 13 13%

16% 19 % 23% 16% 14% 13% 10% 14%

1 8% 22% 25% 19% 17% 16% 13% 1 5%

2 1% 25% 27% 22% 20% 19% 16% 16%

2 3% 28% 29% 25% 23% 22% 19% 17%

2 5% 30% 31% 2 7% 25% 24% 21% 18%

27 % 32% 33% 29% 27 % 26% 23 % 20 %

2 8% 34% 35% 31% 29% 28% 25% 21%

30% 36% 36% 3 2% 30% 29% 26% 22%

30 % 36% 36% 32% 31 % 30% 27 % 23 %

3 1% 36% 36% 32% 31% 31% 28% 24%

3 1% 36% 36% 3 2% 32% 31% 28% 25%

3 2% 36% 36% 32% 32% 32% 29% 26%

3 2% 36% 36% 32% 33% 32% 29% 26%

EM China India Brazil Mexico Russia Ex BRIC S+Mexic o

0% 0% 2% 1% 0% 0% 0%

0% 0% 1% 1% 1% 0% 1%

0% 0% 1% 1% 1% 0% 1%

1% 0% 1% 1% 2% 0% 1%

1% 1% 1% 1% 3% 4% 2% 1%

2% 1% 1% 1% 1% 4% 4% 5% 5% 2% 2% 1%

2% 2% 2% 5% 6% 3% 2%

3% 3% 3% 6% 7% 3% 2%

3% 4% 4% 7% 8% 3% 2%

4% 5% 5% 8% 8% 4% 3%

5% 5% 5% 8% 9% 4% 3%

5% 6% 6% 9% 9% 5% 4%

6% 7% 7% 10% 9% 5% 5%

7% 8% 8% 1 1% 10% 6% 5%

8% 9% 9% 1 1% 1 0% 6% 6%

8% 9% 10% 1 2% 1 1% 7% 7%

9% 10% 10 1 0% 1 3% 1 1% 7% 7%

10 1 0% 11 11% 11 11% 1 3% 1 2% 8% 8%

1 0% 12 12% 12 1 2% 1 4% 1 2% 8% 8%

Streami ng as % Smartphon e T otal

Source: IFPI, World Bank, Goldman Sachs Global I nvestment Research

In addition, we cross-reference our streaming subscriber estimates with the World Bank’s population classification by income. We believe the addressable population for streaming services will consist of the ‘higher income’ and ‘upper middle’ income population, which accounted for 51% of the global population in 2016. Our forecast of 316 mn and 531 mn streaming subs in DM and EM by 2030 would imply 25% penetration of the higher income population and 19% of the upper income population, respectively. The World Bank classifies higher i ncome as GNI per capita of more than $12,475, and upper middle income as between $4,036 and $12,475. Assuming $55/$21 of annual streaming spend per capita for DM/EM equates to c.0.4%/0.3% of GNI, respectively (using average GNI for upper middle income in EM). Exhibit 12: We believe the higher income and upper middle income population is the addressable market for streaming services – i.e. 51% of the global population World Bank Income classification ($) and % addressable global population by income bracket 0.6 e l b n o a i s t 0.5 s l a e u r d p0.4 d o P A l g a0.3 n b i o l m a G0.2 e / r t t e S l k r 0.1 a t a o M T 0

Exhibit 13: We believe roughly 21% of the global addressable population will subscribe to music streaming services by 2030, from 4% currently % subscribers by income bracket

30% 25% 25% 21% 19%

20% 35%

15% 2017E 10%

9%

2030E

16%

4%

5% 2016 High High Income Income

Worl World d Bank Bank Clas Classi sifi fica cati tion on Higher Income Upper Upper Middle Middle Income Income Lower Lower Middle Middle Income Income Lower Income

0%

Upper Upper Incom Income e

GNI GNI per per Capi Capita ta Brac Brack ket ($) ($) $12, 47 475+ $4,036 $4,036 - $12,475 $12,475 $1,026 $1,026 - $4,035 $4,035

DM as % High Income

EM as % Upper Income

Total as % High+Upper Income

< $1,026



2%


8

August 28, 2017


(2) Dissecting our ARPU assumptions We calculate a global annual ARPU of $38.8 in 2016 based on the streaming revenue and number of paid subscribers reported by IFPI, with our analysis of subscriber mix implying DM ARPU at $46 and EM at $16. We note that this is c.35% lower than the theoretical ARPU of $57 computed through the standard $10/month offer (in DM) net of c.18% VAT, 30% platform share and 10% publisher share, which reflects, on our calculations: 

$9 dilution from lower EM ARPU



$4 dilution from telecom bundles



$5 drag from other discounted offerings (e.g. student and family plans).

Over 2016-30, we forecast global ARPU to decline at a 1% CAGR, from $38.8 to $34.4, owing to greater dilution from EM as growth continues to outpace DM. Within the mix, we forecast DM ARPU to rise at a 1% CAGR for 2016-30 to $52.6, as price rises and lower discounting should more than offset a slightly lower label cut (55% vs. 58%-60%), while we expect EM ARPU to rise at a 2.5% CAGR to $23.1, driven by price increases and lower discounting. Exhibit 14: The difference in theoretical DM ARPU and actual ARPU stems from emerging market dilution, as well as telco bundles and other discount offers ARPU mix analysis (2016)

$60

$120 120 e g 110 d i r B U100 P R A 90 l a b o 80 l G l a u 70 t c A 60 o t U P 50 R A M 40 D

Exhibit 15: We forecast blended ARPU to decrease at a 1% CAGR to 2030 owing to dilution from EM, but both DM and EM ARPU to increase, by 1% and 2.5% CAGRs Global paid streaming ARPU (2013-30E)

$50

$22

$40 $30

$41

$20 $57

$10

$4 $9 $5

$39

$0

30 DM retail ARPU

VAT VAT

Plat Platfor form/ m/ Publisher cut

DM label ARPU

Telco

EM

Other

Reported label ARPU

DM


EM

Global ARPU


(3) Sensitivity analysis We have used the above assumptions on subscribers and AR PU as our base case, whic h gives a global paid streaming market of $28 bn by 2030. We note, based on our sensitivity analysis, that: 





A 1 pp change to streaming penetration (assuming the DM/EM mix remains the same) would have a $2.1 bn impact on the paid streaming market. A 1 pp change to ARPU (assuming the DM/EM mix remains the same) would have a $280 mn impact on the paid streami ng market. A 1 pp change in DM penetration would change our streaming market estimate by around c.$520 mn, while a 1 pp change in EM penetration would change it by a round c.$1.2 bn.


9

August 28, 2017


Exhibit 16: Our base case assumptions to derive a $28 bn paid streaming market by 2030E Streaming industry growth by market

CAGR (2016-30)

2012

2013

2014

2015

2016

2017E

2018E

2019E

2020E

2021E

2022E

2023E

2024E

2025E

2026E

2027E

2028E

2029E

2030E

Revenue ($mn) DM EM

594 99

953 119

1, 290 160

1,992 257

3, 132 360

4, 4,591 514

5,939 835

7,207 1,228

8,396 1,706

9,666 2,335

10,826 3, 148

11 11,917 3, 933

13 13,049 4, 810

14 14,089 5,787

14 14,852 6,823

15 15,379 7, 884

15 15,890 9, 030

16 16,223 10 10,265

16 16, 499 11, 632

10% 27%

Tota l

693

1,072

1, 45 450

2,250

3, 49 492

5 ,1 ,104

6,774

8,435

10,103

1 2, 2,001

1 3, 3,974

1 5, 5,849

1 7, 7,859

1 9, 9,876

2 1, 1,676

2 3, 3,262

2 4, 4,920

2 6, 6,488

2 8, 8, 13 131

14%

Mix % DM

86%

89%

89%

89%

90%

9 0%

8 8%

85 %

83%

81%

77%

75%

73 %

71 %

69%

66%

64%

6 1%

59 %

EM

14%

11%

11%

1 1%

10%

1 0%

1 2%

15 %

17 %

19 %

2 3%

25%

27 %

29 %

31%

34%

36%

39 %

41 %

Growth% DM

60%

35%

54%

57 57%

47%

2 9%

21 %

17%

15%

12%

10%

10 %

8%

5%

4%

3%

2%

2%

EM

20%

35%

6 1%

40%

4 43 3%

6 3%

47 %

39 %

37 %

3 5%

25%

22 %

20 %

18%

16%

15%

1 4%

13 %

ARPU ($) DM

$42

$51

$48

$49

$46

$4 $ 46

$47

$48

$48

$49

$50

$50

$51

$51

$52

$52

$53

$53

$53

1%

EM

$42

$23

$21

$18

$16

$1 $ 14

$14

$15

$16

$17

$19

$20

$20

$21

$22

$22

$22

$23

$23

3%

Gl obal ARPU

$38

$41

$39

$38

$39

$38

$37

$36

$36

$36

$36

$36

$36

$36

$36

$36

$35

$35

$34

-1%

32%

Subscriber penetration DM

2%

3%

4%

6%

10%

13 13%

16%

18%

21%

23%

25%

27%

28%

30%

30%

31%

31%

32%

EM

0%

0%

0%

1%

1%

2% 2%

2%

3%

3%

4%

5%

5%

6%

7%

8%

8%

9%

10%

10 10%

Tota l penetrati on

1%

1%

2%

2%

3%

4%

5%

6%

7%

8%

9%

9%

10%

11%

12%

12%

13%

13%

14%

Source: IFPI, Press Reports, Goldman Sachs Global I nvestment Research

Exhibit 17: Our base case is 14% paid streaming penetration and -1% ARPU CAGR for 2016-30E Sensitivity analysis of paid streaming market ($ mn) to penetration of smartphone users (2030E) and ARPU CAGR 2016-30E

