How Irving Azoff saved Warner Music’s quarter

You’ve got to hand it to Warner Music CEO Edgar Bronfman. The man sure knows how to make shit smell good. The spin doctors went in overdrive today and Wall Street bought it. Warner Music Group this morning reported a revenue drop of 11.2% for its fiscal first quarter (Dec 31) to $878 million. Profit turned back into the black with net income of $23 million – after a $16 million net loss in the year-ago quarter. 

But … the only reason Warner turned a profit was the sale of its stake in Front Line Management to Irving Azoff’s Ticketmaster Entertainment last year. That’s important to point out and only few did it as well as Glenn at Coolfer. Wall Street was undeterred, though. WMG stock climbed a ridiculous 24% today to finish at $2.49. 

Wake up, people. The music industry a growth business? Bronfman might want you to believe that but his own numbers prove him wrong. All indicators in Warner’s Q1 report point south. And this claim of Warner being a leader in the development of digital business … well, I don’t know how a 19% share of digital in overall revenues qualifies for a leadership position. Both Universal and Sony Music are well north of 20% by now. Hell, even EMI makes 21% of its business with digital formats. 

Maybe it’s time for some people to read the WMG assessment by Pali’s Rich Greenfield again.

While I was away …

Welcome back, readers of Höf’s Mixtape. Sorry it took me so long to get back online. While I was kicking back in Germany the music world continued to create news. More than I anticipated, actually. In retrospect, though, none of them were real game changers or sensations. But for matters of completeness and for my own sanity I compiled what I think deserves mention. 

Instead of rounding up the old news in chronological order I am listing them by relevance. So this is what’s been missing here: 

