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Tickers in this Article: WMG, TWMC, BBI, NFLX, HAST, EBAY
Record company Warner Music Group (NYSE:WMG) posted a surprise fourth-quarter loss last week, partly due to restructuring charges. Revenue gained slightly, up 1%, but even without the charges, Warner still would have posted a loss. The music business is still feeling the impact of both the recession and the increasing change from CDs to digital music sales.

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Warner Music's Numbers
Warner's fourth-quarter loss was $18 million, 12 cents a share, versus a profit of $6 million, or 4 cents a share in last year's same quarter. The charges accounted for $14 million of the loss, so the company would have posted a $4 million loss excluding those charges. Revenue was $860 million compared to $854 million in last year's fourth quarter. Sales rose internationally, while they fell in the U.S., and the quarter's losses were despite popular releases from recording artists Madonna, Michael Buble and others.

Digital Grows
A key number not only for Warner, but for the industry, is that digital sales amounted to 21.4% of total revenue, up from 19.6% a year ago. The trend toward digital sales continues throughout the industry and its distribution channels. Trans World Entertainment (Nasdaq:TWMC), which runs a chain of music and video stores, recently reported losses for its third quarter of $22.3 million, or 71 cents a share, compared to losses of $28.4 million, or 91 cents a share, in last year's same quarter. Sales were off 17% in the year-over-year quarter, and the company was running a cumulative loss for the first three quarters of this year. Despite closing several of its f.y.e stores, and its founder, Robert Higgins', recent increase in his holdings in Trans World, this company is really getting caught in the shift to digital from CDs.

The Changing Music Business
While Warner Music also relies on its music publishing business to offset some of the ongoing trend of overall falling music sales, music file sharing, piracy, as well as the paltry royalties it receives from music video game makers, the music retailers like Trans World have an even more difficult time adapting. It is not unlike the pure video plays such as Blockbuster (NYSE:BBI), which some observers have on the "death watch" for stocks and industries.

In a similar way that the emergence of Netflix (Nasdaq:NFLX) as well as cable "on demand" movie viewing has altered Blockbuster's fortunes, the increasing downloading of music is hurting a company like Trans World. Not only is the technology changeover to digital killing the old model of a record store, add to that the advantage of other retailers such as Sears Holding (Nasdaq:SHLD) and discounters who can still sell CDs in this transitional industry period without depending on such sales in a way that Trans World does.

Use It, Share It, Trade It, Swap It, Sell It
Music sharing is also another factor in the business, largely undenominated though ubiquitous, as it's not like having to download an entire novel on your computer. Another factor in the changing technology, delivery and usage of music is that a small company like Hastings Entertainment (Nasdaq:HAST) which in effect is a swap and discount place, traffics in used CDs and videos, among other products, so its business can reside in a secondary tier and live off the products that fall out of the first tier, the tier occupied by Trans World or Warner's Music, gaining the benefits while employing minimal risk. You can add eBay (Nasdaq:EBAY) in a big way to this secondary group, as you can get just about anything there, including used CDs or videos, which don't show wear-and-tear the same way as, for example, a set of used tires do.

The Sounds of Change
While music and video retailers are headed for possible extinction, music producers like Warner have a future that's less cloudy, but still not yet clear.

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