23,902 -4% -3% -2% -1% 0% 1% 2%

U P R A

5% 6,239 7,213 8,327 9,801 11,049 12,701 14,579

8% 10,184 11,774 13,592 15,997 18,035 20,730 23,796

Paid Streaming Penetration % 11% 14% 17% 20 % 14,128 17,909 22,017 25,962 16,334 20,705 25,455 30,015 18,856 23,902 29,385 34,650 22,193 28,131 34, 34,585 40,781 25,020 31,715 38,991 45,977 28,760 36,456 44,819 52,849 33,014 41,847 51,448 60,665

23% 29,906 34,576 39,914 46,977 52,962 60,878 69,882

Source: Goldman Sachs Global Investment Research.

Exhibit 18: Sensitivity of subscribers and ARPU to DM/EM penetration Sensitivity analysis of paid streaming penetration and ARPU to streaming penetration as % of smartphone users in developed and emerging markets (2030E)

Exhibit 19: Every 1 pp change in DM/EM penetration has a c.$520 mn/$1.2 bn impact on the streaming market Sensitivity analysis of paid streaming market ($ mn) to streaming penetration as % of smartphone users in developed and emerging markets (2030E) Paid Streaming market ($mn)

2 20 0%

DM streaming penetration 25% 32% 40%

45%

$15, $15,80 805 5 $18, $18,69 696 6 $22, $22,05 051 1 $24, $24,48 480 0 $27, $27,37 372 2

$18, $18,41 417 7 $21, $21,88 884 4 $26, $26,25 254 4 $21, $21,30 309 9 $24, $24,77 776 6 $29, $29,14 145 5 $24, $24,66 663 3 $28,131 $32,500 $32,500 $27, $27,09 092 2 $30, $30,56 560 0 $34, $34,92 929 9 $29, $29,98 984 4 $33, $33,45 451 1 $37, $37,82 821 1

$28, $28,86 866 6 $31, $31,75 758 8 $35,1 $35,112 12 $37, $37,54 541 1 $40, $40,43 433 3

Streaming Subs (mn)

847 g n o n i i t a r M m a E e t e r t n e s p

5.0% 7.5% 10.4% 12.5% 15.0%

DM streaming penetration 20 2 0% 25% 32% 40%

455 582 730 838 965

505 632 780 888 1,015

572 699 847 954 1,082

28,131 45%

655 782 9 93 30 1,037 1,165

705 832 980 1,087 1,215

DM streaming penetration 25% 32% 40%

45%

g n o n i i t a r M m a E e t e r t n e s p

5% 8% 10% 10% 13% 13% 15% 15%

Streaming ARPU

34 g n o n i i t a r M m a E e t e r t n e s p

5% 8% 10% 13% 15%

20 2 0% $37 $34 $31 $30 $29

$38 $35 $33 $32 $31

Source: Goldman Sachs Global Investment Research


$40 $37 $34 $33 $32

$42 $39 $ $3 36 $35 $33

$42 $39 $37 $36 $34 Source: Goldman Sachs Global Investment Research

10

August 28, 2017


Digging into the EM opportunity Emerging markets to account for 40% of streaming revenue by 2030E We believe emerging economies represent one of the biggest opportunities for the music industry as music streaming helps tap into the ‘mobile-first’ population in EM (with smartphone penetration levels close to DM) and create new, legal and more sustainable monetisation avenues for rights holders for the first time in history in these regions. The growth of streaming is further supported by a growing recognition of the value of IP, a proliferation of streaming services (many of which have been launched by local players), and the emergence of new business models (ad-funded, prepaid, telecom bundles etc.) and payment capabilities. As of 2016, EM still accounted for c.10% of the global recorded music market and 10% of the global paid streaming market (although including ad funded streaming, we estimate that EM accounted for c.15% of total streaming revenue). Average annual spend on recorded music per capita in EM stood at less than $1 compared with around $15 in DM. While we expect DM to continue to be the major contributor to the paid streaming market in absolute terms, we believe EM will become a significantly larger contributor in terms of percentage growth, and have raised our EM forecasts more substantiall y. For 2017-30, we forecast a 27% paid streaming revenue CAGR in EM compared with 10% in DM, giving a 14% global revenue CAGR. By 2030, we estimate that EM will account for c.40% of the total streaming market, up from 10% in 2016, while by 2025, the number of streaming subscribers in EM should exceed that in DM. Notably, we forecast China and India to account for 13%/9% of global pai d streaming revenue by 2030, compared with 2%/0% currently. We believe the growth in China will be mainly driven by the rising conversion from ad-funded to paid users, as well as price inflation, while India will predominantly be driven by volume growth.

Exhibit 20: We expect streaming revenue to grow at a 14% CAGR to 2030, driven by a 27% EM CAGR Revenue growth by market (developed/emerging) (developed/emerging) 30%

Exhibit 21: We expect EM’s share of the total streaming market to grow to c.40% in 2030 from 10% currently Streaming market mix by developed and emerging market 100%

27%

90%

10%

17%

80%

25%

41%

70%

R20% G A C e15% u e v e R10%

60% 50%

14%

40%

90%

83%

30%

10%

59%

20% 10% 0%

5%

201 7E

0%

202 0E DM

DM

EM

EM

Global



2030E


11

August 28, 2017


Exhibit 22: We expect EM’s share of streaming subscribers to grow from 23% in 2016… Streaming subscriber mix by country (2016)

2%

1%

8%

Exhibit 23: …to 63% in 2030E Streaming subscriber mix by country (2030E)

USA

USA

UK

3% 2%

South Korea 29%

UK

15%

22%

Germany

7%

South Korea

3%

Germany

2%

France Japan

2%

Other DM

France

3% 3%

1%

Japan Other DM

4%

3%

China 8%

24%

India

5%

India

17%

Brazil

5% 4% 3%

China 9%

Brazil

Mexico

Mexico

18%

Russia

Russia



A focus on China China offers a useful case-study of a large, under-monetised music market, where streaming is opening up sizeable new monetisation avenues at a time when the value of IP is being increasingly recognised. In 2016, the Chinese music market was the 12th largest in the world (up from #14 in 2015), exceeding Sweden for the first time and recording 20% growth yoy to c.$200 mn, driven by 31% growth in streaming. Of note, streaming accounted for 84% of total recorded music revenue in 2016. According to iResearch, t here were nearly 530 mn monthly active users of online music in 2016 or c.72% of the total mobile/internet population, while data from Analysys points to 720 mn monthly active mobile user accounts currently (which includes users with more than one account). Exhibit 24: Chinese online music users expected to reach c.569 mn by 2018 China's online music users, 2010-18 600 548.9

568.7

527.0 478.1 435.9 400

20% 18%

501.4 500

16%

453.1

Exhibit 25: A large proportion of users listen to music on mobile in China Penetration of China's online & mobile music, 2010-18

90% 80%

79.2% 75.2%

77.3% 7 3. 3. 4% 4%

72.8%

14%

385.9

70%

362.2 13.0%

10%

65.8%

60%

78.3%

73.1% 72.0%

12% 300

75.6%

7 3. 3. 7% 7%

73.5% 73.9%

67.2%

58.2% 8% 200

6%

6.5% 5.5% 100

40% 4.9%

5.1% 3.6%

0

2% 0%

2011

20 12

2013

2014

20 15

MAU of China's of China's online music (mn)

Source: iResearch, CNNIC.

2016E Growth (%)

50.9% 46.2%

45.7%

4% 4.2%

4.0%

2010

50%

20 17E

2018E

30% 2010

2011

2012

2013

2014

2015

2016E

2017E

2018E

Share of online of online music users in internet users (%) Share of mobile of mobile online music users in mobile internet users (%)

Source: iResearch, CNNIC.

