Warner Music May Give Spotify Windfall Back To Artists

Major record labels aren't known for being particularly generous to their artists, but in at least one case, that might change a little. Warner Music has made it known that should it ever sell its stake in Spotify, at least some of the proceeds will go to its artists, according to a post on Music Business Worldwide. WMG CEO Stephen Cooper made the announcement when speaking to investors yesterday.

This is an unprecedented step as any income from these types of equity sales have traditionally made their way directly to the label's bottom line in the past, bypassing the artists.

The major labels own around 15% of Spotify, which came as part of the company's negotiations for licensing rights to the major label's catalog. It's estimated that WMG owns between 2 to 3% of Spotify, which at its current $8 billion valuation, is worth around $200 million.

Spotify has signaled its intention for an IPO (Initial Public Offering - where shares of the company are offered to the public for the first time) this year, which would mean a windfall for its shareholders, including the major labels.

Knowing the potential blowback from artists should they not see any money from the sale of the company they helped build, WMG decided to get on the right side of the situation instead of having to react to it after the fact.

Any resulting bad publicity from a Spotify IPO could harm the streaming side of the music business, which has grown into a major source of revenue for the industry as is quickly replacing physical sales.

As a result of this story, Sony Music announced that it would also give back a piece of the proceeds from any sale (no word on exactly how big a piece). The question now remains, will Universal Music feel compelled to follow?

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This Is Why Artists Hate Major Labels

The prevailing wisdom in today's music business is that any artist signed to a major label (and many indies as well) will get shucked and jived out of hard-earned royalties in that rare case when an artist has a hit. It was certainly like that way back when the record business began, and even though artists have made great strides since then in protecting themselves, it's still happening now.

Case in point - iconic balladeer James Taylor. JT is suing his former label Warner Music Group (WMG) for several million dollars, and even after several audits where his accountants have found over 50 contract improprieties, he's still having trouble collecting. This is all laid out in a wonderful article over at Digital Music News by Paul Resnikoff called "52 Ways To Screw An Artist."

It takes a long time to get through every one of the points, so I'll summarize them here.

JT's accountants first did an audit way back in 2004 and found that he was underpaid by $1,692,726. After Warner's and Jame's representatives got together to hash things out, they settled on a figure of $764,056 and WMG immediately cut a check for only $97,857. After trying to get the balance paid over the next 8 years, WMG finally decided to officially dispute the remaining amount, claiming they owed just around $147k instead of the $666k balance, but of that money that even the label agrees is owed, they paid a grand total of $0.

So basically it turns out that JT finds that WMG owes him $1.6 million, they settle on a figure of $764k and pay him $97k and let him twist in the wind for the balance ever since.

What's funny is how blatant some of the royalty "mistakes" are, from charging manufacturing costs (which is on the label) as recording costs (which is owed by the artist) to paying a royalty rate under the agreed amount of points, and on and on.

But it doesn't end there. In 2010 JT initiates a second audit, and this time discovers that he's owed $1,147,559 for the three year period between 2007 and 2010. WMG basically blew him off and never responded to the audit inquiry. And that only appears to be the tip of the iceberg, as there were several additional revenue sources where royalties should have been paid that the auditors couldn't find.

The bottom line is that if James Taylor's high-powered accountants and attorneys can't get paid, you have almost no shot if you're a new artist. And the labels still wonder why artists want to go the DIY route?

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Warner Music Loss Down Thanks To Digital Sales

Warner Music Group's 3rd quarter report is out, and if you look at it closely, it really is a indicator to the trends of the music business today. Here's what we discovered:

• Warner's loses were $32 million, which were down from $46 million last year at this time. This is considered a positive somehow, which is the crazy world of publicly traded companies for you. It always amazes me when a company gets hammered for having only a 14% increase rather than the predicted 15%, and this is much the same. WMG is still losing money, and even though it lost "only" $32 mil, that's not that great when you factor in that there was actually a $11 million tax benefit figured in.

• Total revenue decreased about 5% to $654 million, and much of that they attribute to an unfavorable exchange rate. 

• Recorded music sales slipped 8.4%, and publishing revue also slipped from from $97 to 84 million.

Now for the good news:

• Digital music revenue climbed 13% to $230 million and represented about 35% of WMG's income.

• 25% of the digital revenue came from streaming, which amounted to $54 million, or about 8% of total revenue.

• Domestic revenue was up slightly to $282 million from $276, mostly on the basis of hit records by Jason Mraz, Lincoln Park and B.O.B.

If you want to see exactly how their revenues break down, Digital Music News did a nice graphics below.

What does this tell us? Major record labels are sinking, but very slowly as they hold their own, at least for now. Digital music income may be rising, but it's not going to replace the sales of physical product, and streaming music makes the situation even worse, as that doesn't replace the income from digital downloads. Oh, and the most important piece of the puzzle - you still need hits to make money.

If you're from the musical old school, you're probably lamenting the fact that the business model is changing from the way it previously worked. If you're not tied to that paradigm, you're embracing the change, as a new business model will have to replace the old one at some point. None of us know what that that is at the moment, but we're all on the lookout for it. When you find it, let me know, please.

