Warner Music Group Downplays Potential Apple Friction
Ahead of a rumored Apple announcement on a streaming component to iTunes, which could follow Apple’s planned shutdown of Lala.com at month’s end (CED May 3 p7), Warner Music Group is playing down any possible tension with the digital-music powerhouse. WMG CEO Ed Bronfman told analysts in a Q2 earnings call Thursday that Apple’s dominance in digital downloads had actually promoted greater competition in the broader music-technology industry. Major labels are thought to be opposed to the incorporation of Lala’s upload-and-stream-anywhere business model into iTunes, at least at the royalty rates Apple pays them now.
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WMG saw “stable results” in the quarter, with “moderate” revenue declines, Bronfman told analysts. Total revenue fell 1 percent from the prior-year quarter to $662 million, while digital revenue grew 15 percent, to $199 million, about 30 percent of total revenue, the highest percentage among the majors, largely due to international digital growth. Digital revenue grew to 47 percent of recorded-music revenue, which Bronfman described as “approaching the digital divide” in which digital growth fully offsets physical declines. Bronfman blamed the declines in part on a “light release schedule” in the quarter but pointed to a “handful of solid performances” from big-name artists such as Michael Bublé. The one exception to declines in Europe and Asia was the U.K., where WMG revenue grew 15 percent, the strongest year-over-year growth of the majors there, he said.
The growing demand for the iPhone and iTunes, coupled with the variable-pricing structure majors secured from Apple last year, will drive digital revenue for WMG, where it has a slight lead on other majors, Bronfman said. The company is also increasing its “nontraditional revenue,” now 6 percent of total revenue, through broader artists deals that cover ticketing, touring, fan websites and other components. All its new contracts are “expanded rights deals,” with most of its artist roster signed to such a contract, he said. Publishing revenue fell 1.5 percent due to declines in mechanical and synchronization revenue from falling physical sales, though digital publishing revenue grew 86 percent from the prior-year quarter. One particular bright spot was the Fox show Glee’s “Power of Madonna” episode, which featured the cast singing 12 Madonna songs, 10 of those majority-controlled by Warner/Chappell, and an album of the cast performances that has sold well, Bronfman said.
"The momentum continues to build all over the world” for graduated-response antipiracy procedures, Bronfman said. Commonly known as “three strikes,” the push to have ISPs terminate or slow the connections for users accused of multiple infringement violations is “finally gaining traction,” most recently under the U.K.’s new “digital economy” law, he said. WMG hopes the law serves as an example for other countries and their ISPs to see what a “critical role” they can play in mitigating infringement.
A foreseen light release schedule in Q3 is “nothing terribly unusual” for WMG, which is historically “back end weighted” toward Q4 releases, Bronfman told an analyst. On the performance-royalty fight in Congress, Bronfman said Democratic leaders are “committed to seeing that legislation through” that would have broadcasters for the first time pay over-the-air royalties, but the timing and outcome of the battle is “unpredictable.” Bundling music in sold devices and ISP subscription charges, particularly overseas, will grow, Bronfman said, especially as smartphones with “facile” user interfaces become more popular.
Asked if WMG was concerned about Apple’s “monopsony-like power” -- in effect a single buyer for all digital music -- Bronfman bowed. “Clearly Apple has proven to be far and away the most adept hardware and software manufacturer out there” in content delivery, and is reaping the benefits. He called the company “a very tough competitor for other device manufacturers, network operators and such,” whose market power has actually widened the range of competition. “No one’s got very rich betting against Steve Jobs,” he said. But Apple’s refusal to apply discount pricing on a large scale also shows “the value of its content will continue to be apparent” to consumers. Bronfman disagreed that Apple provided an “implicit subsidy” to digital content through the high price of its devices, which an analyst said was scaring away the TV industry. Content industries going forward are working hard to control their retail pricing, most recently book publishers, and the music industry will continue to do the same, he said. But WMG is still “digesting” the payoff from variable pricing.
Bronfman said he wouldn’t speculate what Apple will do with Lala, which has “interesting technology.” WMG was a former investor in Lala. Apple’s developers conference starts a week after the company is scheduled to shut down Lala. If Apple did add music subscriptions to iTunes, Bronfman said he believed it would create independent growth, not at the expense of its paid download business. WMG doesn’t see a “large” revenue opportunity from the iPad concerning music videos on the device, but using its back catalog and applications, WMG can create a more visual experience for its music, he said. “I think we'll evolve as devices evolve.”