While the number of Chinese st reaming users is already significant, the industry operates largely on a freemium model supported by advertising revenue, with optional premium subscriptions starting at RMB8, or $1.2 a month. We estimate that c.3% of monthly active mobile accounts currently pay for a music subscription. We therefore expect future revenue growth to be mainly driven by the increased conversion of users from free to pay.


12

August 28, 2017


Exhibit 26: China’s music market grew at a 44% CAGR in 2014-16, driven by a 50% streaming CAGR China’s recorded music market ($ mn)

) 16 n m14 ( s r e 12 b i r c s b10 u S d i 8 a P c 6 i s u M 4 t n e 2 c n e T 0

250 200 150 100 50 0 2012

Exhibit 27: Streaming music subscriptions remain low in absolute terms Tencent paid streaming subscribers (mn)

201 3 Phys Physic ical al

2014 Stre Stream amin ing g

2015 Othe Otherr digi digita tall

Source: IFPI.

20 16

15 Tencent Music gains control of KuGou of KuGou and KuWo in July 2016

10

5

5 1 0 2 n i

6 1 0 2 n i

7 1 0 2 d i m

‐

Sync Sync Source: Tencent Music, compiled by Goldman Sachs Global Investment Research.

We believe the three major labels UMG, Sony Music and Warner Music are currently under-represented in China given the prevalence of local content and the high degree of fragmentation in the label industry. We estimate Western artists make up on average less than 10% of all music streamed across Chinese streaming platforms. That said, the majors have stated their intentions to invest and grow their market shares in China, and all three of them already have licensing deals in place with Tencent, the largest music streaming operator in China through QQ Music, Kugou and Kuwo (over 70% market share, according to IFPI). In May 2017, UMG granted the exclusive distribution of its content in China to Tencent, for which Tencent is reported to have paid an upfront fee according to Caixin (August 11, 2017).


13

August 28, 2017


Connected cars & smart speakers: A potential $8 bn opportunity We believe streaming-enabled connected cars and IoT-enabled smart homes offer structural tailwinds to the consumption of music streaming – an opportunity that we evaluate at up to $8 bn (30% uplift to our 2030 forecasts) and which we do not currently factor into our estimates. In particular, we estimate that in-car paid streaming could represent up to a $6 bn incremental revenue opportunity for record labels . Tesla has recently announced plans to launch a music streaming service for its customers, and the CEO of BMG noted at our Music Conference that connected cars would represent the next game-changing step for music streaming services based on di scussions with major car manufacturers. GSMA estimates that there will be 562 mn streaming enabled cars globally by 2022, up from 88 mn in 2015. Using Sirius XM’s penetration of c.35% of enabled cars in the US in 2016, and a price point of $4.99 (a 50% discount to the $10 standard offer) for an in-car only music streaming service, this would i mply a revenue opportunity of up to $5.7 bn by 2022 (vs. our current streaming forecasts of $14 bn in 2022 and $28 bn in 2030). We acknowledge that there could be a risk of cannibalisation of the existing $10/month standard subscription services, although this should be limited given that: (1) such services would only work in the car; and (2) paid streaming subscription rates are currently very low. At various subscriber numbers and cannibalisation rates, we estimate that connected cars could add up to c.20% to our 2030 base streaming forecasts. Exhibit 28: Streaming enabled cars are expected to grow 6x to over 560 mn cumulatively by 2022… Streaming enabled cars (mn) ) 600.0 n m ( s 500.0 r a c d e t 400.0 c e n n300.0 o c d e l b200.0 a n e g n100.0 i m a e 0.0 r t S

Exhibit 29: …and looking at SIRI enabled cars gives potential indications of where penetration could get to Sirius XM enabled vehicle penetration %

562

60% 53% 50%

e l c i h % e 40% V n o d i e t a30% l b r t a e n n E e20% I p R I S 10%

6.4X

88

2015

35%

1%

2022E

0% 4 5 6 7 8 9 0 1 2 3 4 5 6 E E E E E E 0 0 0 0 0 0 1 1 1 1 1 1 1 7 8 9 0 1 2 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 0 0 0 0 0 0 2 2 2 2 2 2

Streaming enabled cars (cum)

Source: GSMA, Goldman Sachs Global Investment Research

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 30: 25% of music consumption in the US currently takes place in the car… US music consumption by activity/location, %

Exhibit 31: …and within the car, radio is currently the predominant source of music consumption US music consumption in the car, % of respondents

50%

45%

45%

60%

35%

50%

30%

25%

25%

15%

75%

70%

40%

20%

80%

40% 30%

15%

15%

20%

10%

15%

10%

5%

0%

0% Work

Chores

Car

Source: Nielsen, Goldman Sachs Global Investment Research


Rest

AM/FM Radio

CD

Digital

Streaming

Podcast

Source: Music Biz Consumer Insights, LOOP, Goldman Sachs Global Investment Research

14

August 28, 2017


Exhibit 32: We believe in-car streaming offerings by either incumbents or new entrants could add significant incremental revenue Illustrative in-car paid streaming service impact

Hypothetical in‐car streaming New in‐car music streaming price (monthly)

$5

Pricing comparison to SIRI SIRI Annual

New in‐car music streaming label ARPU (monthly)

$2

XM Select

$192

$16

Streaming enabled cars (mn)

562

All Access

$240

$20

% penetration of streaming of streaming services

35%

Mostly Mus ic

$132

$11

200 Revenue ($mn, annual) Cannibalization Rate Standard streaming price (monthly) Standard streaming ARPU (monthly)

$5,748 30% $10 $5

Cannibalization ($mn, annual)

$3,456

Incremental Revenue ($mn)

$2,292

Monthly

Exhibit 33: Our sensitivity analysis points to potential for up to 20% additional revenue (versus our base case streaming market revenue estimate) by 2030 Incremental in-car streaming revenue sensitivity to subscribers (car units in mn) and cannibalisation rates $mn n o i t a z % i l e a t b i a n R n a C

10

50

0%

287

1,437

10%

230

1,149

2,298

3,447

4,596

25%

143

717

1,434

2,151

2,868

40%

57

285

570

855

1,140

50%

‐1

‐3

‐6

‐9

‐12

0

10

50

% 2030E Rev Global Paid Streaming market (2030E) Accretion

$28,131 8%


n o i t a z % i l e a t b i a n R n a C

In‐Car subscribers 100 150

1716

2,874

4,311

In‐Car subscribers 100 150

200 5,748

200

0%

1%

5%

10%

15%

20%

10%

1%

4%

8%

12%

16%

25%

1%

3%

5%

8%

10%

40%

0%

1%

2%

3%

4%

50%

0%

0%

0%

0%

0%


In addition, we believe the rise of IoT enabled homes and smart speaker adoption further increases the convenience of streaming services and therefore boosts music consumption, as streaming platforms are already being integrated i nto smart speakers, and voice activation removes the need to swipe a screen. Voice-controlled speakers have proliferated over the last year, with VoiceLabs reporting 7 mn Amazon Echo devices in households in 2016, Google Home launching in November 2016 and Apple’s HomePod set to launch in December 2017. Gartner forecasts that 3.3% of global households (implying around 100 mn) could adopt a VPA-enabled wireless speaker by 2020. A VoiceLabs st udy showed that 46.7% of respondents used their Amazon Echo or Google Home device to play music and books. At our Music in the Air conference in June, Sonos’ CEO also highlighted 2x hi gher listening hours in homes where Sonos connected speakers are integrated. While higher music consumption does not necessarily l ead to higher revenue, we believe this is still beneficial to the music industry through a reduction in churn for existing music streaming users. Similar t o Amazon’s $3.99 music subscription offering on the Echo speaker, we also see opportunities for other in-home only streaming services, which we estimate could add up to 8% to our base case streaming market f orecast (we do not currently factor in any additional contribution from in-car/in-home offering subscribers). In our illustrative example, we assume 300 mn smart-speaker homes and 20% penetration of in-home only offerings at a pri ce point of $4/month, consistent with Amazon’s $3.99 music subscription on its Echo player (implying $2 label ARPU).


15

August 28, 2017


Exhibit 34: Amazon Echo currently has a dominant market share in the US… US Voice enabled speaker users by company share

Exhibit 35: …reaching an installed base of 11 mn in that market as of 1Q17 Amazon Echo installed based in the US as of April 2017 (mn) 12.00

Other 6%

10.00 8.00

Google Home 24%

6.00 4.00 Amazon Echo 70%

2.00 0.00 2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

Source: Consumer Intelligence Research Partners

Source: eMarketer

Exhibit 36: Gartner forecasts 100 mn voice-activated wireless speakers by 2020 Smart home speakers forecast (mn)

Exhibit 37: Playing music & books is the most used feature on smart speakers Why do you like your Amazon Echo or Google Home?