• The biggest tours of 2008 were not by the biggest CD sellers. The global #1 was Madonna with a gross of $281.6 million according to Pollstar, followed by Céline Dion with sales of $236.6 million. Bon Jovi sold tickets worth $176 million. Fellow Jerseians Bruce Springsteen & the E-Street Band raked in $166 million in ticket revenue, and The Police managed $120.6 million in sales. Completing the list of Top Tours in 2008 are Neil Diamond, the Eagles, André Rieu, Kenny Chesney and Coldplay. 
• Steve Jobs decided it’s time to say good-bye to the old pricing dogma of 99 cents per song and got rid of DRM in the iTunes Store as well. Downloads (in the AAC format!) will now come without digital locks at three different price points. Watch for iTunes users predominantly cherry-picking songs at 69 cents. $1.29 anybody?
• Related I: iPhone users can now shop wirelessly at iTunes via 3G (fast, sort of) and EDGE (really not fast at all). Can you hear AT&T and other carriers who are trying to sell DRM-ed OTA downloads cussing at Jobs?
• Related II: Apple so far has sold six billion songs via iTunes. Averages around two billion a year now. 
• The recorded music market in the U.S. remains a battlefield. Album sales were down 14.4% in 2008 at 428.4 million units according to Nielsen SoundScan figures. Digital track sales rose 27% to 1.07 billion units, digital albums gained 32% and sold 65.8 million units. The CD album which still accounts for 84% of the entire business collapsed another 19.7% to 360.6 million copies sold. Vinyl, however, made a comeback to 1.88 million albums (an increase of 89%). 
• More SoundScan I: Album market share (catalog & current combined) leader was again Universal Music with 31.52% of overall sales (slightly down), followed by Sony BMG (25.30%, slightly up), Warner Music (21.38%, up by more than one point) and EMI (8.97%, slightly down). The combined share of independent labels decreased half a point to 12.83%. The same pecking order applies to download market shares. 
• More SoundScan II: The best selling albums of 2008 were “Tha Carter III” by Lil Wayne (2.874 million units), “Viva La Vida”/Coldplay (2.144 million), “Fearless”/Taylor Swift (2.112 m) and “Rock N Roll Jesus”/Kid Rock (2.018 m). Top selling album artist was Taylor Swift who had two titles in the Top Ten for a total of over 4 million sales. The best selling digital tracks were “Bleeding Love” by Leona Lewis (3.42 million units), “Lollipop”/Lil Wayne feat. Static Major (3.161 million), “Low”/Flo Rida feat. T-Pain (2.979 m) and “I Kissed A Girl”/Katy Perry (2.977 m). Top selling digital artist was Rihanna with a total of almost 10 million sales. 
• More SoundScan III: Where does the shrinking number of album buyers get their fix? The mass merchant category (Wal-Mart, Best Buy, Target, etc.) is still #1 at U.S. album retail with a share of 37% (down 3 points, though), followed by chain music stores (i.e. f.y.e.) with a 33% share of the market (also down 3 points) and the non-traditional outlet segment with almost 25% (up 7 points) and indie music stores covering the rest. NTOs include digital, internet, mail order, venue and non-traditional retailers, with digital accounting for 65% of the segment. 
• While 2008 was an annus horribilis for the U.S. record industry, the business accross the pond did far better than expected. BPI figures show the labels sold 133.6 million albums in the UK - a decrease of only 3.2% (some pundits were fearing up to 10%). The singles market was up 33% with 115 million units (mostly downloads) sold. 2008’s best selling album was Duffy’s “Rockferry” with 1.685 million copies. But Take That came awefully close with 1.446 million copies of “The Circus”. The record only had one month to achieve this sum. Even more impressive: The best selling single was “Hallelujah” (a Leonard Cohen cover) by X factor winner Alexandra Burke. The track sold 888,000 units in just two weeks. Overall entertainment sales in the UK were encouraging considering the tight consumer budgets everywhere. The Entertainment Retailers Association (ERA) said its members sold more product in 2008 than ever before. 
• At the RIAA some people started using their brains. The label group decided it’s time to end the witch hunt on music fans. Since the RIAA started suing alleged filesharers in 2003 legal proceedings have been opened against about 35,000 individuals. P2P fans shouldn’t pop the champagne bottles yet, though. The WSJ wrote: “Instead, the Recording Industry Association of America said it plans to try an approach that relies on the cooperation of Internet-service providers. The trade group said it has hashed out preliminary agreements with major ISPs under which it will send an email to the provider when it finds a provider’s customers making music available online for others to take. Depending on the agreement, the ISP will either forward the note to customers, or alert customers that they appear to be uploading music illegally, and ask them to stop. If the customers continue the file-sharing, they will get one or two more emails, perhaps accompanied by slower service from the provider. Finally, the ISP may cut off their access altogether. The RIAA said it has agreements in principle with some ISPs, but declined to say which ones.” Good luck with that. 
• Just when you think reason is taking over, something stupid happens. Like Warner Music pulling their content from YouTube. It’s about the money, what else.
• Meanwhile, Universal Music says online video streaming is making a significant contribution to the company’s bottom line. eLabs EVP Rio Caraeff told CNet that the category was up 80% last year in U.S. revenues. Company insiders estimate Universal’s video streaming business at around $100 million. 
• No surprise then that the majors are rumored to plan their own video streaming service, perhaps in collaboration with Hulu or YouTube – think “YouTube Music” like MySpace Music. 
• Wholesale distributor EUK was killed after administrators failed to find a buyer for the company. 700 people were laid off. 
• As a result of the EUK drama British retail chain Zavvi (formerly known as Virgin Megastores) went into administration on December 24. Some 2,300 permanent staff and around 1,000 part-time workers are in danger of losing their jobs. Zavvi operates 125 stores, HMV is said to be interested in buying some of the locations. 
• Stateside, retail chain Trans World Entertainment (f.y.e.) also experienced a dissappointing holiday sales season. Comparable store sales in the nine weeks to January 3 decreased 14%. Total sales for the period were $287 million (down 24%). TWE closed 18% of its locations during the quarter. 
• What to do when your CD sales are tanking? If you ask Mike McGuire at research group Gartner, all you need to do is let go of the physical format alltogether. Rather than focusing on the the retail CD as a primary revenue generator, McGuire says, labels should move to a “digital first” strategy before Christmas 2009. Well, I don’t know …
• Universal Music Germany bought out joint venture partner X-Cell Records. 
• The highest German Court (BGH) ruled on the licensing of music as ringtones in a case that had been ongoing for years. In short, music publishers cannot ask for a two-tier licensing system that compensates both, the actual recording and the sound editing. Expert comments can be found here and here.
• Prince wants to release three albums this year. All without the help of traditional label means. Physical formats will be carried by one undisclosed major retailer, digital will be handled by one as-of-yet unnamed download store. 
• Removing DRM for download sales at Amazon MP3 so far has failed to put a dent into Apple’s lead with iTunes. But at least they can claim to be #2 now without being heckled. 
• 2009 will be a year of jam band glory: The Dead will go on their first tour since 2004, Phish will reunite and probably play Bonnaroo, and the Allman Brothers Band will celebrate their 40th anniversary with some live shows.
• Last.fm had to lay off 20% of its staff. 
• Anatomy of a flop. GNR’s “Chinese Democracy” at Best Buy? Nobody seems to care. Not even Axl. 
• The Long Tail? Not so long, after all. 
• Michael Robertson (MP3tunes) writes an open letter to Douglas Merrill (EMI). Good read. 
• Sales of Nokia’s “ComesWith Music” cell phones in the UK have been “OK, but not earth shattering”. 

