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Warner Music Group Is Bending, Not Breaking: Analysis

Analyzing five key questions answered by Warner Music Group’s 2020 fourth fiscal quarter earnings report.

The theme of Warner Music Group’s fiscal fourth quarter earnings on Monday was the future of music. In particular, Warner made a point to talk about a foursome of segments that can credit the pandemic for some of its success in 2020: social media, livestreaming, fitness and games.

The word “social” was used 11 times in the earnings call — once for social justice, the rest for businesses like TikTok that have labels wetting their lips in hopes of big paydays. Indoor fitness products like Peloton, which perform licensed recordings by Warner and other labels, got a boost when fitness studios shut down. With schools and businesses closed, early in the pandemic video game usage shot up 75% in March; through August, 46% of gamers played more than before the pandemic. With concerts canceled or suspended, artists turned to livestreaming to reach fans and make a few bucks.


The usual topics best reflected the state of music in the third quarter of the pandemic: streaming, retail sales and synch royalties were the major topics in WMG’s latest income statement. Strong streaming revenues kept Warner even with the prior-year period — not as good as Sony Music’s 5.3% improvement or Universal’s 3% gain in the quarter, but not a deficit, either. Brick-and-mortar retail stores’ sales rebounded in the quarter but faced more business closures as positive tests and hospitalizations are rising globally. Advertising could drop too, leaving subscription revenue labels’ and publishers’ best hope for the next few quarters.

Here are five key questions answered by WMGs’ fourth fiscal quarter earnings report:

What went well?
While some numbers are evidence that Warner has struggled in the pandemic — merch, touring, synch licenses — there were a few bright spots. Digital revenue increased 11% and, if artist services and licensing revenues were removed, overall revenue grew 9%. Retail store re-openings lifted CD and LP sales. Publishing digital revenue grew 30% in the quarter. Synch revenue has shown “some recovery since fiscal Q3 with a gradual resumption of film and television production,” said Stephen Cooper, CEO of WMG. Looking back at the full year, Warner’s streaming revenue grew 13% to $2.4 billion.

Warner Music Group Earnings Analysis Q4
Courtesy Photo

How is WMG’s liquidity?
Warner says its primary sources of liquidity can support its existing operations for more than 12 months after Sept. 30, 2020. That paints a dour picture, though. Warner’s cash and equivalents fell 11% from $619 million to $553 million. But it has $300 million in unused credit as a buffer. And most importantly, consumer spending and brand advertising, which determine performance revenue, are both improving.


How much money is Warner saving during the pandemic?
The company has not needed to drastically cut costs like concert promoters or agencies have. It has also not announced any measures to trim fat or restructure for a post-pandemic world. Eric Levin, CFO, mentioned “cost containment initiates [that] will start in 2021 and expand over time” but was not specific. Before the pandemic, Warner began upgrading its technology and financing infrastructure with an annual savings of $35 million to $40 million. Slowed by pandemic-related delays, the transformation is now expected to be completed within a year.

Where does Warner — and the industry— go after streaming?
Start with any format and there’s always a next thing: the LP, the cassette, the CD, the download and the subscription service. What’s next? Social media, gaming and live-streaming already provide Warner with “ meaningful nine-figure royalties” and are growing faster than subscription services, said Cooper. Also, WMG is seeing “explosive activity” in at-home fitness services, such as Peloton, which license music for use in their workouts.


What are Warner’s plans for live-streaming and virtual reality concerts in 2021 and beyond?
As the pandemic changes how people spend time at home versus in public, live-streaming and VR companies are racing to build a market that would otherwise have matured some number of years in the future. Warner is treating online concerts as more than a dalliance during forced lockdowns. Cooper said the ways music is distributed will look different “for the foreseeable future” regardless of a vaccine announcement. “Our intent is to continue to invest in livestreaming, live concerts, VR concerts and continue to support not only new habits but the marketplace for this sort of entertainment at home,” he said.