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Help support this blog. Any purchases made through our Amazon links help support this website with no cost to you.

You should follow me on Twitter for daily news and updates on production and the music business.

Check out my Big Picture blog for discussion on common music, engineering and production tips and tricks.

A Big Change At WMG....Maybe

Today it was announced that Warner Music Group chairman Edgar Bronfman Jr. will step down as of the end of January. Bronfman has been pretty good at destroying companies, from Seagrams (the liquor dynasty that his family built) to Universal Music to taking Warners to the brink as their stock price took a big hit, so it's hard to tell for sure whether the decision to leave was his decision or new WMG owner Len Blavatnik's.

Bronfman's leadership had little to do with music; it was always about the money. More market share, higher stock price, and more acquisitions all had more precedent than developing talent for the long term. In this case, you reap what you sow, as WMG is just another major on a slow decline.

While it might seem like a good move that one of the old guard executives is leaving, don't be so sure that it will make a difference. Remember that the company is still owned by a Russian oligarch. not by a music person. Big money and music have never mixed, since the product is turned into a commodity rather than the art that it is. Since buying Warners earlier this year, Blavatnik hasn't shown that his purchase was anything more than some wealthy bargain hunting.

When the music business was at its peak in the 70s, the Berry Gordy's, Ahmet Artegan's, Jac Holzman's and Mo Ostin's of the world were running it. These were real music people that lived at breathed what their artists did and were willing to stand behind them until they broke through in a big way. Unfortunately we live in a much different world today; one that relies on immediate success and spurns artist development and technical innovation. It's no wonder that a tech company (Apple) basically took over the business by supplying the distribution chain that the labels could not.

So how will anything change? We need a new crop of music entrepreneurs, ones who are their audience and love music for the music, not the money. Until that happens, music will remain in the doldrums and the 3 remaining major labels will continue down their long, slow death spiral.

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60% Of Warners Artists Have 360 Deals

On a recent earnings call Warner Music Group CEO Edgar Bronfman revealed an interesting statistic; 60% of all their artists now have 360 deals with the labels. For those of you who've not been paying attention, a 360 deal is when the record label shares in all of your revenue streams from touring, merchandise, publishing, films, etc., and not just from music sales.

This is sort of like having your uncle who owns a clothing store be your manager. He may be able to get you into some nice stage clothes and even supply you with some dough for recording or tour support, but what does he know enough about the rest of the music business to help you at all? Same goes for signing a 360 deal with a major. They're not even that good with selling music these days, why trust them with everything else?

Bronfman also went on to say that a full 50% of their revenue came from areas of the business that did not exist in 2004, with the previously mentioned 360 deals a part of that.

Despite all the bluster, WMG still lost $46 million dollars last quarter, which they're touting as some sort of victory since they lost $55 million last year at this time. About the only good thing that I could see was that their total digital revenue grew 13% to $203 million, but that doesn't matter much when your bottom line is in the red.

The interesting thing about all of this is that WMG is in the running to buy at least some of the assets of EMI, who's price seems to be actually increasing by the day (supposedly there are at least 10 bidders, which is a total surprise). Warner's still has over $2 billion in debt, and even though new owner Russian billionaire Len Blavatnik has some mighty deep pockets, this isn't the part of the industry that I'd be speculating on, especially with such a high debt ceiling.

Another thing that's interesting is that Bronfman mentioned how "early traction is encouraging" when speaking about streaming service Spotify. That's all well and good, but believe me, no one's going to get rich on streaming music, especially after the first big license fee that a label takes in. It sounds like a good story to the stock analysts though, as major labels keep on dangling that carrot, and people still appear to be trying to catch it.

Bottom line - WMG lost a ton of money last quarter despite a big rise in digital music revenue. That one fact says it all.

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You should follow me on Twitter for daily news and updates on production and the music business.

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Could The Major Labels Be Reduced To "The Big 2" Soon?

Now that it's likely that EMI will go bye-bye, that will leave the music industry with the Big 3 major labels. But while the initial speculation was about Warner Music Group buying some of the EMI assets, that idea appears to be far-fetched, since WMG's own financial trouble have been illustrated frequently in this space (like just last week).

You see, WMG itself carries a debt-load of nearly $2 billion, and their share price continues to fall, making it pretty difficult for the company to get another loan, should it need it. And while they're not exactly on the brink, a few more quarters of losses and WMG might find itself in the exact same position that EMI is currently in, as in not being able to make the payments on that debt. That possible scenario could eventually leave the music business with only "The Big 2" - Universal and Sony Music.

That's a scary thought if you're old school, but it's exactly what you want if you the music business is to survive. Wall Street is discovering that there's no money left in the music business, and they're trying to get out. Good riddance. The music business was never a place for big banking in the first place.

The sooner the major record labels either die or re-form into something more in tune with the times, the better everyone in the business will be. We need a new generation of music entrepreneur who loves and is a fan of music, just like in the 50's, 60's and 70's when music was at its peak. And when that next generation of music entrepreneurs emerges, the music industry will prosper again.

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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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Follow me on Twitter for daily news and updates on production and the music business.

Check out my Big Picture blog for discussion on common music, engineering and production tips and tricks.