EMI owner Terra Firma released its annual report today. Click here to download the 115-page PDF (the EMI section of the report starts on page 45) or here for a Reuters article.

EMI's EBITDA was £221 million for the last nine months of 2008. That compares well to the £90 million of EBITDA recorded in the last nine months of 2007. Recorded music gross margin (sales less cost of goods) was £250.4 million, up 30.5% versus last year, and earnings were up £92 million. Recorded music overheads and other costs decreased 13.3% to £216 million .Music publishing revenue was up 0.4% to £307 million.

In a costly admission of both EMI and the economy's outlook, Terra Firma wrote off half its 2.6-billion-Euro investment in EMI. In explaining private equity valuations (page 17), Terra Firma said it is a combination of portfolio financial performance and the application of a multiple or discount rate to comparable listed companies. As the valuation of public companies has declined, said the report, private equity firms' higher amounts of leverage have magnified their declines.

Throughout the report, Terra Firma underlines the value it brings to its firms. Here's a blurb:

Working alongside management, we overhaul the business both strategically and operationally. This often involves introducing new initiatives, processes and procedures in order to change the behaviour and culture of a company. This type of change takes time, but a long-term approach to investment is vital in order to create successful, sustainable businesses.

Cleaning up EMI has certainly improved its current financials. It has a more orderly organizational structure and more sound expenses and oversight. But media companies have problems that go well beyond processes, procedures or management.

As seen in the acquisition activity of Universal Music Group and Warner Music Group, as well as the merger of Front Line and Live Nation, one popular vision of the future music company puts more emphasis on artist services (management, agencies, e-commerce) and less dependence on revenues derived from assets (sound recordings and compositions, although music publishing is universally seen as a safer investment than recorded music). This vision recognizes that even the most well managed media company will have difficulties as technology changes how consumers acquire and enjoy their products.

Terra Firma, on the other hand, has put a great deal of its focus on organizational and structural elements tied to EMI's legacy as a creator, marketer and seller of (hopefully) hit albums. Altering how tasks are carried out will allow EMI to cut 1,500 to 2,000 jobs.

Terra Firma does mention, without detail, a strategy that looks beyond monetizing sound recording and publishing assets. On page 48 it mentions the need to gain "touring, licensing and other revenue streams" (presumably in the context of multi-rights deals, not M&A activity). On page 84, the report outlines some strategic changes being made at EMI. The company's future growth, judging from items highlighted here, are bundled subscriptions plans, mobile, gaming, advertising and sponsorships, and multi-rights artist contracts that peel off ticketing, touring and merchandise revenue.

Companies with less need for operational improvements have been looking beyond recorded music and publishing. Vivendi, parent company of UMG, saw a future in gaming and acquired Activision while UMG acquired Sanctuary. Warner Music Group sees a future in artist services and has moved into management, tour promotion and booking.

EMI's growth segments will be their competitors' growth segments. It will license music to the same stores and services. As the market ebbs and flows, only market share will set apart these companies. Once it achieves its desired operational and organizational efficiencies, then what? Terra Firma has spent time straightening up EMI -- and rightly so -- but has not looked far beyond being a consumer product and licensing company. This new annual report, like the Maltby Report before it, does not give any indication that Terra Firma is seriously looking beyond recorded music and publishing. To properly rebuild EMI, it may need to do just that.

Posted by Glenn at 1:21 PM | Link
|EMI||Earnings Releases|

Vivendi announced its Q4 2008 earnings today (press release and PDF of earnings release). Universal Music Group posts a 0.2% drop in its 2008 revenue and a 7.8% decrease in its Q4 revenue (both in constant currency). Annual revenues for publishing, artist services and merchandise all increased due to acquisitions of BMG Music Publishing and Sanctuary in 2007. Those gains offset a 4.8% drop (in constant currency) in recorded music revenue in 2008.

UMG's 2008 revenue was €4.65 billion and EBITDA was €686 million, a 11.6% increase (in constant currency). Digital grew 31%. The press releases do not indicate what percent of total revenue is digital.