120

50.0%

100

40.0%

46.7%

80

30.0% 29.1%

29.1% 26.5%

60 20.0%

40 10.0%

20

2.7%

1.1%

0.0%

0 2016

2017E

Play Music & Smart Home Games and Books Devices Entertainment

2020E

News & Podcasts

Brand Conten Contentt

Busines Businesss Services

Source: Gartner, VoiceLabs Co

Source: VoiceLabs Co Consumer Survey December 2016

Exhibit 38: We believe in-home streaming offerings could also be accretive Illustrative in-home paid streaming service impact

Exhibit 39: We believe an in-home only streaming offering could also add revenues beyond our base case Incremental in-home streaming revenue sensitivity to subscribers (mn) and cannibalisation rates

Hypothetical in‐home streaming only New in‐home music streaming price (monthly)

$4

New in‐home music streaming label ARPU (monthly)

$2

$mn

Smart speaker homes

300

% penetration of streaming of streaming services

20%

Revenue ($mn, annual)

$1,379

Cannibalization Rate

10%

Standard streaming price (monthly)

$10

Standard streaming ARPU (monthly)

$5

Cannibalization ($mn, annual)

Incremental Revenue ($mn) Accretion (2030E)

$1,033 4%

10

25

In‐home subscribers 50

75

100

0%

230

575

1,149

1,724

2,298

10%

172

431

861

1,292

1,722

20%

115

287

573

860

1,146

30%

57

143

285

428

570

40%

‐1

‐1

‐3

‐4

‐6

0

10

25

50

75

100

0%

1%

2%

4%

6%

8%

10%

1%

2%

3%

5%

6%

20%

0%

1%

2%

3%

4%

30%

0%

1%

1%

2%

2%

40%

0%

0%

0%

0%

0%

% 2030E Rev

$346




517


In‐home subscribers


16

August 28, 2017


Company implications While the entire music streaming ecosystem should benefit from the growth in streaming, we continue to see the major labels as the main beneficiaries, as they receive 55%-60% of royalties for every piece of content that is being monetised. Although disintermediation risk has been raised as a concern by investors, we expect the top three labels’ position to remain intact for the foreseeable future given the current copyright structure and competition among streaming services. This is also consistent with the views from our conference speakers that the scale and leverage of labels remained especially important. That said, we do factor in greater redistribution of profits to artists over time, partly in response to the emergence of a-la-carte models offering the options for artists and songwriters to pay for administrative services and retain their IP. As the owners of the world’s largest recorded music companies, Vivendi and Sony are our preferred picks, and we reiterate our Buy ratings on both stocks (also on their respective regional Conviction Lists) . As a result of our higher market estimates, we raise our valuations for UMG and Sony Music by 16% and 12%, and our 12-month price targets for Vivendi and Sony by 8% and 2% to €25.2 and ¥5,600, respectively. On the distributor side, we note Amazon (CL-Buy), Pandora (Buy) and Apple (CS) as beneficiaries of the growing consumer adoption of music streaming, with YouTube (Alphabet – CL-Buy) also favourably exposed to the growing monetisation of music videos through advertising.

Vivendi (CL-Buy; last close €18.83): Raising UMG valuation by 16% to €19.5 bn and 12m price target by 8% to €25.2 We see Vivendi as a main beneficiary of the recovery in the music industry through UMG, the world’s largest record company and second-largest music publisher. UMG accounted for 49% of 2016 group revenue and 79% of EBITA (pre corporate costs). We believe UMG will not only benefit from overall music market growth, especially in the recorded segment, but will also drive new revenue streams and synergies in synchronisation and live music through greater integration with Vivendi’s other businesses and partners: leading online video services Dailymotion and VEVO, TV, video games, ticketing and telecom partnerships (Telecom Italia, Orange). UMG should also increasingly benefit from the marketing, branding and PR expertise brought in as Vivendi integrates Havas, the world’s sixth-largest advertising agency. Feeding through our new industry model, we now forecast 2017-30 CAGRs of 7% in group revenue, 12% in streaming revenue and 9% in EBITA for UMG. Our estimates are based on: 





Labels’ share of retail revenue decreasing to 55% from 60% over time, reflecting our view that labels will have to concede a slightly greater portion of streaming revenue to distributors as they scale up. UMG’s share of the streaming market eroding slightly over time to 32% given the dilution from EM, where it has a lower (but growing) market share. An 800 bp EBITA margin expansion to 23% by 2030 from 2017E given the highly attractive unit economics of streaming and scope for greater overhead cost efficiencies, partly offset by a greater payout to artists over time. Within this, we assume that streaming margins will rise to 25% over time, although we believe that a range of 25%-50% is possible depending on the evolution of A&R costs (see Exhibit 40). We believe this is feasible given the operating leverage that labels have over distribution, other product costs such as handling and packaging, and G&A expenses. In our view, as streaming gains traction, the value of library will increase, allowing labels to achieve operating leverage on their marketing spend, although we do not currently assume any leverage from A&P costs. While labels do not break out streaming revenue, even at the segment level, incremental margins already exceed 20%.


17

August 28, 2017


Exhibit 40: We estimate paid streaming could command up to 50% EBITA margin from leveraging distribution and G&A costs Illustrative streaming subscriber unit economics Streaming ‐ subscription Average spend per person

$120

% of gross of gross revenue

VAT

$22

18%

Net revenue

$98 % of net of net revenue

Split: Distributor revenue

$34

35%

Content pool

$64

65%

$10 $54

10%

Split Publishing Split Record company

55%

Record company costs

% of record of record revenue

Artists & Repertoire

$14 ‐$27

25 ‐50%

Production & Distribution

$0

0%

Other Product Costs

$0

0%

Gross margin Selling & Marketing

$27‐$40 $12

50‐70% 23%

$0

0%

G&A EBITDA Margin

$15‐$28

Depreciation EBITA margin

$1

3%

$14‐$27

26‐51%


Exhibit 41: Paid streaming has highly attractive unit economics, with an estimated EBITA per user >3x greater than in Physical and >2x greater than in Downloads… Illustrative unit economics by music consumption format Physical

Download

Average spend per person

$ 55.0

VAT Net revenue

$

9.9

% of gross of gross revenue 18%

$ 45.1

Streaming ‐ ad funded + subscr iption

Average spend per person

VAT Net revenue

$ 48.0


$ 8.6

18%

$ 39.4

% of net of net revenue Split:

Split: Distributor revenue

Record company revenue

$ 13.5 $ 31.6

Average revenue per user VAT Net revenue

70% Record company revenue

$ 11.8

30% Distributor revenue

$ 27.6

70% Content pool

% of record of record revenue Record company costs $

4.5

14%

$ 3.5

13% 22% 22%

Artists & Repertoire

$

5.7

1 8% 8%

A rt rt is ts ts & Repertoire

$ 6.1

$

4.4

14% 14%

Prod Produc ucti tion on & Distribution

$ ‐

Other Product Costs

$

1.6

5%

Other Product Costs

$ 2.8

Gross marg in

$ 15. 4

49 %

G ro ro ssss margin

$ 15.2

Selling & Marketing

$

7.3

2 3% 3%

S el el li ng ng & Marketing

$ 6.3

G&A

$

4.9

15%

G&A

$ 4.1

EBITDA Marg in

$

3. 3

10 %

E BI BI TD TDA Mar gin

$ 4.7

$ 0.79

3%

Deprec Depreciat iation ion

$ 0.69

3%

Deprec Depreciat iation ion

$

8%

EBI TA TA margin

$ 4.0

15 %

E BI BI TA TA marg in

EBITA Margin

2. 5


7.4

18%

$

33.6

$

10.1


$

23.5

$

3.4

70% Content pool 10% Split Publishing

$

20.2

% of record of record revenue Record company costs

Pay away to publishers

Production & Distribution

Depreciation

41.0

$

Average spend per person VAT

Net revenue

60%


21.6

18%

$

98.4

$

29.5

30%

$

68.9

70%

$

9.8

10%

$

59.0

60%

% of record of record revenue Record company costs $

5.0

Produ Product ctio ion n & Distribution

$

‐

Ot he her Product Costs

$

4.0

55 %

G ro ro ssss margin

$

11.1

55 %

G ro ros sm s margin

2 3% 3%

S el el li ng ng & Marketing

$

4.6

2 3% 3%

S el el llii ng ng & Marketing

15%

G&A

$

3.0

15%

G&A

1 7% 7%

E BI BI TD TD AM A Margin

$

3.4

17 %

E BI BI TD TDA Marg in

$

0.50

3%

Depr Deprec ecia iati tion on

$

2.9

15%

EBITA margin

1 0% 0%

120.0

$

% of net of net revenue

Split Record company

Arti Artist stss & Repertoire

0%

$


Split Record company

Pay away to publishers

$



Split Publishing

Record company costs

St reaming ‐ subscription

2 5% 5% 0% 20%

% of record of record revenue

A rt rt is is ts ts & Repertoire

$

Prod Produc ucti tion o n & Distribution Ot he her Product Costs

$ $

14.8

25%

‐

0%

11.8

20%

$

32.5

55%

$

13.6

23%

$

8.9

15%

$

10.0

17%

$

1.48

3%

$

8.6

15%

‐28%

+64%

+112%

+19%

+250%



18

August 28, 2017


Exhibit 42: …and this is already evident in segment level EBITDA margins at UMG and BMG, which were likely also dragged down by physical and digital UMG and BMG EBITDA margin% 30.0% 25.0% % n20.0% i g r a M15.0% A D T I B10.0% E

