AI May Turn Consumers From Passive Listeners to Content Creators

A new Citi Research report from analysts led by Jason Bazinet explores how artificial intelligence (AI) could impact the music industry, including the possibility that AI tools could let consumers migrate from the role of music listeners to active content creators.

To assess the implications, we’ve divided the music industry into three groups: AI-centric music start-ups such as Suno, Udio and KLAY Vision; major record labels Warner Music Group, Universal Music Group and Sony; and digital service providers (DSPs) such as Spotify, Apple and Amazon.

While we see AI as offering both risks and opportunities for the music industry, we think if left unchecked, the risk-reward profile skews negatively for labels and positively for DSPs. We see labels as more exposed to downside from headwinds such as the erosion of intellectual-property (IP) value and monetization challenges, while we think AI brings a myriad of opportunities for DSPs, including content creation, enhanced features and cost efficiencies.

We see the bulk of AI music start-ups as focused on content creation, with some helping to create brand new content and others looking to enhance existing content. For AI start-ups, licensing arrangements with record labels remains a key focus, as major labels have proved assertive in pursuing copyright-infringement litigation.  

As AI start-ups expand, record labels face potential risks from lost market share, though they could benefit from licensing arrangements and music-creation efficiencies. But if left unchecked, we see the challenges for the labels outweighing the potential opportunities. 

So far, Warner Music Group stands alone in signing licensing deals with the three biggest AI music start-ups, possibly signaling a more collaborative approach. While Universal Music Group appears to have more AI agreements than any other labels, we suspect it’s been more restrictive in its deal-making, seeking stronger safeguards to protect its IP and guard against low-quality AI content. Sony, meanwhile, has taken the most conservative approach, with minimal licensing or partnership activity.

Changing industry flows

Before the rise of AI, the value flows for the music industry were simple: 1) artists created music; 2) labels promoted it; 3) DSPs distributed it; and 4) consumers listened to it. 

But now AI tools can be used by the artist, the DSP or the consumer. (We can’t think of many use cases for the labels.) Of these three constituencies, we find consumer use of AI perhaps the most interesting as well as potentially disruptive. That’s because AI allows consumers to migrate from passive listeners to music to active creators of it. In effect, AI makes all consumers potential content creators.

Unlike the labels, we see DSPs as apt to see greater benefits than risks from AI. Despite concerns about AI-generated content flooding platforms, we think DSPs have a significant first-mover advantage in distribution, and we suspect their share loss to emerging AI-focused DSPs will likely be minimal. 

On the opportunity side, DSPs are actively leveraging AI to improve R&D efficiency and enhance the user experience. We think AI-driven feature enhancements will let platforms improve engagement and retention, and suspect AI could deepen engagement with DSP platforms and/or unlock new revenue streams as consumers become content creators.

Looking ahead, we see DSPs as better candidates to acquire AI music start-ups (especially ones focused on content creation) than labels. We see DSPs as having strong incentives to integrate AI to help differentiate their platforms, while labels are more likely to prioritize IP control and licensing.