Wednesday, November 17, 2010

Warner's Earnings An Industry Warning?

Warner Music Group's quarterly SEC filing today is symptomatic of a number of trends in the music business, and not surprisingly, most of them aren't good. Here are a few lowlights.

  • Revenues declined 13 percent from the previous quarter and 7 percent for the year. While you can blame this on many things, I believe it's an indictment of the quality of music. Lots of good music = lots of sales = lots of revenue. If you give us music that goes in one ear and out the other, it will never have any catalog value, which directly translates into long term revenue.
  • Digital revenue grew 7 percent for the quarter and is now 30.9 percent of WMG's total revenue. Great, but that's not enough to offset the decrease in CD sales. Generally speaking, digital revenue industry-wide is flat to slightly declining, yet I see no company adjusting for a world with less revenue unless it's by the weight of a balance sheet.
  • CD sales have been hurt by a drop in retail floor space. You can't buy a CD even if you want to these days. Try to find a music retailer in a mall; it's hard. There are some large cities that don't even have a single record store, and the ones that are left have such a limited selection that it's only a matter of time until they die as well.
  • CEO Edgar Bronfman Jr. stated on a conference call with analysts that music in the cloud presents a "significant opportunity" to increase sales next year. This was a pep talk for the financial analysts. The fact of the matter is that no one knows how music in the cloud will be accepted. In my view, it's going to be a tough sell unless the industry finds a way to easily convince the public that it's a lot more convenient than storing music on your hard drive as you do now. No one except the music industry is waiting for this to happen, and they only want it because it will move everyone into a subscription model, which is the "Holy Grail" business model that the major labels crave. Make no mistake, music in the cloud is in our future, but it will take someone like Apple to lead the way, not a record label like WMG.
  • Music publishing revenue fell 12.9 percent, mostly due to the drop in mechanical royalties. This one is bad. Music publishing has always been the steady, if under the radar, performer in the business. Until recently, that is. There are a lot of industry execs quivering in the their Gucci's over the fact that publishing revenue is declining too.
  • The company has $430 million of cash on hand. This is code for, "We collect cash so we can make a run at buying EMI." WMG has kicked EMI's tires before. Now it gets serious.
Can't wait for the next quarter. Some big things are going to happen in the business, if this earnings report is any indication.
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Brad said...

Great article, Bobby!

Red Cap Sly said...

I agree with your analysis.In particular the quality of music being released- there are fairly large markets that are not being serviced by the current releases- similarly in the UK which seems to be focused on Urban and Katty Perry type pop.

Music in the cloud has not yet coalesced into a viable model (freemium perhaps?) - i do agree though it needs a pathfinder and that will not be WMG.

The fall in publishing revenue is alarming as that -as you say- has traditionally been a solid performer. If that is reflected in EMI's results Mr Guy Hands et al will be very alarmed as the publishing catalogue is perhaps the only thing that performs consistently well for EMI, and it was that that Terra firma was trying to sublicence to meet loan covenants - interesting to see what transpires with EMI over the coming months.


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