Record Label Shake Ups, Sales Make For A Tumultuous Year In The Music Industry
Record Label Shake Ups, Sales Make For A Tumultuous Year In The Music Industry

The Real Story in Warner Music's Earnings Report: Diversity, Digital Growth

Two things get the headlines in coverage of Warner Music Group's fiscal third quarter ended June 30: Spotify and LimeWire. But dig deeper and you'll find far more important information on the world's third-largest music company.

Spotify isn't as much as a speck on Warner's U.S. revenue just yet, but CEO Edgar Bronfman. Jr. said his company likes the progress the music service has made since launching in the US last month. "We're very pleased with the arc of Spotify's growth. Their traction has been very encouraging."

A far bigger speck also gained some attention Thursday. Warner's latest earnings included its $12 million share of the record labels' settlement with LimeWire. That's actually a significant chunk of change. Think of it this way: because Warner's OIBDA margin was just 11.2% in the latest quarter (meaning operating income before depreciation and amortization was 11.2% of total revenue), Warner would have had to generate top-line revenue of about $107 million to put $12 million on the bottom line. Whereas today's music company is a low-margin business, legal settlements are high-margin items.

Other reports - and some tweets - focused on the company's $28 million net loss in the quarter. And while profit or loss (in the strict accounting sense) is certainly important, it doesn't tell the whole story. And it doesn't explain why Access Industries acquired Warner. If you've ever wondered why a company with constant losses can be worth $3.3 billion, it's because a company's value is not derived from its net profit or loss.

More than talked-about startups, legal settlements and accounting profit/loss, the thing to look for in this earnings release is evidence the company is diversifying, making steady digital gains (which hasn't always been the case) and is at least treading water. Physical losses are still a problem. Larger industry trends are still formidable. But Warner, like its peers, appears to making gains in the right places.

Year-over-year digital revenue grew 13.4% to $203 million in the quarter ended June 30 (growth was 9.1% on a constant currency basis). Recorded music digital revenue grew 13% to $191 million and was up 6.9% to $108 million in the domestic division. Publishing digital revenue grew 15.6% to $15 million.

That digital growth is helping bring Warner's record labels near an important threshold. "We are approaching the point where the majority of our U.S. recorded music business will be digital while continuing to transform our approach to artist signings with more than 60% of the artists on our active global recorded music roster being signed to deals with a comprehensive suite of expanded rights," Bronfman said in a statement.

There were other signs of diversification. In the publishing division, increases in synchronization revenue and performance revenue of 25% and 18%, respectively, helped offset mechanical revenue declined by 24%. Total publishing revenue was up 5% (down 2.7% at constant currency).

Top-line revenue also tells an important story. Warner's revenue rose 5% to $686 million. Its revenue rose 1% in the previous quarter. (Both figures are lower at constant currency.) So, no, Warner's revenue is not falling off a cliff in a mangled heap of failing business models - industry contraction is not the same thing as industry failure. Instead, for the time being, Warner is floating along with its head above water. ( Warner earnings release)

Did Kanye and Gaga Invest in Um ...

-- Is legal? Probably. Would the social music startup benefit from investments by Kanye West and Lady Gaga? Definitely.

A Business Insider report claims the two artists are participating in the $7.5 million round of financing led by Union Square Ventures. Neither has mentioned anything on Twitter, and is under a media blackout, so right now their involvement in the New York-based startup is quite unconfirmed. ( Business Insider)

NARM Comments on Continued Growth in Album Sales
-- Year-over-year album sales have gone into positive territory in the last 10 weeks. In a statement, NARM president Jim Donio expressed his pleasure for the streak. "We have now experienced 10 consecutive weeks where album sales have eclipsed the prior year's numbers, and we're up 2% from 2010 overall. Combined album and track equivalent sales brings even better news...up 4% from the prior year. This is certainly helping to set an optimistic tone for the industry as we head into the biggest selling season of the year in a few months. Specifically, album sales this past week rose 11% compared with 2010 and digital track sales were up 13% from last year, and are up 11% overall." (Press release)

EMI Comments on Lockerz Deal
-- As mentioned in yesterday's post about Live Nation's investment in Lockerz, EMI is offerings its videos to Lockerz users; the partnership has not been officially announced, but Lockerz shared information with about it. EMI Music will deliver up to 10,000 videos that Lockerz users can be to accumulate points (called PTZ) that can be put toward purchases of everything from clothing items to concert tickets (to Live Nation shows).

"At EMI, we're always looking for new means to bring music and consumers together," said Michael Abbattista, EMI Music's Vice President of New Channel Development, in a statement. "Partnering with Lockerz gives us an opportunity to reach music fans with great video content in a new and innovative way."