Facebook Signs Multiyear Deal With Universal Music Group

Facebook Inc. (NASDAQ:FB) recently signed “an unprecedented global, multi-year” deal with Universal Music Group (UMG) that will allow users to post videos with music from the record label on its platform as well as on Instagram and Oculus.

Facebook has been in talks with content providers like record companies for licensing for a long time before sealing the deal with UMG, which became the first major label to license recorded music to the company.

The collaboration is expected to increase user engagement. Reportedly, “the agreement is intended to serve as a foundation for a strategic partnership roadmap that will deliver new music-based experiences online.”

Going forward, the company also plans to bring more “music-based products” to platforms including Messenger in order to make the conversations more engaging for users.

Earlier this month, Facebook launched a video editing tool called Sound Collection that offers users a number of free high-quality audio tracks and sound effects for creating videos and sharing them on Facebook and Instagram.

We believe these initiatives will significantly drive Facebook’s user base and sustain its share price momentum. Notably, Facebook has gained 54% year to date, substantially outperforming the industry’s 23.2% rally.

Rising Online and Mobile Video Consumption

Facebook has been extending its presence in the online video market with its growing user base and rising engagement levels. We note that social networking platforms are widely used for consuming music. Record labels therefore do not leave an opportunity to promote their albums on such platforms.

The U.S. music industry witnessed 15% growth in the first half of 2017, according to the Recording Industry Association of America, while global sales grew 5.9%, according to the International Federation of the Phonographic Industry.

Furthermore, the online video market (especially music) is expected to grow exponentially going ahead. Per research firm ZenithOptimedia, online video viewing will increase 20% this year, driven by 35% increase in mobile video viewing. The report also states that by 2019, mobile videos will represent 72% of total online video viewing compared with 61% in 2017.

Growth in video consumption has translated to rising video advertisements as advertisers find this to be the most lucrative medium to attract the audience. Notably, online video is likely to represent 31% of worldwide ad spending by 2019, per ZenithOptimedia.

The firm also states that in a lot of markets, after Alphabet’s (NASDAQ:GOOGL) YouTube, Facebook is the second largest provider of video content.

Facebook has been improving its scope of monetization through video views on its platform. We expect music videos to form a major chunk of views, generating a significant portion of ad revenues.

There have also been speculations regarding Facebook’s entry into the music streaming market like its peer Apple Inc (NASDAQ:AAPL). and Spotify. However, nothing has been confirmed yet.

Meanwhile, it seems that YouTube, which also signed a deal with UMG recently, is up for more challenging times ahead as Facebook gears up to strengthen its relationship with record labels.

Zacks Rank & Stocks to Consider

Facebook carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader technology sector are IPG Photonics Corporation (NASDAQ:IPGP) and NetApp Inc. (NASDAQ:NTAP) , both sporting Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Long-term earnings growth rate for IPG Photonics and NetApp is projected to be 12% and 11.3%, respectively.

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