Those are very good numbers for UMG, all things considered. Fiscal 2009 will be more challenging as indicated by the slump in Q4 revenue. UMG's Q3 earnings did not take such a hit from the global economic turmoil. Q3 revenue increased 1.1% at constant currency, and the company's revenue through the first nine months of 2008 was up 3.5% at constant currency.

But UMG has set itself up for a good performance by keeping costs in check and integrating recently acquired assets. Those additions give it broader reach into not just publishing, which is more stable than recorded music, but also artist services (management) and merchandise. How those new facets to the 360-degrees model are integrated into the company will ultimately be the measure of UMG's diversification strategy.

Posted by Glenn at 7:15 AM | Link
|Earnings Releases||Universal Music Group|

RealNetworks announced Q4 2008 and full-year earnings last week (read SEC filing). Taking into account digital trends, RealNetworks' music gains are fairly disappointing. The company's music revenue increased 8% for the entire year and 8.2% in Q4. Those gains are well behind the increase in U.S. digital download revenue (about 30% in 2008) and the high adoption rates of free, ad-supported services for both PC and iPhone.

In 2008, RealNetworks launched an MP3 download store with a multi-million advertising campaign (from this press release, $50 million over a year and $15 million in Q3 alone). In addition, it has a partnership with Verizon Wireless that effectively gives it a nationwide sales force -- Verizon customers are now able to sign up for Rhapsody at Verizon retail locations and the Verizon Wireless web site.

Yet with all the new developments, RealNetworks is missing out on much of the the digital music boom. iTunes' growth most likely mirrors the 30% growth in digital downloads. Amazon.com has grabbed MP3 market share -- although it is taking a loss on many of those bargain album sales. New services are capturing the attention and affection of the media and marketplace. In comparison, Rhapsody is stuck in the mud.

The earnings release says music revenue increased 8% in 2008. Where is RealNetworks' revenue growth coming from? Based on the numbers provided in the earnings release, almost half of the growth has come from the Rhapsody subscription service and the rest is from digital downloads.

The company said it added 175,000 Rhapsody subscribers from Q4 2007 to Q4 2008. In Q3, 150,000 new subscribers were added. In Q4, another 25,000 subscribers were gained. If we assume those subscribers were obtained at an even rate over those six months (a mid-point method of estimation) and each paid $15 per month, that's an increase in Rhapsody revenue of $5.34 million for all of 2008.

RealNetworks' music revenue increased about $12.9 million in 2008. If you take out a $5.34 million increase in Rhapsody revenue, you're left with $7.5 million that is accounted for by MP3 store sales and Verizon over-the-air downloads. It's not a terrible number, but it shows what little success Rhapsody has had in selling more digital downloads. And that's a problem. Part of the company's music strategy is to lure MP3 buyers to its higher-margin subscription service. Few new MP3 buyers means few potential subscription customers.

The company just started disclosing the number of subscribers it has had going back to Q1 2007. The problem here is that its declared number of subscribers looks fishy. If we trust their numbers, we are to believe Rhapsody stayed flat at 600,000 subscribers from Q1 2007 through Q2 2008 and then jumped by 25% after its deals with Verizon and MTV Networks started. Those partnerships started in May 2008, which is in Q2 2008, but subscribers didn't jump to 750,000 until Q3 2008. Not only is the timing of the subscriber increase odd, six straight quarters level at 600,000 subscribers is really odd. Since RealNetworks' music revenue has steadily increased over time, I think it's safe to assume the number of Rhapsody subscribers has increased over time as well. A jump in Q3 is understandable given the Verizon partnership, but six straight quarters stuck at 600,000 subscribers is not believable.

Given all of the above, it's difficult to properly assess RealNetworks' performance in digital music over the last two years. We know revenue growth is lower than the overall growth in digital music spending. We could safely guess that Rhapsody's MP3 store isn't gaining much traction. Beyond those items, there's a lot of guessing going on.

Posted by Glenn at 11:27 AM | Link
|Earnings Releases||RealNetworks||Rhapsody|

Warner Music Group eked out a slight profit in Q1 ending 12/31/08 even though revenue dropped by 11% and operating income fell 34%.

