Citing improved digital sales and the integration of BMG Music Publishing and Sanctuary, Vivendi announced Universal Music Group's Q1 2008 earnings today. (Read PDF of earnings release.) Revenue increased 0.6% to €1,033 million (6.8% at constant currency) and operating profit increased 94.7% % to €111 million (the increase was 111.1% at constant currency).
Vivendi cited improved margins relating to a shift to owned product and away from licensed product.

While Q1 was an improvement, revenues were below the €1,027 million recorded in Q1 2006, and operating income lagged behind the €141 million achieved in Q1 2006. Keep in mind that UMG has made a number of acquisitions in the last two years that have helped bolster falling top line numbers.

Digital sales increased 33% year over year. As a comparison, UMG's digital sales increased 51% in fiscal 2007 (and represented 14% of total revenues) and were up 54% year over year in 2007 Q1. The rate of growth is slowing considerably, which is very unfortunate since the rate of the CD's decline has been accelerating over the last two years.

Sony Corp released its earnings today. Sony BMG revenues dropped 4% while operating profit jumped 90%. (Info is on slide #4 and #18 of the earnings presentation .) No results with constant currency were given. The reason given for the drop in revenues was the standard one: declines in sales of physical products are not being offset by the growth in digital.

Music publishing is part of an "other" category that had a 7.6% increase in revenues. Sony/ATV's acquisition of Famous Music was a factor in that increase.

You can read a PDF of the consolidated financial results here.

• Clear Channel, its private equity buyers and the banks that agreed to finance the company's acquisition have settled their litigation. Shareholders are now being offered $17.9 billion ($36 per share), down from the original bid of $20 billion ($39.20 per share). (Reuters and press release)

• The Chicago event promoter's ordinance has been sent back to City Council committee for fine-tuning and more public input. Mayor Daley said he is willing to lighten the measures in the ordinance. (Chicago Sun-Times)

• Royalty Logic has filed a motion with the Federal Appeals Court asking permission to file additional arguments in hopes of challenging the legal status of the Copyright Royalty Board. (Billboard.biz)

• A summary of various legal opinions on the two pieces of orphan works legislation that were introduced to Congress last week. (The SAA Orphan Works Blog)

• Related: 2005 comments by the RIAA to the Copyright Office. "...we would be interested in development of a broadly-applicable regime to ensure that, in appropriate circumstances, the inability to identify or locate a copyright owner with due diligence need not stand in the way of public access to creative works, while at the same time safeguarding the legitimate interests of copyright owners." (Orphan Works Comment 0687)

• The Grand Ole Opry, CMT/MTV Networks, CMA and others cautioned the FCC that a decision to allow consumer wireless devices to operate in the same spectrum as on-stage wireless equipment such as in-ear monitors and cueing systems. (Music Row)

• Singer-songwriter Josh Rouse has launched a members-only download site called Bedroom Classics Closet Archives. Members get to download all songs and videos posted to the site -- over 100 songs. A premium membership for $99.99 gets his new EP, a two-CD bootleg of rare tracks and a copy of his next album once it is completed. After 750 of those memberships have been sold, the basic digital membership plan will cost $29.99. (Glide)

There is a thought-provoking article in yesterday's Wall Street Journal titled "Does Being Ethical Pay?" While reading it I wondered if "ethical music" could work. (Check out the article. It's a very good read.)

June Cotte (associate professor of marketing at the University of Western Ontario's Ivey School) and Remi Trudel (doctoral candidate in marketing at the Ivey School of Business) conducted a series of experiments to arrive at a rough dollar estimate of the premium consumers will pay for ethical products. In one experiment, consumers were given a pay range and asked what they would pay for a certain amount of coffee. The consumers were split into three groups. One group was told the company followed ethical business practices, another group received neutral information and the third group was given negative information about the company.

...we found that -- regardless of their expectations -- consumers were willing to pay more for ethical goods than unethical ones, or ones about which they had no information. Likewise, negative information had a much bigger bearing on consumer response than positive information. People punished unethical goods with a bigger discount (about $2 below the control group) than they rewarded ethical ones with premiums (about $1 above the control group).

So, what effect did consumer attitudes have? People with high expectations doled out bigger rewards and punishments than those with low expectations. Those with high expectations were willing to pay a mean of $11.59 per pound for the ethical coffee, versus $9.90 for those with low expectations. And the high-expectations group punished the unethical coffee with a price of $6.92, versus $8.44 for low-expectations consumers.

The lessons are clear. Companies should segment their market and make a particular effort to reach out to buyers with high ethical standards, because those are the customers who can deliver the biggest potential profits on ethically produced goods.

Music cannot easily be compared to coffee and organic cotton, but there's a moral in the story. When an industry has for years undertaken an unpopular legal campaign that many consumers consider unethical, there's a very good chance its products cannot bear as high a price as they did in the past.

Would "ethical music" work? Even if the product could be made more ethical, it would probably be difficult to communicate how the product is more ethical. Perhaps a marketing campaign could be built around artists and labels that -- just throwing out ideas here -- use green packaging, incorporate sustainable energy during recording, give to charities and refrain from suing consumers. Slap some kind of Juan Valdez-like logo on it and give it a premium price. It could work...if the RIAA's legal strategy changes first. Even if it doesn't create new sales, ethical music could at least help retain some consumers.

At the NARM website there is a PDF of NPD Group's "NARM 2008 Physical Products Concept Test," the presentation given at last week's NARM conference in San Francisco. The study presented seven product concepts to about 1,400 respondents aged 13 and over. NPD argues there is no replacement for the CD -- which it insists still has life -- and alternative physical formats like digital album cards, CDVU and USB drives can find some success in niches.

