What’s Happening at Warner Music Group?
More than four years have passed since Edgar Bronfman Jr. led an investor group to acquire Warner Music from Time Warner Co. Bronfman’s goal for the company was to transform its traditional record label business model into that of a music content company. Though the business has taken many positive strides, Warner Music Group (NYSE: WMG) has continued to struggle as a result of digital piracy, declining CD sales, and a struggling economy. In January, the company’s share price declined to an all time low of $4.57, off over 60% from its initial public offering price of $17. In addition, many analysts have questioned whether WMG can maintain enough cash to meet its near term debt obligations. Despite the plethora of difficult challenges, WMG still has reason to be optimistic.
In 2007, WMG reported digital sales from recorded music increased to $434 million, up 30% from 2006, and up over 216% from 2005, making digital revenue 13.6% of its total recorded music revenue for the year. While WMG’s global market share of recorded music is estimated at 14%, its market share of digital sales is estimated higher, meaning that the company is outperforming its competitors in the industry’s fastest growing market sector. WMG’s aggressive digital strategy has seen it not only partner with more and more digital services, but also acquire equity stakes in such services, specifically Imeem, Lala, and recently launched MySpace Music. MySpace, which is owned by Rupert Murdoch’s News Corp., has over 120 million users. The social phenomenon is likely to draw more fans to the site in search of new music, as well as high rolling advertisers looking to reach a large audience. The launch of Nokia’s, “Comes with Music,” mobile service in October is another venture where WMG believes a real opportunity exists. Success of services like MySpace Music and Comes with Music will help promote WMG’s artists and increase digital sales, while also providing them with a return on their investment. Should digital music sales continue to rapidly increase, WMG stands in a strong position to benefit.
Another area that WMG is looking towards for future revenue growth is in 360 deals, which now encompass about 1/3 of its artist roster. Bronfman, who recently spoke at the Goldman Sachs Communacopia Conference in New York, compared Warner’s 360 strategies to that of a venture capital business, which wages small bets in hopes of deriving income from a multitude of revenue streams. WMG’s previous arrangements with its artists were limited to recorded music sales and sometimes publishing, if the artist was also a songwriter and did not have an existing publishing agreement. The 360 deals include revenue sharing agreements that expand WMG’s participation in artists’ revenues to areas such as touring and merchandise. Bronfman also clarified that WMG does not have the intention of expanding its infrastructure into touring, saying “We’re more likely to be in the business of sharing revenue with the artists from their tours than being a tour manager or promoter ourselves, or getting into the venue management or venue ownership business.”
Bronfman did note however that most artists signed to 360 deals were young in their careers, and that it would take a few years for their ancillary income to be meaningful. In comparing the inception of its 360 business to that of the early days of its digital business, Bronfman noted, “If this were 2005 I might be saying the same thing about digital, which is its growing fast but from a very small base, this is growing fast from a small base, and I do expect over the next couple years this becoming a more and more significant part of our business.”
On the publishing end, WMG continues to maintain healthy revenue. Its publishing unit grew 5.9% in 2007 to $570 million, and is currently trending up 7.9% in 2008. Warner/Chappell has a 16% market share, making it one of the top three music publishers in the world. Bronfman believes that publishing will continue to grow and that the dynamics of the sector will change for the better at the point that the overall economic situation stabilizes. In July, WMG announced the appointment of Scott Francis, formerly President of BMG Songs in North America, to the position of President Warner/Chappell Music, and Chairman & CEO Warner/Chappell Music U.S. The move solidified Warner/Chappell’s Executive team, and concluded a restructuring of the unit’s employees.
WMG’s capital allocation strategy continues to focus on A&R both in its recorded music and publishing units, as well as marketing and promotion. WMG has also acquired a range of artist service companies throughout Europe, which will greatly strengthen its ability to manage artists on a global basis. In February, the company eliminated its dividend, and plans to use the retained cash to pay down the debt on their balance sheet. Much emphasis has been, and continues to be, placed on improving profit margins, which are currently the highest they’ve ever been, and should continue to grow as digital sales increase. Profit margins are higher on digital units than on physical. WMG has also realized cost savings of $250 million a year as a result of a restructuring in 2005, which cut about 30% of its artist roster and 20% of its workforce.
More on the operational front, WMG announced in September a global restructuring of its management team, in which the Office of the Chairman was established to help run operations of the company on a global basis. Lyor Cohen and Michael Fleisher were each promoted to Vice Chairman, and will collectively work to drive a unified global strategy. Warner Music International will now divide its operational focus into three regions: Warner Music Americas and the U.K; Warner Music Asia Pacific; and Warner Music Continental Europe. As a result of the restructuring, WMI Chairman Patrick Vien will leave the company. Because of the evolution of technology and the way in which WMG has ran its business, the move recognized that it no longer made sense to divide the company simply into U.S. and Non-U.S. operations.
Like many entertainment and media companies, WMG faces an uphill battle in a rapidly changing and evolving marketplace. Though it is very difficult to predict consumer behavior in the future, WMG has set a carefully crafted and measured strategy that puts it in a strong position to benefit. As platforms become more robust, digital services begin to mature, and the music business continues to evolve.
By Kyle Shoemaker
Sources:
Goldman Sachs Communacopia XVII Conference
WMG 2007 Annual Report
“UMG, WMG Increase Global Market Share.” Coolfer 4 April 2008
“Global Shake Up at WMG” Billboard 16 September 2008