It wasn't improved cost management that allowed WMG to eke out a slight profit of $23 million on revenue of $878 million. Cost of sales was flat at 51.5% of revenue, and SG&A was basically flat at 33.6% of revenue (versus 33.5% of revenue last year).

Selling its stake in Front Line Management was the difference between last year's net loss of $16 million on the recent gain of $24 million was non-operational. The $36-million gain from the sale of WMG's share of Front Line Management (sold to Live Nation) and a $9-million gain on foreign currency transaction (the result of the settlement of a short-term foreign-denominated loan relating to its sale of Front Line equity) were the difference between the red and the black.

Digital revenue was $171 million (19% of total Q1 revenue). That was up 2% sequentially from $167 million in the Q4 2008 and up 20% from $142 million from Q1 2008.

The success of Josh Groban in the 2007 holiday season took much of the blame for WMG's 18.8% drop in U.S. revenue. International revenue declined 4.9% but improved 5.1% on a constant-currency basis.

Recorded music: Revenue dropped 11.9% (7.4% on a constant-currency basis) to $749 million. Digital music accounted for 20.8% of global recorded music revenue and 31.4% of U.S. recorded music revenue.

Publishing: Revenue dropped 6.9% (increased .8% on a constant-currency basis) to $134 million. Mechanical revenue dropped 16.4%, synchronization revenue increased 10%, performance revenue rose 4.3% and digital revenue jumped 66.7%.

Below are notes I took from the Q&A part of the earnings call.

• On debt covenants: "We can and will meet our covenants."
• Josh Grobin was responsible for the big Q4 year-over-year drop in operating margin
• Outside consultants reviewed A&R spending, and it was concluded they are "very strong" and "probably the strongest in the industry." A&R spending has been constant for two or three years and will remain constant in 2009. They found a formula for strong A&R returns.
• Mobile deals in the U.S. Introduction of OTA downloads will show a "significant increase" in consumers accessing downloads in that manner. Apple iPhone OTA agreement will be the first impetus for mobile growth in the U.S>
• Music industry will "unquestionably become a growth industry," but there are questions about when that will happen and from what base. Multi-rights deals will impact that change, mobile will impact that change.
• Bronfman believes digital business will lead to higher margins -- even for mobile and digital subscriptions.
• On physical retail: WMG had limited exposure to Circuit City and other troubled retailers through inventory management.
• Live Nation-Ticketmaster impact: No comment on rumors.
• Are there pieces of the music business that would be required to offer artists a more meaningful package? Bronfman does not believe WMG needs additional infrastructure to do so. WMG will either involve itself in revenue streams or simply share in those streams. Would rather stick with a variable-cost structure than take on additional pieces to a 360-degree service.
• Almost all senior executives had been recently signed, so Bronfman does not expect losses in management team.
• No shift between new releases and catalog due to reductions in shelf space. Drops in floor space has impact WMG's business "very little" and mainly the slow-moving titles.
• There will be competition for Apple. Apple continues to grow WMG's business. As long as Apple innovates and allows WMG to innovate, WMG sounds content with iTunes' market dominance.
• Cash balance is stronger, no great desire to buy back bonds.
• Performance royalties legislation introduced yesterday: Bronfman mentioned the countries that do not pay sound recording owners (China, Iran, Rwanda, etc). Not much of a comment about the income impact.
• WMG comment on a possible no-returns policy at retail: Not much of a comment.
• Market share gains in recorded music in historical context: WMG's historic market share high is about the same as where it is now. In the past, there were six majors and many stronger indies. Bronfman believes WMG will be able to gain more U.S. market share.
• What role WMG plays in convergence of landscape and multi-rights deals in light of disbursement of Front Line: "We are more in the venture capital business. We are not so much in the business of renewing or partnering with artists when they are at a mature level in their careers." WMG believes the highest-margin opportunity is to partner with artists early in their career. The infrastructure of other companies are focused more on mature artists.
• Impact of iTunes' three-tier pricing: Dropping DRM has not changed piracy activity. It's too early to predict what will happen with variable pricing or predict what songs will end up at what price points and for how long. WMG is hopeful for a better consumer experience and an improved position for the entire industry.