The content page (slide 5) surprised me a bit. Lyrics are especially important to older consumers while younger consumers said bonus content was most important. Environmentally friendly packaging was the third most important product feature.

The CDVU format (slide 7) tested well with heavy physical buyers (which makes sense) and was the highest format next to the CD. Likely CDVU buyers are willing to pay the price of a CD. According to the survey, at $12 an equal number of respondents said the CDVU was both too expensive and too cheap.

The DFS updatable CD with Internet access to bonus content scored well with 18-24 segment. The MFA enhanced CD with bonus content (slide 13) was liked for the bonus content but was seen as a high-cost option for getting that content. The MVI format (slide 15) scored best with the 13-17 age segment. The digital album card (slide 17) received lukewarm response, had the strongest appeal to heavy digital buyers and was liked for gifting purposes. Interestingly, the digital album card's bonus content received a more positive response than its open format (slide 20).

The USB drive (slide 24) does not appeal to core digital buyers but has a broad appeal (for different reasons) and a higher acceptable price range.

As I wrote yesterday, the CD is not dead. Physical formats are not dead. Just as with digital products, what is needed for new physical products is some tinkering, creativity and persistence. Some respect for the consumer would be nice, too, and I assume that post-Sony BMG root kit that won't be a problem.

• Six banks are reportedly near a deal to finance the private equity acquisition of Clear Channel. (Deal Journal)

• Chicago promoters are facing proposed legislation that could make it more difficult to hold concerts at licensed venues. "The ordinance as it stands requires independent promoters to apply for a license at a cost between $500 and $2,000 every two years, submit to fingerprinting and a criminal background check, secure as much as $300,000 in liability insurance and be at least 21 years old." (Chicago Sun-Times)

• Related: An interview with Chicago alderman Brendan Reilly. "Unfortunately, there are bad apples in this industry as well who are ruining it for those folks with a good business model. I know that law enforcement is in favor of passing an ordinance that will help us better regulate these folks and license them so we can track the bad actors and get them out of the industry." (Time Out Chicago)

• Starbucks' Hear Music is going to release a CD/DVD package for the next John Mellancamp album, Life, Death, Love and Freedom. The DVD will contain the entire album in CODE, a high-quality audio format developed by musician/producer T-Bone Burnett and a group of engineers. (Digital Music News)

• Seen at Billboard.com: An ad for the Zune Pass subscription service with the text, "Hurry, before they make this illegal. Discover unlimited music for the price of one CD a month." If the Zune Pass really is endangered, it's nothing a few more rounds of charity couldn't fix.

• The struggles of France's "three strikes" law. (EFF Deep Links)

Update: EMI has denied The Telegraph's report that it will cut an additional 1,000 jobs. The company said it plans to have 2,700 employees by the end of 2008 and that "the new EMI" will be up and running by the end of June.

The Telegraph just reported that EMI will cut another 1,000 jobs. Those cuts are on top of previously announced plans to cut between 1,500 and 2,000 jobs. About 2,000 jobs -- down from 4,5000 when EMI was purchased -- will remain after the next round of cuts are made.

People familiar with the situation said Mr Hands was looking to cut more jobs at the company because, even after the round of redundancies announced in January, the business will still have more employees generating less revenues than its competitors at Warner Music and Universal.

Insiders speculated that the next job cuts will come in waves throughout the year.

From where I sit, it appears Terra Firma head Guy Hands is content to starve the beast rather than gain strength. For all its talk of improving A&R, which would impact its top line in the coming years, EMI seems to want the same bottom line simply through lower spending. It would have to be a far more efficient operation than currently exists. Cut just enough and EMI should be able to properly develop its artists. Cut too much and it will be undermanned and unable to realize its artists' potential. The wild card is EMI's future organizational structure and creative vision for monetizing its recordings. Just how the company will do more with less is quite a big question mark.

In an article about digital music, Wired editor Nancy Miller proclaimed the CD to be "dead and gone" and advised record labels on how best to sell their products. "At a certain point record companies are going to have to go with what is the cheapest way of distribution, and that's digital," she said.

That's especially funny because the previous paragraphs had quotes from record store owners -- the people that sell CDs -- that pained a different, more realistic picture. For example:

I really wasn't concerned with loss of sales because Radiohead is the kind of band whose fans want the physical album as well," said Lee Wolfson, owner of independent Tampa music shop Vinyl Fever. "I knew we'd sell plenty of the CDs when it became available.

Some people -- maybe not the Wired crowd who live in a digital silo -- still want and purchase CDs. Some consumers still want a physical product, and music companies and retailers are still very much in the business of selling physical product.

No, the CD is not dead. Sales are down, true, and many retailers are shifting floor space to other products. But the CD is far from dead. According to RIAA figures, 511 million CDs (net) were shipped last year.

Journalists are too dazzled by the efficiencies of digital distribution and tend to ignore the diversity of consumer preferences. Music distribution is not one single, cheapest route. Wired blogger Eliot Van Buskirk said as much when Radiohead signed a deal to release the CD version of In Rainbows, the album that originally got a tip-jar release. While the digital release grabbed on the headlines, "there's still a great deal of money to be made by letting unconnected music fans purchase this album," he wrote. (Truth be told, it's not just the unconnected fans who are buying physical formats.) Heck, Van Buskirk has even written about vinyl's resurgence. C'mon, Wired. Now we're up to two physical formats that are obviously not "dead and gone."

Labels, keep on pressing CDs and LPs. Physical products and physical distribution are not going to go extinct any time soon. Retail will continue to be gloomy but there will be outlets to sell your physical product, and there will continue to be distributors to get your product into those stores. The bottom line is nobody should mistake digital adoption for complete physical abandonment.