December ‘08 – redundancy month …

News about job cuts are everywhere. I really don’t want to add anything to that kind of static. People are being handed pink slips in the run-up to the holidays in every corner of the media industry. It’s depressing and probably only the beginning. 

Hypebot has a summary of the latest developments, inluding Viacom, RealNetworks, Variety, Hollywood Reporter, Buzznet and Pinnacle. 

Bailouts for Detroit’s Big Three? Yeah right …

Warner Music surprises with Q4 earnings, FY results bleak

Warner Music Group reported Q4 and full-year (ended September 30) results today. Details can be found in the regulatory filings here.
Upon a first look: Even though it’s a mixed bag, FY revenue actually went up slightly, but net loss is ballooning. Q4, however, saw revenues that weren’t hit as bad as some might have thought, while net profit grew 20 percent. Also, it looks like international business is keeping WMG out of more serious financial trouble. 

Some key group FY details first: 

• Total group revenue grew 3.2 percent to $3.491 billion (down 2.2 percent on a constant-currency basis)
• 46 percent of group revenue was domestic, 54 percent was international
• Domestic revenue declined 3.9 percent, while international revenue was up 10.3 percent (down 0.5 percent on constant currency)
• Group digital revenue increased 38.6 percent to $639 million (domestic vs international = 65:35) and represents 18.3 percent of total revenue (year ago: 13.6 percent of total)
• Group operating income was down 9.2 percent to $207 million
• Loss from continuing operations was up by 338 percent to $35 million
• Net loss increased by 167 percent to $56 million

 FY Recorded Music: 

• Revenue grew 2.1 percent to $2.895 billion (down 2.8 percent on constant currency)
• 48 percent of recorded music sales were domestic, 52 percent were international
• Domestic RM revenue decreased by 5.4 percent to $1.380 billion, while international RM sales went up 10.1 percent to $1.515 billion (flat on constant currency)
• Digital RM revenue grew 38 percent to $599 million (domestic: $388m = 28.1 percent rev. share/ international: $211m = 13.9 percent rev. share) and represents 20.7 percent of total RM revenue
• RM operating income from continuing operations fell 6.4 percent to $233 million

 FY Music Publishing: 

• Revenue at Warner/Chappell grew 9.3 percent to $623 million (up 1.3 percent on constant currency)
• 36 percent of W/C revenue was domestic, 64 percent international 
• Domestic W/C sales were up 6.1 percent to $225 million, while international W/C revenues increaed 11.2 percent to $398 million (down 1.2 percent on constant currency)
• Digital W/C revenue was up 48.1 percent to $40 million and represents 6.4 percent of total W/C revenue (year ago: 4.7 percent)
• Mechanical royalty revenues were down 8.7 percent, synchronization royalties were up 10.9 percent, performance royalties grew 4.5 percent, and digital royalties increased 48.1 percent (all on constant currency)
• W/C operating income declined 7.1 percent to $91 million