22.6%

13.9%

24.4%

22.8%

22.6%

14.2%

5.0% 0.0% 2015

2016 BMG

Exhibit 43: Our estimate reflects c.1,100 bp of EBITA margin expansion in streaming by 2030, with the incremental margin ramping up to 35% UMG streaming EBITA per paid subs and streaming margin, % ) 3.0 n m € ( 2.5 r e b i r 2.0 c s b u s 1.5 d i a p 1.0 r e p A0.5 T I B E G0.0 M U

30%

% n i

25% g r

a M

20% A

T I B E 15% g n i m 10% a e r t S 5% G M U

0%

Incremental Margin%

UMG


Streaming EBITA per sub

Streaming Margins %


As a result, our DCF-derived valuation for UMG increases to €19.5 bn from €16.8 bn. Depending on UMG’s market share and incremental streaming margin growth, its value ranges between €12 bn and €34 bn on a 20%-40% market share and 25%-55% incremental margins, respectively (Exhibit 45). Based on the 8.2% WACC and 2.5% terminal growth rate that we use, at our current valuation, UMG’s terminal multiple is around 11.9x EV/EBITA and 18.0x EV/UFCF (Exhibit 46). Our 12-month SOTP-based target price for Vivendi increases to €25.2 (from €23.3), mainly reflecting a higher valuation for UMG – for further details please see our accompanying report on Vivendi, Streaming keeps on rocking: UMG valuation up to €19.5 bn; CL-Buy. We continue to value Vivendi’s stakes using: (1) Goldman Sachs target pric es for covered companies such as Telecom Italia; (2) public market values for listed companies such as Ubisoft; and (3) relevant peer or deal -based multiples, or disclosed rounds of private funding for private companies. At the current price, our SOTP analysis implies that UMG accounts for c.70% of Vivendi’s EV. Our new valuation for UMG further highlights the valuation discrepancy in Vivendi’s asset portfolio, with our SOTP analysis suggesting that the market currently ascribes €8.0 bn of value for the remaining asset s compared with our valuation of €14 bn.

Key risks to our view and price target for Vivendi relate to a potential exclusion from Euro Stoxx 50 at the next index rebalancing, lower streaming adoption than we expect, disintermediation of record labels, cord cutting and greater competition in French Pay TV, and capital allocation/M&A. 









Index rebalancing: The annual review of the Euro Stoxx 50 will take place in September. Selection is based on the free float market capitalisation as of the cut-off date (last trading day of August), and Vivendi could be at risk of being excluded based on that criteria. Lower-than-expected streaming adoption than we expect, which would affect our longterm music forecasts and UMG valuation. Disintermediation risks for UMG should streaming platforms consolidate and gain greater bargaining power. Cord cutting and greater competition for sports rights (notably from SFR) could negatively affect Canal+’s turnaround. Capital allocation/M&A: Value-destructive M&A or strategic missteps could pose a downside risk to the stock.


19

August 28, 2017


Exhibit 44: Our DCF for UMG implies a value of €19.5 bn € mn, except per share data in € UMG MODEL (€mn) UMG streaming revenue % growth % of total of total streaming market Download revenue % growth

2016 1,483 55% 35%

2017E 1,991 34 3 4% 36%

2018E 2,562 29 2 9% 36%

2019E 3,148 23 2 3% 36%

2020E 3,737 19% 36%

2021E 4,268 14 1 4% 35%

2022E 4,900 15 1 5% 34%

2023E 5,497 12 1 2% 34%

2024E 6,130 12 1 2% 34%

2025E 6,760 10 1 0% 34%

2026E 7,318 8% 33%

2027E 7,808 7% 33%

2028E 8,316 7% 33%

2029E 8,799 6% 32%

2030E 9,302 6% 32%

755

572

410

300

228

193

164

140

119

101

86

73

62

53

45

‐26%

‐24%

‐28%

‐27%

‐24%

‐15%

‐15%

‐15%

‐15%

‐15%

‐15%

‐15%

‐15%

‐15%

‐15%

1,225 ‐13%

1,041 ‐15%

864

735

624

531

478

430

365

311

258

206

165

‐17%

‐15%

‐15%

‐15%

‐10%

‐10%

‐15%

‐15%

‐17%

‐20%

‐20%

132 ‐20%

106 ‐20%

Licence & other (artist services) % growth

725 0%

754 4%

776 3%

799 3%

823 3%

848 3%

873 3%

899 3%

926 3%

954 3%

983 3%

1,012 3%

1,043 3%

1,074 3%

1,106 3%

Publishing % growth

792 5%

856 8%

880 3%

924 5%

970 5%

1, 1,019 5%

1, 1,070 5%

1, 1,123 5%

1, 1 ,180 5%

1, 1,238 5%

1, 1,300 5%

1, 1 ,365 5%

1, 1 ,434 5%

1, 1,505 5%

1, 1,581 5%

Merchandising % growth

313 13%

323 3%

332 3%

348 5%

366 5%

384 5%

396 3%

407 3%

420 3%

432 3%

445 3%

459 3%

472 3%

486 3%

501 3%

‐26

‐26

‐26

‐26

‐26

‐26

‐27

‐27

‐28

‐28

‐29

‐29

‐30

‐30

‐31

5,267 3%

5,510 5%

5,799 5%

6,228 7%

6,723 8%

7,217 7%

7,854 9%

8,470 8%

9,112 8%

9,768 7%

10 10,361 6%

10 10,894 5%

11 11,461 5%

12 12,019 5%

12 12,609 5%

UMG streaming EBITA % margin % incremental margin

212 14% 15%

285 14% 14%

410 16% 22%

535 17% 21%

665 18% 22%

792 19% 24%

956 20% 26%

1,124 20% 28%

1,307 21% 29%

1,496 22% 30%

1,669 23% 31%

1,826 23% 32%

1,994 24% 33%

2,158 25% 34%

2,334 25% 35%

UMG physical + download EBITA % margin

190 10%

180 11%

143 11%

115 11%

87 10%

72 10%

64 10%

57 10%

48 10%

41 10%

34 10%

28 10%

23 10%

18 10%

15 10%

UMG licensing & other margin % margin

87 12%

91 12%

93 12%

96 12%

99 12%

102 12%

105 12%

108 12%

111 12%

115 12%

118 12%

121 12%

125 12%

129 12%

133 12%

UMG Publishing EBITA % margin

225 28%

243 28%

250 28%

262 28%

276 28%

290 29%

307 29%

325 29%

343 29%

363 29%

384 30%

406 30%

429 30%

453 30%

479 30%

24 8% 738 14.0%

25 8% 823 14.9%

26 8% 922 15.9%

27 8% 1,035 16.6%

28 8% 1,155 17.2%

30 8% 1,227 17.0%

30 8% 1,401 17.8%

31 8% 1,580 18.6%

32 8% 1,774 19.5%

33 8% 1,976 20.2%

34 8% 2,164 20.9%

35 8% 2,338 21.5%

36 8% 2,524 22.0%

37 8% 2,710 22.5%

39 8% 2,909 23.1%

(44)

(30)

(30)

(30)

(30)

(30)

(30)

(30)

(30)

(30)

(30)

(30)

(30)

(30)

(30)

8

(40)

(40)

(40)

(40)

0

0

0

0

0

0

0

0

0

0

(49)

(50)

(52)

(56)

(61)

(62)

(63)

(64)

(65)

(67)

(68)

(70)

(71)

(72)

(74)

(222)

(247)

(277)

(311)

(346)

(368)

(420)

(474)

(532)

(593)

(649)

(701)

(757)

(813)

(873)

432 50%

457 6%

523 15 1 5%

599 14 14%

678 13%

767 13 1 3%

888 16 16%

1,012 14 1 4%

1,146 13 13%

1,287 12 1 2%

1,417 10 10%

1,537 8%

1,666 8%

1,795 8%

1,933 8%

Physical revenue % growth

Intercompany eliminations Total UMG revenues % growth

UMG merchandising EBITA % margin Total UMG adj EBITA % margin Restructuring charges Working capital Capex Taxes FCF % growth Long Term WACC =

