Running a major record label for the last four years is probably what it’s going to be like running any company during this era of economic pestilence. When Edgar Bronfman Jr and his fellow investors took over majority ownership of Warner Music from Time Warner in 2004, the outlook for the music industry was pretty bleak, what with its devastation by the pirates of the Net. Warner Music Group became the only music company to be publicly traded in the States in May 2005.
Warner Music this week reported a profit of $6 million for its fourth quarter ending September 30, up 20% from $5 million in the same quarter a year ago. Reuters said that many analysts were expecting Warner Music to report a loss.
Warner Music is getting the profits by cutting costs, not by selling more. Helped by currency exchange rates, Warner’s revenue for the quarter declined 1% to $854 million. Its share of the music market increased only one-half of one percent to 21.5%.
Recorded music revenue dropped nearly 4% to $707 million. Revenue from digital music, downloads, subscriptions and ring tones, increased 26% to $156 million from the year ago quarter. Warner’s music publishing division increased revenue 14% to $156 million and its digital revenue increased 57% to $11 million.
Warner Music, perhaps like the other major labels, still isn’t on a fast track in selling downloads. Its digital revenue, recorded and published music, in the fourth quarter only increased by $1 million from the prior quarter, from $166 million to $167 million. The $167 million is about 20% of its total revenues.
For the full year, Warner’s numbers did not look impressive. It lost $56 million compared with a loss of $21 million in the prior fiscal year. Losses from continuing operations totaled $35 million compared with a year-ago loss of $8 million. Annual sales increased 3% to $3.49 billion from $3.38 billion.
For the last four years in the music industry, and for the coming four years for most businesses, keeping revenue the same is a major accomplishment, something to write home about. Increasing profits if ever so slightly is worth a 21-gun salute.
Looking ahead short term, Warner said it expects worse results early in 2009 because of the recession and its own music release schedule. “The volatile global economy and timing of our release schedule may result in back-end weighted fiscal 2009 results,” said Warner CFO Steve Macri in Wall Street speak, meaning the company will get off to a slow start in October, November and December but expects revenue to pick up by next summer.
Bronfman said, “I don’t think any of us know what the Christmas shopping season will be. We are managing inventory very, very carefully and we are not over-shipping.” The labels ship CDs on consignment and music retailers, at least the major ones, can ship back unsold inventory.
Those inventory problems will not occur, of course, with online tracks. For the digital sector, inventory costs are zero and the online music services pay for servers and bandwidth, not the record company.
Particularly dire in the company’s prediction is that the first quarter of Warner’s 2009 fiscal year is the last quarter of 2008, a time when many consumers could be expected to buy music CDs and download gift cards.
Warner said it’s too soon to know how much the economic downturn would impact its revenues. The company said that the music industry had been resilient in prior recessions.
On the other hand, in prior recessions, consumers couldn’t copy and swap music tracks as easily as they can in this one. Warner’s, and perhaps the other labels’, biggest weakness is sales of digital tracks outside the States. The US accounted for about 65% of Warner’s digital revenue. Warner said it does well in Japan but not in Europe, particularly not in Spain and Germany.
On the other hand, it could be that Warner isn’t offering music that fans want in the countries where its sales are weak. The BusinessWeek article “Look Who’s Doing O.K. in the Music Business” says Bronfman equates running Warner with flying a plane while fixing the engine.
The article credits Bronfman and Warner Music with doing something that the other three major labels have not: increasing album sales, which still account for the vast majority of revenues in recorded music. Bronfman is said to have focused on finding, signing and “nurturing” talent. Yet, as the article points out, Bronfman and all the executives at the major labels haven’t found the Holy Grail: how to grow sales and profits in the Internet age.
BusinessWeek describes Warner Music profits as anemic and its revenues as flat. The magazine said it examined closely guarded industry sales numbers that showed Warner Music has opened up a lead over the other labels in album sales, which include physical CDs, digital albums, and digital tracks with 10 singles counting as one album.
Warner Music’s album sales are up 5% for the first 10 months of 2008 compared to the first 10 months of 2004 when Bronfman took over. It’s not a big increase for a four-year period but it sure beats the hell out of what the other majors did.
Tom Lowry, who wrote the BusinessWeek piece, concludes that the music industry needs to re-invent itself big time. But, he says, until it can figure out how to do that in a way that produces profits, Warner Music is determined to continue to cut costs and find hot new performers whose albums will sell in the millions.