Three Things Missing from The Economist's Take on Warner Acquisition
--While it's great that The Economist would chime in on Access Industries' acquisition of Warner Music Group, the article doesn't actually say anything of substance. We get the standard music industry terms such as "collapsing industry" and even a buggy whip metaphor. But good analysis? Not this time.
Instead of trotting out tired themes, The Economist should have addressed these three things:
1. Are investors really "splurging," as the headline says? Not necessarily. A "splurge" is a purchase with little regard for price. But is that the case here? The Economist doesn't actually offer evidence that Access overpaid for Warner, nor does it mention the $3.3 billion price tag was less than half of what Terra Firma overpaid for EMI just four years earlier. And let's not forget that Warner attracted other bids, too.
Here's what Access did pay: 1.15 times Warner's trailing 12-month revenue of $2.875 billion and 26 times trailing 12-month EBITA of $127 million. The enterprise value/sales ratio is relatively low while the enterprise value/EBITA ratio could be seen as high, especially for an industry with revenue problems.
2. The official price tag for Warner was indeed $3.3 billion, but The Economist really should have noted that Warner had $319 million cash and cash equivalents at the end of March. That cash balance effectively lowers the acquisition price to about $3 billion. Cash paid for cash doesn't really count toward the value paid for a company. If I give you $10 for your wallet and your wallet has $2 inside, I have really paid $8 for your wallet. If The Economist thinks $3.3 billion is a splurge, then roughly $3 billion is certainly less of a splurge.
3. At the very least, The Economist could answer the question that's implied in the article. If "no one wants to pay for music," as the headline says, why is Access buying a music company? A future acquisition of EMI is mentioned in the article, but no mention is given of the regulatory roadblocks that are certain to appear. One should assume Access bought Warner under the assumption it might not merge any part of Warner with any part of EMI. Thus, Access must have valued Warner based on its own merits, not on the future value of a merged Warner-EMI. In the end, the fact that Access bought Warner means Access sees value in Warner's assets, leadership and business model. Don't forget that Access founder and CEO Len Blavatnik was a Warner board member from March 2004 to January 2008, a time when the company shaped its current leadership and strategy. He knows the company he just bought.
As for the frequent question, "Why would anybody want to buy any music company?" the main factor - and this often goes overlooked - is copyright law. Sure, piracy is a problem and revenues are down, but any company that wants to sell digital music or license music for use in audio-visual works must negotiate with the rights owners. And instead of promoting looser laws to fit the less centralized nature of the Internet, governments are doing more to protect intellectual property such as music. The existence and enforcement of those laws give companies like Warner the means to monetize their assets. Don't forget that record labels were "supposed" to be dead about ten years ago. The fact that they're hanging on is in part a reflection of the laws that underpin the industry.
Warner CEO Spot-On With Spotify 15% Conversion Rates
-- Warner Music Chairman and CEO Edgar Bronfman Jr. told the jury in the LimeWire trial that 85% of Spotify users do not pay, according to CNET. That implies 15% are paying subscribers, and that's higher than the official 10% statistic that Spotify has given publicly for a while now.
But don't get excited. The company's conversion rate has not improved and Bronfman did not give out new information. A Spotify spokesperson confirmed with Billboard the company has converted 15% of its current users, which is a higher number than its conversion of all registered users. "To be clear - when we announced that we'd reached 1m subscribers back in April, we also said that the ratio of paying subscribers to active free users is 15% across our 7 markets," the spokesperson wrote in an email. "'Active' is defined as someone who has used Spotify at least once in the past 30 days - it's the industry standard (see Pandora who announced 80m registered/30m active) for how to measure users who are active."
The Battle of Hastings (Entertainment's First Quarter Format Sales)
-- Music sales were up at Hastings Entertainment in the first quarter of 2011 while book sales felt the pinch of ebook popularity. Revenue dropped 3.8% to $124.1 million in the first quarter. Comp store sales dropped 3.4%. Driven by a 4.6% increase in new music sales, same store music sales were up 1.3% after posting a 4.8% decline in the prior-year period. Other same-store comps: the video games were up 2.5%, electronics were down 1.9% (impacted by lower Blu-ray players), movies were down 6.5% (due to a 25% drop in the box office value of titles released on Blu-ray and DVD) and books were down 9.1% (weak release schedule and growing popularity of ebook readers were blamed).
( SEC filing)
GrouponLive Looking to Reach Casual Fans
-- In a Q&A with Fast Company, Ticketmaster CEO Nathan Hubbard explains Live Nation's partnership with Groupon is not related to the company's tiered pricing or dynamic pricing. "This is about creating better awareness of our shows among more casual fans. Groupon gives us a powerful and efficient local engine to reach casual fans."
One thing Hubbard did not mention is that Live Nation's tickets sold through Groupon will have "all in" pricing - one price that includes the ticket and all related fee.
( Fast Company, TicketNews)
Common Ground Closing
-- Common Ground in Gainesville, Florida is closing after 15 years of hosting local and touring bands. Co-owner Jason Rockhill cited the heavy demands of running the venue, not financial issues, when explaining the club's closing. "It wasn't a spur-of-the-moment decision at all. Places like this are very demanding, labors-of-love kinds of places. It's rewarding and fulfilling, but it's a lot of work." Rockhill added he hopes somebody will step in to run another music venue in the same location.