Financial details of Apple's acquisition of Lala, Lala's annual revenue and insight into bonuses paid were revealed thanks to a proxy statement filed today by Warner Music Group.
The proxy statement offers a few clues on Lala's acquisition price paid by Apple. WMG received $9 million in the sale of online music service Lala to Apple. Affiliates of Bain Capital, according to the proxy statement, owned 20% of Lala. Since WMG had a minority stake in Lala and Bain owned 20% (the two combined are under 60%), it is unlikely the acquisition price was the $17 million reported by TechCrunch. A $17 million price would mean WMG would have received more than 50% of the sale proceeds. Reported estimates of Lala's acquisition price have been as high as $80 million. WMG had invested $20 million in Lala and wrote down $11 million of its investment in early 2009. Lala raised $35 million in funding from Warner Music Group as well as two earlier investors, Bain Capital Ventures and Ignition Partners.
How much annual revenue was Lala generating? Based on what WMG received last year, not much. In fiscal 2009, WMG received about $300,000 in royalties from its content agreements with Lala. Based on WMG's 21% market share for track equivalent albums, that puts Lala's royalties bill for that 12-month period at $1.43 million. Assuming a more conservative 15% share, Lala's total royalties paid would still be only $2 million. So, based on the figure in WMG's proxy statement, Lala's annual revenue was likely in the $2 million to $3 million range. WMG stated it believes its content agreement with Lala is on fair market terms, meaning WMG was not giving Lala lower-than-normal rates because it was an equity owner. Even so, $300,000 in annual royalties is an incredibly small number that indicates Lala had yet to convert its programming talent, excellent product and media awareness into actual revenue.
-- WMG had warrants to purchase an additional shares in Lala for $4 million if the start-up accounted for 25 million CD shipments. It's safe to say that threshold was not reached.
-- In fiscal 2009, WMG extended for six months a deal with Thumbplay for sales of ringtones and referral fees. Affiliates of Bain Capital own approximately 10% of Thumbplay.
-- In fiscal 2009, more than 50% of Atlantic Records' revenue was from digital. Atlantic had the top album market share the U.S. in calendar 2009, according to Nielsen SoundScan. The label had 8.23% current album market share, 7.33% total album market share and 8.45% digital album market share.
- Also of note in the proxy statement is a section on the determination of annual cash bonuses for its top five executives. The bonus pool is weighted 25% revenue goals and 75% OIBDA goals (operating income before depreciation and amortization). The use of those two metrics emphasizes both top line growth and bottom line fundamentals. (Some people may like to see music industry bonuses paid on something other than top line revenue.) But when times are tough, the compensation committee may adjust the bonus pool upward to reward the performance of the executives. That's just what happened in fiscal 2009, a year in which WMG gained market share but reported a net loss of $100 million.
From the proxy statement:
"These metrics are used because we believe they encourage executives to achieve superior operating results. In its assessment of whether the performance goals are met, the Compensation Committee may consider the nature of unusual expenses or contributors to financial results, and authorize adjustments in its sole discretion. For example, in 2009, the Compensation Committee considered and approved adjustments to increase the aggregate bonus pool amounts that would have resulted from reference to the metrics in order to take into consideration the continued pressures on the recorded music industry, particularly the industry-wide decline in physical music sales."