Posted by Glenn at 9:03 AM | Link
|Earnings Releases||Warner Music Group|

Rafat Ali at paidContent has a good overview of RealNetworks' pre-earnings release. Notable is "a decline in the assumed valuation of the Rhapsody America venture" and a non-cash charge of $185 million to $200 million related to impairment in goodwill and acquired intangible assets (a few mobile acquisitions that aren't panning out). For you accounting geeks, the gain on sale of interest in Rhapsody America will be booked to shareholders' equity rather than as revenue on the income statement.

My thoughts on the access-and-hardware strategy are here. Rhapsody does not limit hardware to the extent of Zune, but its music service does not allow for total freedom in choosing your hardware. And that's a problem. (Price is a problem, too.)

Posted by Glenn at 7:32 AM | Link
|Earnings Releases||Rhapsody|

Sony Corp. profits were thin in Q3 2008 ending December 31, 2008. Sony Music Entertainment did not fare so well. On a pro forma basis -- necessary because Sony took over BMG in October 2008 -- sales were down 22% on a U.S. dollar basis. Operating income rose 10% to $158 million but was 41% lower on a pro forma basis. Deterioration of the yen was a considerable factor in Q3.

The company as a whole saw its Q3 profit decline 95% while it sales sank nearly 25%. Change will be in the air, along with the sort of survival instincts that arise during a tough recession.

Here the 24-page earnings release (PDF, 3.8 MB) if you've got the time and inclination.

Posted by Glenn at 11:57 AM | Link
|Earnings Releases||Sony|

Here are some notes from the Q&A portion of yesterday's WMG earnings call. Two things stodd out. First, WMG said weakness in sales has not been due to reductions in floor space. Second, CEO Edgar Bronfman was almost as cautious as Vivendi's CFO was last week in answering analyst questions about mobile growth. (Updated: Here's the transcript of the earnings call at Seeking Alpha.)

Overall economy and decline in CD sales: The weakness seen is not due to reduction in floor space but to lower traffic on the floor. WMG is happy with product it has in the marketplace and has met its ship goals for its releases. There will be opportunities for further cost reductions if it sees weaker sales. (Coolfer note: Get ready for a miserable holiday season. The wild card is how many iTunes gift cards will be gifted and what share of purchases a music company can get from them. WMG may lag because of its relatively weak release schedule through March 2009.)

Music publishing: A mix of growing businesses (performing, sync) and declining (mechanical). Mechanicals represent about 40% of revenue. WMG releases represent about 15% of Warner/Chappell releases.

Windowing strategy: Continued success across the board with bundling strategies, not just in one genre.

Retail: WMG is very confident about Wal-Mart's creditworthiness but continue to deal with challenges of creditworthiness of some smaller retailers. Has not taken any big losses and does not expect it will. Post-holiday returns are not expected to be a problem due to proactive inventory management and not over-shipping. (Coolfer note: He didn't come out and say it, but I get the feeling some retailers may be on restrictive shipping and/or credit terms due to late payments. That's a standard way to get product into stores while minimizing exposure.)

Variable pricing: iTunes has "continued to be a strong partner" with bundling, but no comment on variable pricing at iTunes. Bronfman believes it is appropriate for digital content, that not all songs are worth the same amount, that record companies should have the right to experiment with pricing. Long term, Bronfman hopes there will be more variable pricing in the industry.

Mobile: Growth of improved handset devices will bring increased consumption (both download sales and subscription revenues). Sales through iPhones is sometimes 10x or 20x higher than sales through other handsets. Bronfman called Comes With Music-type plans a "very attractive consumer offer" that device manufacturers should like as well.

Posted by Glenn at 11:32 AM | Link
|Earnings Releases||Warner Music Group|

Warner Music Group's Q4 and fiscal 2008 results show a company doing its best to move forward until its strategy pays off. For the most part, the story line hasn't changed: recorded music down and tenuous, publishing up and healthy, digital improved but growth slowing. Shares of WMG were up as much as 22.5% (to $3.43) before plunging into negative territory then rising to close up 4.3% (at $2.92)

For Q4, revenue dipped 1.5% to $854 million, operating income from continuing operations dropped 20% and net income rose one tick to $6 million. For the year, revenue was up 3% and net loss more than doubled to $56 million.