+8.20%

Long term growh rate =

+2.50%

Undiscounted terminal value

34,758

Discounted terminal value Enterprise value (€ mn)

1 1 ,5 3 1 19,486



20

August 28, 2017


Exhibit 45: Our €19.5 bn UMG valuation is based on a 32% market share and 35% incremental margin by 2030 UMG value sensitivity to market share, streaming incremental margins and cost of capital/terminal growth %

Exhibit 46: Implied terminal multiple is around c.12x EV/EBITA and c.18x EV/UFCF Implied terminal multiple sensitivity to WACC and terminal growth %

Implied UMG Valuation (€mn)

Implied Terminal Multiples (X)

19,486 25.0% l g a t % 30.0% n n i n 35.0% e m i g a m r e e a 40.0% r r t c M S n 45.0% I 55.0%

19,486 % h t w o r g l a n i m r e T

1.0% 1.5% 2.0% 2.5% 3.0% 3.5%

20.0% 1 1, 1,764 1 2, 2,532 1 3, 3,301 1 4, 4,069 1 4, 4,837 1 6, 6,373

UMG Streaming Market Share 25.0% 30.0% 35.0% 13,430 15,0 96 96 16,761 14,654 16,7 76 76 18,897 15,878 18,4 56 56 21,033 17,102 20,1 35 35 23,169 18,326 21,8 15 15 25,304 20,774 25,1 75 75 29,576

7.20%

WACC 8.20%

20,474 21,581 22,902 24,503 26,486 29,005

7.70% 18,573 19,460 20,502 21,745 23,253 25,119

1 6, 6,951 1 7, 7,670 1 8, 8,505 1 9, 9,486 2 0, 0,657 2 2, 2,076



8.70% 15,553 16,142 16,819 17,606 18,530 19,633

40.0% 1 8, 8,427 2 1, 1,019 2 3, 3,610 2 6, 6,202 2 8, 8,794 3 3, 3,977

EV/EBITA 12 1.0% 1.5% l a % n h i 2.0% t m w r 2.5% o e r T g 3.0% 3.5%

7.20% 10 10.8X 11 11.8X 13 1 3.0X 1 4. 4.5X 16 1 6.3X 18 1 8.6X

7.70% 10.0X 10.9X 11.9X 13.1X 14.6X 16.4X

WACC 8.20% 9.3X 10.1X 10.9X 11.9X 13.2X 14.6X

8.70% 8.7X 9.4X 10.1X 11 11.0X 12.0X 13.2X

9.20% 8.2X 8.8X 9.4X 10.2X 11.0X 12.1X

9.20%

EV/UFCF 18

7.20%

7.70%

WACC 8.20%

8.70%

9.20%

14,337 14,824 15,380 16,018 16,759 17,630

% h t w o r g l a n i m r e T

1.0% 1.5% 2.0% 2.5% 3.0% 3.5%

16.3X 17.8X 19.6X 21.8X 24.5X 28.0X

15.1X 16.4X 17.9X 19.7X 21.9X 24.6X

14 .0X 15 .1X 16 .5X 18.0X 19 .8X 22 .0X

13.1X 14.1X 15.2X 16 16.5X 18.1X 19.9X

12.3X 13.2X 14.2X 15.3X 16.6X 18.2X


21

August 28, 2017


Exhibit 47: Vivendi SOTP analysis € mn, except per share data; price target has a 12-month timeframe Assets

% owned

EBITDA 2 01 8 E 2,109

EV/EBITDA

100.0%

7 80

Canal+ France

100.0%

35 3

7.0x

Canal+ Overseas

100.0%

249

9.5x

VSTV

49.0%

32

9.5x

Core Media (C+ / UMG / Havas ) Canal Plus Group

StudioCanal

100.0%

76

Free TV (C8, Cstar, iTele)

100.0%

12

ITI Neovision

51.0%

58

100.0%

9 19

Universal Music Group

14.3X

EV at 100% 3 0 , 2 16

Vivendi's share 2 8 ,30 2

Value per share 2 2 .5

% of Total EV 76.3%

9 .0x

7,049

6,637

5.3

17.9%

2,471 2,

2 , 4 71

2. 0

6.7%

2,368 2,

2 , 3 68

1. 9

6.4%

30 308

151

0. 1

0.4%

12.0x

91 7

917

0. 7

2.5%

na

46 5

465

0. 4

1.3%

52 520

265

0. 2

0.7%

1 9 ,486

1 9 , 48 6

1 5 .5

52.5%

9.0x 21.2x

Purchase (physical, download)

100.0%

165

10.0x

1 , 65 2

1 , 6 52

1. 3

4.5%

Streaming

100 .0 %

4 61

29 . 8 x

13 , 7 6 0

13 13,760

11 .0

37.1%

Recording

100.0%

626

24 .6 x

15 ,41 2

15 15,412

1 2 .3

41.5%

Publishing

100.0%

264

14.0x

3 , 69 6

3 , 6 96

2. 9

10.0%

Merchandising/ others

100.0%

29

13.0x

37 8

378

0. 3

1.0%

59.2%

409

9.0x

3, 68 0

2 ,1 7 9

1. 7

5 .9 %

Ha H avas

Other consolidated assets

1 , 22 7

See Tickets

100.0%

140

Digitick

100.0%

80

W engo

90.0%

Gameloft

100.0%

Dailymotion

50 30

22 . 7 x

80.0%

Other stakes Vevo

40.0%

Other music s takes Telefonica

1 , 1 68

0. 9

3.1 %

1 40 14

0. 1

0.4%

80

0. 1

0.2%

45

0. 0

0.1%

686

6 86 68

0. 5

1.8%

271

2 17 21

0. 2

0.6%

8 6 , 0 02

7 , 8 85

6. 3

21.3%

1,000

400

0. 3

1.1%

1 2 ,9 5 9

559

0. 4

1.5% 1.2%

1.0%

4 5 , 809

435

0. 3

Telecom Italia

24.9%

1 3 , 6 35

3,395

2. 7

9.1%

Mediaset

28.8%

3,900

1,123

0.9

3.0%

FNAC

15.0%

2 , 07 0

311

0. 2

0.8%

Ubisoft

25.0%

6, 24 7

1 ,5 6 2

1. 2

4.2%

Banijay

26.2%

382

100 10

0.1

Other adjustments Net deferred taxation (NPV)

100.0%

Holding costs

100.0%

TOTAL ENTERPRISE VALUE

(1 0 0 . 0 )

8.5x

60 0

600

0. 5

1.6%

(850)

(850)

(0.7)

-2 . 3 %

1 1 7 , 1 95

3 7 ,1 0 6

2 9 .6

100.0%

Conglomerate discount (10%) Net cash incl pension and liability

(3,711) (1,801)

(1,801)

TOTAL EQUITY VALUE

3 1 , 59 4

Number of shares (mn)

1 , 2 56

Sum-of-the-part valuation per share (€)

25 . 2

(1.4)



22

August 28, 2017


Sony (CL-Buy; last close ¥4,191): Raising SME valuation by 12% and Sony 12m price target by 2% to ¥5,600 We believe Sony is one of the key beneficiaries of a recovery in the music industry alongside Vivendi, and reiterate our Buy (Conviction List). Sony Music is the world’s second-largest record company and the largest music publisher, and we view Music as being the cornerstone of Sony’s transition to becoming a global entertainment giant. We estimate the music segment will account for 8% of group revenue and 15% of operating profits in FY17. We believe Sony Music is well positioned vs. peers given: (1) its large catalogue, which should benefit from rising c onsumption and monetisation of streaming. Sony’s main label, Columbia Records, founded in 1887, is the oldest record label in the industry. (2) Cross-media synchronisation opportunity and improved discoverability: Sony is a large media conglomerate with strong TV production activity in North America, unprofitable yet large-scale motion pictures studio and the world’s most successful video game platform, PlayStation. We raise our Sony Music operating profit estimate by 6% for 2020E and have a positive outlook for margin expansion in the music business. We now assume a 27% revenue CAGR (2015-20E) for the streaming business, partly offset by a negative 11% revenue CAGR for the physical recording business over the same period. Overall, we expect the recording segment to grow at a 5% CAGR and music publishing at a 4% CAGR. With digital commanding 7-10 pp higher operating margins than physical, we forecast Sony Music’s operating margin to improve from 11.7% in FY 16 to 14.6% in FY20. As a result, we raise our Sony Music valuation by 12% to ¥2.16 tn (€16.5 bn), using the implied EV/sales multiple for UMG, and our 12-month SOTP-based target price for Sony by 2% to ¥5,600 (from ¥5,500). For the games, movies, and music businesses, we apply a sector average multiple of 14x to FY3/21E NOPAT (net operating profits after tax). In our view, FY3/21 EV/ NOPAT enables the reflection of medium-/long-term earnings in enterprise value. This is underscored by greater online-related revenue in the games business and the uptake of subscription services in the music industry in recent years. We value the hardware business at 6.93x EV/DACF on 2017E, the average of the Asia technology sector. We value the entertainment business at over ¥5.2 tn, making up 74% of the theoretical value of the company. Key risks to our investment thesis for Sony include: 





Delayed movie business recovery: We forecast operating profits of ¥65.0 bn in FY3/19, rising to ¥131.1 bn in FY3/21, for Sony’s movie business. Any delay in the recovery of Sony Pictures would be a downside risk for the company. We note that this business is under the stewardship of a new chairman and C EO. Failure of blockbuster game titles: We expect proprietary titles to provide a significant earnings contribution for the games business, but weak sales of major new titles, such as Gran Turismo Sports (set for release on October 19) and Spider-Man (in 2018), are another downside risk. Lower-than-expected streaming adoption than we expect, which would affect our longterm music forecasts and Sony Music valuation.


