Warner Music Group's latest quarterly results  shows how the industry can hope to transition to the future. Gains in digital revenue, licensing and synchronizations helped offset drops in physical revenue.
Of course, the quarter may look rosy because it was a period of due diligence. Had potential acquirers not been looking at the company's books in order to value the company and make informed bids, the numbers may have been different. In sports it's known as great individual performance during a contract year.
Nevertheless, Warner pulled off the balancing act. Total revenue was up 2% from the prior-year quarter and each of its two divisions posted a 2% revenue increase. Within those improvements were nearly offsetting gains and losses that show how music companies can stay afloat.
1. Steady digital growth. The company's recorded music digital revenue was up 7% while publishing's digital revenue rose 31%. Growth has not been so steady in the past, and Warner's recorded music division has posted double-digital digital gains in only two of the last nine quarters. The company's $220 million of digital revenue in the quarter was its highest yet and 17.6% greater than the previous quarter. It needs many more quarters like it.
2. Greater importance on new revenue from licensing and synchronization. The recorded music division's licensing revenue was up 13% and the publishing's synchronization revenue increased 29%. The future holds more opportunity for the placement of music in film, television, commercials and video games.
3. A slowing physical decline offset by non-traditional revenue. Warner's "physical and other" recorded music revenue slipped just 3% in its most recent quarter, although the existence of the "other" revenue is masking a deeper decline in physical sales. CD sales were down 12.8% in the first quarter of 2011, according to Nielsen SoundScan . And yet that double-digit decline is more manageable than the 20% annual losses experiences in past years. To offset CD losses, Warner-like its peers-has invested in companies around which it will build 360 models. Diversification is the key to offsetting the decline of the CD.