For the fiscal year, digital revenue rose 38.6% year to $639 million -- with a 65% domestic to 35% international split. Digital now accounts for 18% of total revenue. In the recorded music division, digital revenue grew 38% to $599 million and represented 20.7% of recorded music revenue (28.1% in the U.S.). During the fourth quarter ending September 30, 2008, recorded music digital revenues increased 25.8% to $99 million while total digital revenues rose 28% versus 2007 and were flat sequentially.

Unlike EMI, WMG has not undergone radical internal or structural changes. There has been a relatively drama-free attitude there. The company has patiently cut costs, pushed digital initiatives, acquired companies, invested in start-ups and restrained itself from overpaying to keep some aged superstars.

All good moves if they work out, but at the end of the day WMG is still moving backwards. Expenses were up across the board -- selling & marketing, general & administrative, A&R, distribution. There may be some light at the end of the tunnel. For the year, digital recorded music gains (up 38%) made up for physical recorded music losses (down 5.4%), and licensing had a small bump upward. The caveat is that Q4's physical recorded music loss (down 9.7%) was greater than digital recorded music's gain (up 25.8%). The holiday season is not shaping up well for the CD format, and WMG admits its holiday release schedule is not exceptionally strong. Next quarter's physical drop could be large.

Aside from market forces, WMG has financial issues arising next year. Today, a Citi analyst lowered the target price on WMG to $1 because of a belief the company risks violating debt covenants in December.

The 10-Q filed with the SEC is here.

Posted by Glenn at 5:56 PM | Link
|Earnings Releases||Warner Music Group|

Vivendi released its operating results for the first half of 2008 on Monday. Universal Music Group's EBITDA increased 17.7% to €259 million. Revenue for that period was €2,044 million, a 2.4% decrease.

Such a margin is far ahead of that of Warner Music Group (6% operating margin in its most recent quarter) and Sony BMG (-1% operating margin for its most recent quarter). Terra Firma does not release specifics on EMI's financial performance, but we can assume overhauling a struggling company takes more than a few years.

So why is UMG doing so well relative to the other majors? It has increased its market share, it acquired BMG Publishing and Sanctuary, and it regularly tops the charts in numerous countries. Rather than sit on its catalog, as EMI has hinted it may do, UMG aggressively goes after new acts. And the latter half of the year will see a strong release schedule, according to the release: The Killers, Fall Out Boy, Bon Jovi, Black Eyed Peas, Pussycat Dolls and Ne-Yo, among others.

There are, however, some underlying issues. UMG's revenue has been more or less flat in spite of continued acquisitions. Digital growth is tapering off, as it is at other music groups. Physical formats are under pressure and no new revenue stream -- not mobile, not ad-supported services -- is offering a clear path to revenue growth. Like everybody else, UMG is swimming against a current and trying to keep from going backwards. There is no silver bullet that will recapture lost revenues, but UMG is doing a very good job at muscling out one success at a time.

Posted by Glenn at 12:42 PM | Link
|Earnings Releases||Universal Music Group|

The nuts and bolts of Warner Music Group's Q3 2008 earnings release are below.

The conference call (notes below) was as informative as any I can recall hearing -- that's what Live Nation and yesterday's Sony BMG deal will do to analyst inquisitiveness. We got comments on the Nokia deal ("The economics are extremely favorable to us"), Amazon.com's MP3 store (Amazon.com is "attacking a different customer base," sales are "incremental"), video games (Bronfman called the per-song licensing fees "paltry") and the state of wholesale prices (WMG does not believe lower prices drive increased consumer demand). For additional notes, go to Alley Insider's notes on the call.

About the best a music company can do right now is have some positive developments while holding losses to a minimum. WMG did just that. While net loss for the quarter improved to $9 million, operating incomes were up, net cash improved (M&A activity was down) and WMG showed strong digital gains. Recorded music digital revenue grew at 39.3%. That is better than the market will do this year, an increase I project will be about 30% over 2007 digital revenues. That's great for WMG's bottom line as digital margins are improving.