23

August 28, 2017


Exhibit 48: Sony SOTP ¥ mn, except per share data; price target has a 12-month timeframe

Sony Target Price Calculation Entertainment NOPAT (2020E)

373,441

Global game/internet EV/NOPAT 2020E Entertainment EV

14.00 5,228,178 330,821

Hardware DACF (2017E) Asia tech 2017E EV/DACF Hardware EV

6.93 2,292,588 13% 7,520,766 (333,668) 846,229 7,008,205 469,800

Ex‐financial CROCI (lease adjusted) Implied HW&Ent EV Net debt/ (Net cash) 2017E Leases 2016E Implied market cap (ex. Financial) Sony Financial (8729.T) market cap (60%, at GS TP) Other major holdings Conglomerate discount Total implied market cap Number of shares of shares Target Price

337,392

‐10%

¥

7,033,857 1,263 5,600


Amazon (CL-Buy; last close $945.26) For Amazon, music is a component of i ts Prime ecosystem that helps to drive customer engagement, sell devices like the Amazon Echo, and create upsell opportunities. opportunities. Amazon’s e-commerce footprint and user base puts the company in a strong position to benefit from the growth in digital music, offering multiple price-points, incentives, and channels for user adoption. The Amazon Music Unlimited Family plan all ows up to six family members to use the service for $14.99/month, comparable to Family plan pricing at Spotify and Apple Music. In addition, the c ompany’s bundling discount of individual Music Unlimited for Amazon Prime users ($7.99/month vs. $9.99 at competing services) provides a unique opportunity to take share as the music industry sees growth in paid users. Its price competitiveness on connected devices ($3.99/month on Echo, Dot, or Tap) along with its free radio offering on these same devices could also allow the company to take advantage of growth in voice-activated platforms. Valuation: Our $1,275 12-month price target is based on a SOTP, i mplying 27x 2018E EV/EBITDA. Key risks: Risks to our view relate to competition, margin pressures from investment, and valuation.

Pandora (Buy; last close $8.08) We continue to believe that Pandora is set to benefit from overall growth in t he consumption of streaming music, along with the s hift of advertising dollars online as the company develops both its subscription and advertising-based offerings. With nearly 80mn monthly active users and 5+ billion listening hours quarterly, we believe there remains significant opportunity for the company to monetize it s existing base while driving growth through new offerings, features, and devices. The company noted that 2Q17 saw 9.7mn active users from consumer electronics (+23% yoy), with 1.6mn from voice-activated devices (+282% yoy); a c ategory we see significant growth opportunity as ad-monetization on these platforms is generally early stage. From an ad-supported perspective we see the connected device opportunity providing upside to advertising RPM numbers in addition to ad load increases and diversification of inventory in traditional channels.


24

August 28, 2017


In our view, Pandora’s unique music discovery functionality, brand and customer relationships also puts it in a favorable position to upsell its on-demand service to its ~80 mn ad-supported radio customers and better segment its customer base through multiple price points. The company indicated that there were 390K Premium subs at the end of 2Q as users began to convert off of trials in mid-May, with 64% of subscriptions coming from the ad-supported tier with minimal customer acquisition costs. We believe Premium subscribers will reach 1.6mn by the end of 2017, bringing overall paid subs to more than 6 million vs. 4.4 million at the end of last year. Valuation: Our 12 month price target of $13 is based on a 2x 2018E EV/sales multiple. Key risks: Risks to our view relate to competition, content costs, subscriber costs, and execution.

Alphabet (CL-Buy; last close $930.50) As the dominant online video platform for music, we view YouTube as particularly well positioned to benefit from the strong growth in music video consumption and online video advertising especially on mobile devices. We estimate the platform accounted for c.40% of the online video market in 2015. We also estimate that YouTube revenues grew at a 50% CAGR over 2010-15 and forecast a c.30% CAGR over 2015-18, with around 15%-20% coming from music. While there remains a significant gap between the consumption of music streams on YouTube (70% of total music streams) and their monetisation (YouTube accounts for around 6% of total recorded music revenue), we do not foresee any major change to the safe harbour provisions that benefit YouTube and also note that the music industry has toned down its criticism of the platform in recent months. However, we believe that YouTube could face greater competitive pressure from Facebook's entry into the music video space with the latter being reportedly in talks with record labels over a music licensing deal (Music Business Worldwide, March 24, 2017). Valuation: Our 12-month price target of $1,100 (DCF, EV/EBITDA, P/E) is derived from a three-way equal-weighted valuation approach, which includes a discounted cash flow (DCF) analysis, an EV/EBITDA multiple analysis, and a P/E analysis. For EV/EBITDA, we use 14x 2018E. For P/E, we use a multiple of 24x FY18E EPS. Our DCF analysis assumes a FCF perpetuity growth rate of 5%. Key risks: Risks to our view include weaker-than-expected cost discipline, competition and dilutive M&A.

Tencent (Buy; last close HK$323) We also view Tencent as a beneficiary of the risi ng consumer adoption of music streaming (see our ‘Focus on China’ section earlier). Valuation: Our 12-month SOTP-based price target is HK$369. Key risks: Risks to our view include slower gaming growth and online advertising competition.


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Appendix: Global recorded music forecasts Exhibit 49: We forecast the global recorded music market (label share) to grow to $41 bn, driven by growth in streaming Global recorded music revenues ($ mn) RECORDED MUSIC MARKET