And these are the group highlights for Q4: 

• Total group revenue declined 1.5 percent to $854 million (down 5.2 percent on a constant-currency basis)
• Domestic revenue declined 5.4 percent, while international revenue was up 3.7 percent (down 4.1 percent on constant currency), due to strong results in Japan, Italy and France
• Group digital revenue increased 27.5 percent to $167 million, representing 19.6 percent of group total revenue in Q4
• Group operating income from continued operations was down 20.5 percent to $66 million
• Income from continuing operations was down 64.7 percent to $6 million
• Net income increased by 20 percent to $6 million

Q4 Recorded Music: 

• Revenue declined 3.7 percent to $707 million (down 6.9 percent on constant currency)
• Domestic RM sales were down 7.6 percent to $364 million, while international RM revenue was up 0.9 percent to $343 million (down 6.0 percent on constant currency)
• RM digital revenue grew 25.8 percent to $156 million (domestic: $99m = 27.2 percent rev. share/ international: $57m = 16.6 percent rev. share) and represents 22.1 percent of RM sales in Q4
• RM operating income from continuing operations fell 22.2 percent to $56 million

Q4 Music Publishing

• Revenue at Warner/Chappell grew 13.9 percent to $156 million (up 6.1 percent on constant currency)
• Domestic W/C sales were up 12 percent to $56 million, while international W/C revenues increaed 14.9 percent to $100 million (up 3.3 percent on constant currency)
• Digital W/C revenue was up 57.1 percent to $11 million and represents 7.1 percent of total W/C revenue
• Mechanical royalty revenues were down 5.6 percent, synchronization royalties were up 31 percent, performance royalties grew 6.1 percent, and digital royalties increased 57.1 percent (all on constant currency)
• W/C operating income declined 7.7 percent to $36 million 

So, what does all this mean? Warner Music ended their fiscal year in a rather solid manner. And current market trading in the first hours after the release of the FY report suggests that Wall Street is honoring that. But given the increasing decline of domestic sales levels during WMG’s fiscal Q1 (calender Q4) it will be interesting to see how management can further control costs in coming quarters. CEO Edgar Bronfman jr. and his team have downsized operations so much, I wonder were they want to cut next. I suppose, we’ll see much different bottom lines in fiscal 2009.

WMG stock is back up

Rebound or rollercoaster ride? Stocks of Warner Music Group gained more than 37 percent in Thursday’s trading and finished at $3.76. That’s more than a dollar more than on Wednesday. Tuesday marked the first time WMG shares slid below the 3-dollar-mark. The market increase might be a relief for some investors, but don’t hold your breath: in after hours trading WMG continued its up-and-down ride and fell more than 23 percent to $2.87.

Warner Music stocks slip below $3

This is a new record. Stocks of the Warner Music Group finished trading today below the $3 mark for the first time since the Bronfman consortium had bought the U.S. major from Time Warner and floated it on Wall Street. WMG ended the day at $2.98, down 7.17 percent from yesterday. 

To put this into perspective: The Dow Industrial was down 2 percent today, Apple lost 1.16 percent, The Orchard was up 4.25 percent, Ticketmaster down 31.3 percent and Circuit City lost a whopping 60 percent. 

The current market capitalization for Warner Music is only $443.7 million.

Warner stock caught in downward spiral as markets keep slipping

There are publicly traded companies that have been struggling at Wall Street long before the current credit crisis hit. But the continuing bear market – the Dow Jones industrial lost 679 points today – certainly puts additional pressure on the Warner Music Group. 

The U.S. major was down almost six percent to $5.65 at the closing bell. Throughout this week WMG lost 16.5 percent on Wall Street. In mid-September the stock reached a temporary high mark at $8,77. At current levels the company has a market capitalization of only $841m.