• Net loss improved 47% to $9 million
• Revenues increased 5% to $848 million (declined 1% on a constant-currency basis).
• Recorded music revenue increased 5.1% to $686 million.
• Recorded music digital revenue of $156 million grew 39.3% and represented 22.7% of total recorded music revenue.
• Publishing revenue in the quarter increased 7.0% to $168 million. Mechanical revenue dropped 14.3%.
• Operating income from continuing operations improved 7% to $116 million.
• Publishing operating income held steady at $33 million.
• Free cash flow increased to $93 million from 57 million.
• Unlevered (before debt) after-tax cash flow improved to $140 million from $105 million.

Notes from the Q&A:

Performance royalties: This will be an issue under the next Congress.

Catalog business: "Continued to perform well." Has not been a dramatic change between mix of new release and catalog, either in physical or digital. Retailers are showing "greater thoughtfulness" in managing inventory. The titles that actually sell will have higher velocity.

Music video games: Bronfman says there is "enormous opportunity." But recorded music and publishing should not allow for an ecosystem to occur "where we are not properly compensated." Referred to early deal with MTV in which labels were not paid for plays of promotional videos. That's the state industry is in with Activision and Harmonix. "The amount being paid to the music industry, even though their games are entirely dependent on the content we own and control, is far too small." The industry needs to participate in more of a partnership kind of way. If that does not become the case, WMG will not license to those games. Bronfman called the per-song licensing fee "paltry" and "far below what their true value is."

A&R: The analyst referred to EMI cutting A&R "to the bone" and wanted to know if WMG was reducing spending on A&R (he misheard an earlier comment about reduced M&A). CFO Michael Fleischer said WMG is "extremely bullish" about the process and the people they have in place.

Nokia deal: "The economics, I think, are extremely favorable to us and to the industry generally." The potential is quite large given the number of handsets Nokia sells. Music will be "available on the device as they are purchased" (not sure if that's going to be the case, but what Bronfman said implies a pre-loaded device). "Significant margins." Will have to wait for a year or two to see if the promise proves itself.

Valuation: Sony BMG was a private transaction. Nobody outside of the company knows the value of what was paid or received. From WMG's knowledge of the transaction, the analysis done and the resulting multiples are "well below" the actual multiples paid and if they were correct they ague for an improved valuation of WMG. (Translation: We don't agree with analysts who say Sony's acquisition price has negative implications on our value.)

Amazon.com: It's early, but it's encouraging. It appears Amazon.com is "attacking a different customer base," sales are "incremental" and skew more toward the album than does iTunes.

Margin growth in recorded music: International had better performance, digital business continues to grow and it is more profitable on a dollar basis, and the company has strong cost management.

Roadrunner and Sinatra: Loss of Nickelback has no effect on the investment. And Warner Chappel has the band's songs. The company has a high hurdle rate because two-thirds of the company is owned by private equity, and both deals are going to pass their hurdle rates.

Cash on balance sheet: WMG has a capital structure in which cash accrues to its equity holders, unless it sees an opportunity to increase equity value. Reducing net debt will be a strong focus for the "foreseeable future."

Word on the street: Music industry has not been as reactive to changes in economic environment as other industries, and WMG feels digital will support that trend.

Non-traditional deals: Short term or long-term phenomenon? What does it mean to developing new artists? Bronfman thinks artists have become too expensive. "We don't pay retail" and he sees no reason to change that model. Likened its model to a VC that makes a cheaper deal in a band's early stage. When it comes time to renew, it will pass if the economic burden is too great. (Translation: We would not have received an adequate return on investment had we re-signed Madonna and Nickelback.)

Retail health: The weak music-only players were pushed out of the business long ago. Creditworthiness of existing retailers is good. No collection issues, no credit issues that would limit retailers' ability to buy.

Upcoming releases: Had Josh Groban last year and did really well in last two quarters. "Very strong" release schedule in 2009. Still in the process of budgeting, so it can't break out what is coming out when. "Feel good" about its release schedule.

