Atlantic Equities analyst Hamilton Faber has downgraded Warner Music Group (WMG) to neutral. The stock’s price target was also lowered to $26 per share from $39.
Faber explains that the downgrade is due to the slower-than-expected growth and rapid development of AI-created music, which is impacting the entire industry. “There have been two key developments over the last six months: 1) the loss of streaming share means that revenue from streaming recorded music is growing at a slower rate than expected, and 2) the rapid development of AI-created music is weighing on the overall sector significantly,” Faber told investors in his memo.
AI-generated music like the recent Drake/The Weeknd mash-up is a new phenomenon. Faber adds that when WMG upgraded six months ago, AI music wasn’t a problem. Since AI-generated songs and tracks have become commonplace on social media, this poses new legal challenges.
“WMG and other music labels insist they should be paid for every AI-created track that comes from their artists’ work, yet the primary defense appears to be regulation that could take years to pass,” adds Faber. AI regulation is a hot topic for both the United States and Europe.
The three major music labels are considering creating some sort of AI takedown notification to quickly respond to these tracks being uploaded. Meanwhile, Wall Street isn’t convinced there’s a long battle going on over how to regulate AI music.
Generative AI models are trained on existing content, so the Drake/The Weeknd mashup was trained on existing music by these artists. Because of this, these labels argue that all AI-derived music is a product of their artists, whether they created it personally or not – their intellectual property was used to train the model to create the track in the first place. It is a sticky wicket of a problem That won’t be resolved this year — even if AI development continues to explode.