2016

2017E

2018E

2019E

2020E

2021E

2022E

2023E

2024E

2025E

2026E

2027E

2028E

2029E

2030E

Global Recorded Music Revenues % change

15.7 6%

16 . 8 7% 7%

18.1 8% 8%

19 . 5 8% 8%

21.0 8% 8%

22.7 8% 8%

24.5 8% 8%

26.4 8% 8%

28.6 8% 8%

30.8 8% 8%

32.8 7% 7%

34.6 6% 6%

36.6 6% 6%

38.6 5% 5%

40.8 6%

Physical % growth % share of total

5.4 -7% 34%

4. 9 -9% 29 2 9%

4.4 -1 -10% 24 2 4%

4 .0 -1 -10% 20 2 0%

3.6 -1 - 10% 17%

3. 0 -1 -15% 1133%

2.6 -1 -15% 1111%

2. 2 -1 -15% 8%

1.9 -1 -15% 7%

1. 6 -1 -15% 5%

1.3 -2 -20% 4%

1.0 -2 -20% 3%

0.8 -2 - 20% 2%

0.7 -2 -20% 2%

0.5 -20% 1%

Digital % growth % share of total

7.8 18% 50%

9 .3 19% 55%

10.9 18% 60%

12 . 6 16% 65%

14.3 14 14% 68%

16 . 4 14% 72%

18.5 13 % 76%

20.7 12% 78%

23.0 11% 81%

25.4 10% 82%

27.6 9% 84%

29.5 7% 85%

31.6 7% 86%

33.6 6% 87%

35.8 6% 88%

Streaming % growth % share of total Paid streaming revenue ($bn) % growth

4.6 60% 30% 3. 5 70%

6 .5 40% 39% 5.1 46%

8.4 30% 47% 6.8 33%

10 . 4 23% 53% 8.4 25%

12.3 19 19% 59% 10.1 20 20%

1 4 .5 18% 64% 12.0 19%

16.8 16 % 68% 14.0 16 %

19.0 13% 72% 15.8 13%

21.3 13% 75% 17.9 13%

23.7 25.9 27.9 11% 9% 8% 77% 79% 81% 19.9 21.7 23.3 11% 9% 7%

30.0 7% 82% 24.9 7%

32.0 7% 83% 26.5 6%

34.2 7% 84% 28.1 6%

Ad supported streaming revenue ($bn) % growth

1.1 37%

1. 4 21%

1.6 19%

1. 9 18 18%

2.2 14 1 4%

2 .5 13 13%

2.8 11 %

3 .1 12%

3.5 12%

3 .9 11%

4.3 10 10%

4.7 9%

5.1 9%

5.6 9%

6.1 9%

Download % growth % share of total

2.4 -21% 15%

1 .9 -2 -20% 11 11%

1.5 -2 -20% 8%

1 .2 -2 -20% 6%

1.0 -20% 5%

0. 8 -2 -20% 3%

0.6 -2 -20% 3%

0. 5 -1 -15% 2%

0.5 -1 -15% 2%

0. 4 -1 -15% 1%

0.3 -1 -15% 1%

0.3 -1 -15% 1%

0.2 - 15% 1%

0.2 -1 -15% 1%

0.2 -15% 0%

Other revenue % growth % share of total

0.8 10.0% 5%

0. 9 10% 5%

0.9 10% 5%

1 .0 5% 5% 5%

1.0 5% 5%

1 .1 5% 5% 5%

1.2 5% 5%

1. 2 3% 3% 4%

1.2 3% 4%

1. 3 3% 3% 4%

1.3 3% 4%

1.3 2% 2% 4%

1.3 2% 4%

1.4 2% 2% 4%

1.4 2% 3%

2.2 6% 14%

2. 3 6% 6% 14%

2.4 6% 6% 14%

2. 6 6% 6% 13%

2. 7 6% 6% 13%

2 .9 6% 6% 13%

3.0 6% 6% 12%

3 .2 4% 12%

3.3 4% 4% 11%

3 .4 4% 11%

3.5 4% 4% 11%

3.7 3% 11%

3.8 3% 3% 10%

3.9 3% 10%

4.0 3% 10%

0.3 3% 2%

0 .3 4% 4% 2%

0.3 4% 4% 2%

0. 3 4% 4% 2%

0.4 4% 4% 2%

0 .4 3% 3% 2%

0.4 3% 3% 2%

0 .4 3% 1%

0.4 3% 3% 1%

0 .4 3% 1%

0.4 3% 3% 1%

0.4 3% 1%

0.4 3% 3% 1%

0.5 3% 1%

0.5 3% 1%

Performance Rights % growth % share of total Sync % growth % share of total

Source: IFPI, Global Investment Research


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August 28, 2017


Disclosure Appendix Reg AC We, Lisa Yang, Masaru Sugiyama, Heath P. Terry, CFA, Piyush Mubayi, Heather Bellini, CFA, Se Park, Yusuke Noguchi and Alex Woodgate, here by certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.

GS Factor Profile The Goldman Sachs Factor Profile provides inves tment context for a stock by comparing key attributes to the market (i.e. our coverage universe) and its sector peers. The four key attributes depicted are: Growth, Financial Returns, Multiple (e.g. valuation) and Integrated (a composite of Growth, Financial Returns and Multiple). Growth, Financial Returns and Multiple are c alculated by using normalized ranks for s pecific metrics for each stock. The normalized ranks for the metrics are then averaged and converted into percentiles for the relevant attribute. The precise calculation of each metric may vary depending on the fiscal year, industry and region, but the standard approach is as follows: Growth is based on a stock's forward-looking sales growth, EBITDA growth and EPS growth (for financial stocks, only EPS and sales growth), with a higher percentile indicating a higher growth c ompany. Financial Returns is based on a stock's forward-looking ROE, ROCE and CROCI (for financial stocks, only ROE), with a higher percentile indicating a company with higher financial returns. Multiple is based on a stock's forward-looking P/E, P/B,

price/dividend (P/D), EV/EBITDA, EV/FCF and EV/Debt Adjusted Cash Flow (DACF) (for financial stocks, only P/E, P/B and P/D), with a higher percentile indicating a stock trading at a higher multiple. The Integrated percentile is calculated as the av erage of the Growth percentile, Financial Returns percentile and (100% - Multiple percentile). Financial Returns and Multiple use the Goldman Sachs analyst forecasts at the fiscal year-end at least three quarters in the future. Growth uses inputs for the fiscal year at least seven quarters in the future compared with the year at least three quarters in the future (on a per-share basis for all metrics). For a more detailed description of how we calculate the GS Factor Profile, please contact your GS representative.

Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It c an be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.

GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry).

Disclosures Coverage group(s) of stocks by primary analyst(s) Lisa Yang: EMEA New Markets-Media, Europe-General Retail, Europe-Media. Masaru Sugiyama: Japan Internet and Games, Japan-Consumer Electronics, Japan-Media. Heath P. Terry, CFA: America-Internet. Piyush Mubayi: China Internet. Heather Bellini, CFA: America-Software. America-Internet: Amazon.com Inc., Bankrate Inc., Blue Apron Holdings, Criteo SA, eBay Inc., Endurance International Group, Etsy Inc., Expedia Inc., Groupon Inc., GrubHub Inc., IAC/InterActiveCorp, LendingClub Corp., Match Group, Netflix Inc., Pandora Media Inc., PayPal Holdings, Priceline.com Inc., Redfin Corp., Shutterfly Inc., Snap Inc., TripAdvisor Inc., Trivago N.V., TrueCar, Twitter Inc., WebMD Health Corp., Yelp Inc., Zillow Group, Zynga Inc.. America-Software: Adobe Systems Inc., Akamai Technologies Inc., Alphabet Inc., Atlassian Corp., Autodesk Inc., Citrix Systems Inc., Facebook Inc., Microsoft Corp., MobileIron Inc., Okta Inc., Oracle Corp., Red Hat Inc., RingCentral, Salesforce.com Inc., Twilio, VMware Inc., Workday Inc.. China Internet: 58.com Inc., Alibaba Group, Baidu.com Inc., Ctrip.com International, Gridsum, JD.com Inc., NetEase Inc., New Oriental Education & Technology, SINA Corp., TAL Education Group, Tarena International Inc., Tencent Holdings, Vipshop Holdings, Weibo Corp.. EMEA New Markets-Media: Mail.ru Group, Naspers Ltd., Yandex NV. Europe-General Retail: adidas, ASOS Plc, Associated British Foods, B&M European Value Retail SA, Burberry, Debenhams, Delivery Hero, Dixons Carphone Plc, Europris ASA, Hennes & Mauritz, Hugo Boss AG, Inditex, JUST EAT, Kering, Kingfisher, Luxottica (Italy), LVMH Moet-Hennessy Louis Vuitton, Maisons du Monde SAS, Marks & Spencer, Moncler SpA, Next, OVS SpA, Pandora, Pets at Home Group, Prada SpA, Puma, Richemont, Rocket Internet SE, Salvatore Ferragamo SpA, Showroomprivé, Sports Direct International Plc, Steinhoff International Holdings, Swatch Group, Takeaway.com, Technogym SpA, Ted Baker, Thule Group, Tod's, Tokmanni Group, XXL ASA, YOOX Net-A-Porter Net-A-Porter Group, Zalando SE. Europe-Media: Ascential Plc, Atresmedia, Auto Trader Group, Axel Springer AG, Daily Mail and General Trust, Emerald Expositions Events Inc., Havas, Informa, ITV Plc, JCDecaux, Lagardere, M6 - Metropole Television, Mediaset, Mediaset Espana, Modern Times Group, Pearson, ProSiebenSat.1, Publicis, RELX NV, RELX Plc, Rightmove Plc, RTL Group, Schibsted ASA, Scout24 AG, Sky Plc, TF1, UBM Plc, Vivendi, Wolters Kluwer, WPP Plc, ZPG Plc. Japan Internet and Games: Bandai Namco Holdings, Capcom, CyberAgent, DeNA Co., Kakaku.com, Konami, LINE Corp., Nexon, Nintendo, Rakuten, Recruit Holdings, Sega Sammy Holdings, Square Enix Holdings, Yahoo Japan. Japan-Consumer Electronics: Panasonic Corp., Sony. Japan-Media: Dentsu, Hakuhodo DY Holdings.

Company-specific regulatory disclosures Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research


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August 28, 2017


Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global Equity coverage universe Rating Distribution

Buy

Hold

Investment Banking Relationships

Sell

Buy

Hold

Sell

Global 32% 54% 14% 65% 56% 49% As of July 1, 2017, Goldman Sachs Global Investment Research had investment ratings on 2,753 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various r egional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by the FINRA Rules. See 'Ratings, Coverage groups and views and related definitions' below. The Investment Banking Relationships chart reflects the percentage of subject companies within each rating category for whom Goldman Sachs has provided investment banking services within the previous twelve months.

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2017.08.28 - Goldman - Music in the Air

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