Pricing: Wholesale pricing is under constant pressure and WMG "continue to hold the line." Do not believe lower prices drive increased consumer demand. As digital grows, retailers should see a "marginally lower" wholesale price along with higher profitability and downward pressure on revenue. (Translation: We're doing what we can with some retailers' demands for huge cuts in wholesale CD prices.)

Posted by Glenn at 9:05 AM | Link
|Earnings Releases||Warner Music Group|

Universal Music Group parent company Vivendi released its Q2 results today. (PDF of earnings release) First half revenues of €2,044 million were 4.9% improvement at constant currency and a 2.4% decline in actual currency. Digital revenues were up 33%, the same year-over-year improvement achieved in Q1. The company claimed growth in music publishing, merchandising and license income but offered no supporting numbers.

Q2 revenues were €1,011 million, a 3% gain at constant currency and a 5.3% decline in actual currency.

Not great but not bad all things considered. Revenue is only part of the story. Improved digital margins may be helping the overall but we weren't given any information. Unlike most Vivendi earnings releases, this one was void of anything but gross revenue numbers. No EBITA or operating profit numbers were given for any of its divisions.

Posted by Glenn at 11:14 PM | Link
|Earnings Releases||Universal Music Group|

The CD format showed to be of waning importance for Borders as the company issued a press release for its Q1 2008 results. Music sales dropped 25.8% versus the previous year. The company attributed the decline to negative sales trends as well as a planned reduction of inventories. No data was given for same-store results in the music category. The filing does indicate there were no closings of Borders stores during the quarter (14 Waldenbooks stores were closed during the period), so it is likely same-store sales represent all or nearly all of the 25.8% drop in music sales.

Borders' same-store music sales dropped 13.1% in Q3 2007, 14.2% for fiscal 2007 and 15.1% in fiscal 2006.

The company is attempting to reshape its digital footprint, though I'd bet music companies are not likely to feel much difference. Yesterday Borders announced it has stopped outsourcing its online store to Amazon.com and re-opening its own online storefront. In addition, Borders is testing concept stores that will have digital centers where customers can download music and books, research family histories and print photos.

Posted by Glenn at 9:13 PM | Link
|Brick-And-Mortor Retail||Earnings Releases|

Trans World, which operates f.y.e., Suncoast and other retail chains, posted a $11.8 million first quarter loss. Total sales dropped 19% to $233 million and same-store revenue dropped 6%. Same-store music sales dropped 23% on a comp basis while sales from the top 50 titles dropped 30% on a comp basis. CD sales accounted for 37% of revenue, down from 44% the year before.

During the conference call, president and COO Jim Litwak said the company is committed to improving its music market share. CFO John Sullivan said stores have reduced by 10% the square footage of CDs and they see an opportunity in "secondary and tertiary genres."

The company has been searching for success with in-store digital kiosks. It will soon test a music download service at stores in Albany, NY and the Mall of America in Bloomington, MN. The service, which has yet to have tracks from all four major music groups, will reportedly download music to iPods and other portable music players. Although the article does not mention formats, the implication is the service will offer MP3 files.

Trans World has tried to get its Mix & Burn kiosks off the ground for a number of years but has appeared to have little to no success. A year ago the company said the kiosks were showing "promising, but still inconclusive results." Monday's article in the Albany Business Review says the Mix & Burn kiosk at the Albany store "was shrunk and moved to a corner as part of a recent downsizing of the store."

Go here for the 8-K filing with a transcription of the conference call.

Posted by Glenn at 12:45 PM | Link
|Brick-And-Mortor Retail||Earnings Releases|

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.

Posted by Glenn at 7:48 PM | Link
|Earnings Releases||Universal Music Group|

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.

Posted by Glenn at 4:42 PM | Link
|Earnings Releases||Sony BMG|

Entertainment retailer Hastings reported improved Q4 earnings and slightly lower revenue for fiscal 2007. (Read 10-K filing.) Comp-store music revenue was down 15.3% in fiscal 2007 (compared to a 9.3% decline in fiscal 2006 and 2.9% decline is fiscal 2005). In fact, music was the only one of the top eight product categories to decline in fiscal 2007.

