Dominated by talk of new digital business models, Warner Music Group's fiscal Q1 earnings call on Tuesday morning exhibited a mix of patience and optimism. The company's flat revenue, small net loss and stalled digital growth were a repeat of previous quarters. So too was the feeling that WMG's long-term strategy will wait even longer to bear fruit. But it was the optimism displayed by CEO and chairman Edgar Bronfman, Jr. that differed from previous earnings calls. Mostly in responses to analysts' questions, Bronfman spent more time than normal discussing past digital initiatives and the prospects of future digital models.

Total digital revenue, accounting for 20% of total revenue, was flat sequentially and up 8% over the previous year. Recorded music digital revenue grew 10.3% (7.5% on constant currency basis) to $172 million. Digital accounted for 34.7% of domestic revenue, up from 31.4% last year. International digital revenue was a bright spot, gaining 20%.

While Bronfman outlined a vision - deals with service providers, hardware manufacturers, massive adoption by subscribers - there is currently little actual movement toward that future. Digital growth has slowed. FQ1 digital revenue was equal to the previous quarter's total and only 7.6% higher than the year-before period. Domestic recorded music digital revenue has been stagnant. FQ1's domestic digital figure of $99 million was lower than the previous three quarters and equal to the numbers achieved back in FQ2 and FQ3 2008.

Free Streaming Services

One path the company may no longer pursue is free music. Bronfman said free streaming services are not a net positive and are "not the kind of approach to business we will be supporting in the future." That comment was even more pessimistic than a comment made during a panel at Midem by Stephen Bryant, WMG's senior VP of digital business development. "The concern on the ad-supported side is obviously to make it engaging enough to have an opportunity to up-sell," Bryan said. "We believe we should be doing more to ensure we're not undermining the paid service by creating a service so compelling that they don't see enough value in taking consumers to the paid service."

Access, Bronfman said, is the key to future digital growth. WMG expects digital innovation to grow "rapidly" and access models to be drivers of long-term digital growth and "meaningfully contribute" over time.

Mainstream Consumers

Digital growth will not be easy. For WMG and others, the problem with digital is also the source of its potential: mainstream consumers. As Bronfman noted during the call, access models rely upon scale. With a huge number of subscribers, they will provide strong digital growth for labels and publishers. But as long as digital music services continue to be the domain of tech-savvy early adopters, the small user base will lack the revenue sought by music companies.

Optimism, however, is not out of line here. There is a new generation of music services that give consumers increased mobility and better service. At the same time, consumers are showing they have started to move beyond downloads by warming to cloud-based services. Depending on how labels partner with these new services and help them grow, access models could begin to gain a worthwhile number of subscribers within a few years.

Other Bronfman Comments:

• On the adoption of graduated-response piracy measures: "It's essential (ISPs) play an active role" in preventing digital piracy and supporting legitimate distribution. Bronfman said he attended a meeting in December 2009 with Vice President Biden that focused on protecting intellectual property. "We are delighted to see the U.S. government focusing on this very important issue," he said.

• On the likelihood of passage of the Performance Rights Act: Democratic leadership has been "very vocal in their determination to set this right" and pass the legislation. Bronfman is "hopeful" Congress, currently busy with major issues like the economy and health care reform, will pass the bill when it has a chance to turn to the issue.

• On today's regulatory environment: EU was clear in Sony BMG decision that more consolidation, at least at that time, was non-threatening. Bronfman thinks regulatory approval of a recorded music merger would be possible, wouldn't say if it is likely.

• On the Live Nation-Ticketmaster merger: WMG thinks of the company as a complimentary business. It is a business of scale, consumer relationships and venue relationships, and it is not in the artist development business. WMG is in the venture capital business. Live Nation Entertainment has the opportunity to be a strong company, but in areas WMG does not really currently compete.

Read the 10-Q filing (2)here(2) and the press release (3)here(3).