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Warner Music Trapped In A Shrinking Market (WMG)
Warner Music (NYSE: WMG) was in good shape when CDs were the primary way to listen to music, but the iPod and digital downloads changed all that.
Warner Music traded at almost $30 just one short year ago. The stock is now trading at about $14.
Disappearing Revenue
Each quarter, industry trends get worse for the large music publishers. In the first half of the year, Nielsen SoundScan reported that album sales fell 15% to 229.8 million albums. Digital sales rose 49% to 417.3 million. But, music sold over the internet does not pay as well as CDs. Apple (Nasdaq: AAPL) has 70% of the digital market, so it gets to set the prices.
The struggle between Apple and the industry was highlighted by Universal Music's decision to pull out of renewing its one-year deal with Apple. Universal will simply offer songs through Apple if and when it wants to. Universal is the largest of the music publishers, so it may actually have some leverage in getting a bigger chunk of the 99 cents Apple gets for each song.
Universal and Warner are looking at new ways to distribute music online, and that includes offering free downloads that are supported by advertising.
No Short-Term Fix
Warner is trying to buy rival EMI for $4.7 billion. It is not clear why this is a good idea in a falling market for music publishing, but Warner may hope that combining the two companies will involve a lot of cost savings. It may also give the larger enterprise more leverage with Apple when the next royalty negotiations come around. Warner is also gambling that completely new outlets for songs, such as mobile phones, will help resurrect sales and make the business a reasonably good one again.
However, the math for Warner is brutal right now. The company has laid off about 400 people, about 10% of its total workforce. Revenue in the last quarter fell to $784 million from $796 in the same quarter last year. The company lost $27 million during the period. (For more insight, see Cashing In On Corportate Restructuring.)
Warner may hope that a merger gives it more leverage with Apple or that sales of music on wireless handsets picks up. But, neither of these hopes is likely to help it swim out of a flood that is taking the company downstream.
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Warner Music traded at almost $30 just one short year ago. The stock is now trading at about $14.
Disappearing Revenue
Each quarter, industry trends get worse for the large music publishers. In the first half of the year, Nielsen SoundScan reported that album sales fell 15% to 229.8 million albums. Digital sales rose 49% to 417.3 million. But, music sold over the internet does not pay as well as CDs. Apple (Nasdaq: AAPL) has 70% of the digital market, so it gets to set the prices.
The struggle between Apple and the industry was highlighted by Universal Music's decision to pull out of renewing its one-year deal with Apple. Universal will simply offer songs through Apple if and when it wants to. Universal is the largest of the music publishers, so it may actually have some leverage in getting a bigger chunk of the 99 cents Apple gets for each song.
No Short-Term Fix
Warner is trying to buy rival EMI for $4.7 billion. It is not clear why this is a good idea in a falling market for music publishing, but Warner may hope that combining the two companies will involve a lot of cost savings. It may also give the larger enterprise more leverage with Apple when the next royalty negotiations come around. Warner is also gambling that completely new outlets for songs, such as mobile phones, will help resurrect sales and make the business a reasonably good one again.
However, the math for Warner is brutal right now. The company has laid off about 400 people, about 10% of its total workforce. Revenue in the last quarter fell to $784 million from $796 in the same quarter last year. The company lost $27 million during the period. (For more insight, see Cashing In On Corportate Restructuring.)
Warner may hope that a merger gives it more leverage with Apple or that sales of music on wireless handsets picks up. But, neither of these hopes is likely to help it swim out of a flood that is taking the company downstream.
Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!
by
Douglas McIntyre
Douglas A. McIntyre is the editor of 24/7 Wall St., a financial commentary site. He has been president of Switchboard.com, which was the 10th most visited website in the world, and publisher of Financial World Magazine. He has served on the board of TheStreet.com. McIntyre graduated from Harvard magna cum laude.
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