One thing the internet has managed to quite successfully accomplish over the past ten years is to monetize the online music industry. In 2012, 52% of record company revenues domestically were actually digital. When compared with other online revenue streams, such as games, newspapers, books, and film, music revenue obtained digitally utterly swamped most other. The global percentage of revenue obtained digitally the last reported year, 2011, with 32% year over year growth, compared with averages of about three percent for books, newspaper and film combined. Globally, there were over 13 million digital music subscribers at year end.
In light of these sorts of trends in the computerization of recorded music, I wanted to take a look at some of the leading domestic based music download or streaming companies. The 800 pound gorilla in the room, in terms of downloads, is Amazon.com, Inc. (NASDAQ:AMZN). Of course, the core of Amazon has been and will continue to be tangible books, records, and almost any other consumer item imaginable. But there is little reason to doubt Amazon when it decides to enter a new niche, as it has with music downloads.
The Amazon download system includes millions of titles, priced from $0.69, and entire compact discs, priced from $5. Amazon often bundles downloads upon selling a tangible music products. Amazon is thought of in the industry as the “economy brand” of the downloadable music world, which is quite consistent with this company over the past several years in general. It has been far more interested in growing revenue than in turning profits.
Amazon's earnings have advanced 30% annually the past five years. Its profits, which are being announced as I write this, are forecast for $0.29 per share, nearly a 30% drop from the same quarter last year. For a company selling as richly as Amazon is, I would like to see more than just revenue power. Amazon is not for me.
Hewlett-Packard Company (NYSE:HPQ) has made great strides toward downloadable music with high quality audio in its recently introduced 27 inch monitor with hip hop superstar Dr. Dre's Beats audio imbedded into it. The monitor is to be released near February 3, and was designed specifically, with upward angled speakers, to be a high quality music player. In addition, the company has introduced a new, highly affordable line of mid-grade laptops. Later in February, the company is to release its first “Chromebooks” with 14 inch monitors and price points below $400.
All of this is not necessarily going to save this sunken ship of a company. Neither, I believe, will its new Connected Music service, which was launched in November of 2012. This music download service will be bundled into many Hewlett Packard (NYSE:HPQ) machines with no cost, short term use. But if Hewlett Packard is to thrive, it will do so by succeeding in its expansion of its enterprise business. However, even in that business there are deep pocketed, well established competitors such as International Business Machines Corp. (NYSE:IBM) and Oracle Corporation (NASDAQ:ORCL).
Hewlett-Packard's fiscal 2012 ended October 31 on a decidedly downcast not due not only to the write off of the Autonomy investment, but sour ongoing earnings as well. It is unlikely there will be another multibillion dollar write off fiscal 2013, but ongoing earnings are not looking too bright. Wall Street is looking for first fiscal quarter of 2013 earnings of $0.71 per share, and I don't think that is going to happen. Upfront costs of new hardware, along with general economic malaise has me thinking any real earnings recovery will not occur until the second half of the year. As for consistently earning in the $7 billion to $10 billion per year range that it was last decade, I don't see that on the horizon at all. Hewlett Packard is not on my radar for an investment choice.
When it comes to streaming music, the best known domestic player in the industry is probably Pandora Media Inc (NYSE:P). Pandora is unique in that is uses proprietary technology based on customer feedback to customize user “radio” stations. It was recently named by JPMorgan Chase & Co. (NYSE:JPM) as that investment advisory division's top internet small cap pick for 2013. Despite this, Pandora has declared a profit in only one quarter since going public in June, 2011, and is not forecast to be profitable in fiscal 2013, which ended January 31, 2013, or in fiscal 2014. What Pandora does have is revenue growth. Fiscal 2013 revenues should be up about 55% from the previous year, and another 40% jump is likely next year. The bulk of those revenues come from advertising, as in the last reported quarter, the third fiscal quarter ending October 20, 2012, advertising accounted for $106.3 of the overall $120 million that was reported.