Atlantic Equities analyst Hamilton Faber has downgraded Warner Music Group (WMG) to Neutral. The stock’s price target was also lowered from $39 to $26 per share.
Faber explains that the downgrade comes on the back of slower than expected growth and the rapid development of AI-created music impacting the industry as a whole. “Over the past six months, there have been two key developments 1) loss of streaming share means recorded music streaming revenues are growing slower than expected, and 2) the rapid development of AI-created music is placing a major cloud over the whole sector,” Faber told investors in his memo.
AI-generated music like the recent Drake/The Weeknd mash-up is a recent phenomenon. Faber adds that when WMG was upgraded six months ago, AI music was not a concern. Now since AI-generated songs and tracks have become commonplace on social media—which presents new legal challenges.
“WMG and other music labels insist they should be paid for any AI-created track that is derived from their artists’ work, yet the primary defense appears to be regulation, which could take years to pass into law,” Faber adds. AI regulation is a hot-button issue for both the United States and Europe.
The Big Three music labels are looking at creating some kind of AI takedown notice to swiftly respond to these tracks being uploaded. Meanwhile, Wall Street doesn’t have confidence that a long fight will be waged to determine how AI music should be regulated.
Generative AI models are trained on existing content, so the Drake/The Weeknd mashup was trained on existing music from these artists. That’s why these labels argue that any AI-derived music is a product of their artists whether they personally created them or not—their intellectual property was used to train the model to create the track in the first place. It’s a sticky wicket of an issue that won’t be resolved this year—even as AI development continues to explode.