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For Warner Music, one step forward, one back - November 29, 2007

Interesting juxtaposition from Warner Music Group this a.m. The company reported a 58 percent drop in net income for the quarter ended Sept. 30, as the music industry continues to be pounded by piracy and plummeting CD sales.

Things would have been even worse, but for a one-time benefit of $12 million, representing Warner Music's share of the settlement in the industry litigation against Bertelsmann AG over Napster (how ironic is that?).

Digital revenue rose 25% in the quarter, but accounted for only a modest 15 percent slice of total revenue. The bulk of the company's income still comes from sales of physical goods, the part of the business that is declining most rapidly.

Even if digital sales were to grow more rapidly, however, it wouldn't solve the labels' fundamental problem. The record companies are sales organizations, built, capitalized and organized to sell discreet copies, which in CD form or purely digital form. The role that the marketplace and the technology have reserved for them, however, is as licensing agencies, administering catalogs of music and rights accounted for as services, not goods. The transition from a company built to sell goods, to a company that exists to rent rights will be far more wrenching than simply "getting a new business model," and may, in fact, not be do-able.

Just when you're ready to write Warner Music Group off, however, it comes up with a deal indicating they may be starting to get it after all. On Wednesday, the company struck a deal with the family of Frank Sinatra to form a joint venture to manage Ol' Blue Eyes' music, name and likeness. The deal apparently includes some sort of new-media angle as well, although details were sketchy.

Although Warner no doubt hopes to continue to sell Sinatra records (as I hope they will, too) the structure of the deal--an equity partnership premised on more than simply the distribution of physical goods--is a hopeful sign. Too bad there's only one Sinatra.
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