Warner Music Group Hits Streaming Milestone in First Quarter

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Signage for Warner Music Group is displayed at their offices at Warner Bros. Studios in Burbank, California on Feb. 5, 2013.

Streaming revenue exceeded download revenue in Warner's recorded music division last quarter.

Music streaming reached a milestone in the first quarter of 2015. Warner Music Group revealed in Monday its recorded music division received more revenue from streaming than downloads, the first such announcement by the three major labels. Recorded music streaming revenue increased 33 percent. In the music publishing division, streaming helped drive a $1-million increase in digital revenues.

It was a strong quarter for the smallest of the three majors. Warner's revenue grew 3.7 percent from the prior-year period, or 12.8 percent on a constant-currency basis, to $677 million. Operating income before depreciation and amortization grew 64 percent to $121 million. The company said the improvement was the result of the combination of revenue growth and lower expenses at Parlophone Music Group, which Warner acquired from Universal Music Group in 2013. Net income was $19 million compared to a net loss of $59 million in the prior-year period.

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While streaming is generally regarded as the future of music consumption, there is uncertainty over which business models will receive record labels' support. Spotify has come under fire for its freemium business model that has a free, advertising-supported tier in addition to a paid subscription tier. Some high-profile artists, including Taylor Swift, have been critical of Spotify's business model and the per-stream royalties it produces.

Warner chief executive Stephen Cooper spoke with an inclusive tone during Monday's earnings call, saying Warner is supportive of freemium business models that encourage listeners to migrate from free, advertising-supported tiers to paid subscriptions. He said Warner is working with some of its digital partners to speed that migration "through modifications of service offerings or more sophisticated approaches" to the consumer marketplace.

Cooper went on to warn that limiting free options can drive people to illegal sites that provide no revenue to rights holders or creators. Hinting at the criticism levied on Spotify by some other labels, Cooper said the industry should be careful to avoid the these consequences "before freemium is burnt at the stake."

Warner's recorded music revenue was up 5 percent, or 15 on a constant-currency basis, to $564 million. Operating income improved to $35 million from a loss of $19 million a year earlier. Music publishing declined 4.5 percent to $117 million but rose 4.5 at constant currency. Other than digital, all revenue streams in the music publishing division declined on an as-reported basis. However, on a constant-currency basis, performance and synchronization revenues were both up and mechanical revenue was flat)

In terms of geography, U.S. revenue grew 6 percent to $288 million and international revenue rose 2 percent to $393 million. Revenue increased in all U.S. recorded music divisions. A four-percent decline in international digital revenue was exceeded by gains in international physical sales and licensing revenue.

In addition to its tempered tone on the freemium business model, Warner sent the message it is open for business in an era of anxiety. "As part of our desire to create change, rather than merely embrace it, we are constantly exploring ways to further boost the uptake of streaming," Cooper said. He pointed to its licensing deals with video subscription service Vessel, music-focused chat service Rithim, Chinese Internet company Tencent, and video messaging service Snapchat.

Digital revenues will be dominated by more traditional partnerships, however. Other than Tencent, which Cooper said will have a material effect on Warner's revenues in China, the deals show open-mindedness in licensing but won't help Warner's bottom line in the foreseeable future.