The bad news for labels is that falling CD sales will result in fewer titles being stocked -- a painful double whammy -- that will result in even lower CD sales. For fiscal 2008, the company has budgeted $5.3 million to reformat 35 stores to reduce the retail space dedicated to music by 15-20%.

Posted by Glenn at 6:11 AM | Link
|Brick-And-Mortor Retail||Earnings Releases|

Bertelsmann reported its 2007 earnings yesterday. For the year, BMG revenues declined by 27.8% to €1.5 billion and operating EBITA (basically operating profit) dropped 46% to €93 million. Physical revenues dropped 17% while digital increased 40%. Digital accounted for 17% of BMG's revenue (up from 12% in 2006). BMG's revenue from Germany dropped 19.2% to €130 million.

The earnings release and annual report emphasize the emergence of 360 deals (called "partnerships" and "partnerships" in the annual report) BMG signed during the year, as well as the company's expansion into artist management, concert promotion and merchandising. Those new facets certainly added some revenues during the year. The company lost a good deal of revenue in 2007 when it sold its publishing division to Universal Music Group.

The annual report laid out BMG's revenue, operating EBIT and number of employees for the last five years. Revenues, from 2003 to 2007, were €2.712 billion, €2.547 billion, €2.128 billion, 2.017 billion and €1.456 billion. Operating EBIT for those years was €54 million, €162 million, €177 million, €173 million and €93 million. Number of Sony BMG employees (total for the joint venture) from 2003 through 2007 was 4880, 4259, 3597, 3009 and 2851.

Put another way, BMG's revenue has dropped 46.3% over the last five years and at a cumulative annual rate of 11.7%. The number of Sony BMG employees has dropped 41.6% over the last five years and at a cumulative annual rate of 10.2%.

And there is continued talk about Bertelsmann's possible sale of BMG. From the Times Online: "Thomas Rabe, chief financial officer, said: 'What we will do depends on price. Of course, the EMI price is a good price for a seller, but we would not be interested in selling if we were offered a figure based on the current valuation of Warner Music. The market is undervaluing music assets.'"

Since Bertelsmann has been looking for somebody to take its half of the joint venture, one would expect Rabe to insist the market has undervalued music assets.

Helpful links:

• 2007 Annual Report (8.1MB PDF)
• Investor Conference Call Presentation (PDF)

Posted by Glenn at 2:49 PM | Link
|Earnings Releases||Sony BMG|

The old way of selling CDs looks to be dying faster than overall CD sales. Trans World's fourth quarter revenue dropped a whopping 23% and 2007 sales revenue dropped 14% (read press release and 8-K, which has a transcript of the conference call). Net loss for fiscal 2007 was $99.4 million. Comp store sales dropped 8% on the year.

In the conference call, President and COO Jim Litwak said Trans World's comp store music sales dropped 28% in Q4, the top 50 titles 35% in Q4 and the top 50 video titles were down 12%. For the year, comp store music sales dropped 23%.

Store closings and one less week in Q4 definitely affected sales, and the company admitted that its "transition to a full entertainment retailer is taking longer than expected."

Posted by Glenn at 11:50 PM | Link
|Brick-And-Mortor Retail||Earnings Releases|

Vivendi announced its 2007 earnings last week (download PDF of earnings release). Yeah, I'm a bit late on this one. EBITA dropped 16.1% (12.9% at constant currency). Digital sales increased 51% (at constant currency).

These slight revenue drops are par for today's course, but they don't tell the entire story. It's important to keep in mind that UMG and the other majors are acquiring quite a bit of revenue. It's one thing to grow revenue organically and another to buy revenue. The only organic growth, digital, isn't enough to offset losses related to CD sales. Music companies have always been active acquirers, though, so there's no reason to look for any red flags that aren't already visible -- M&A happens in both good and bad years.

UMG's 2007 revenue most likely includes partial-year revenue from two main acquisitions, BMG's music publishing (bid in late 2006, got E.U. approval in May 2007, had 2006 revenues of €362 million but divested some publishing assets to gain E.U. approval) and Sanctuary Music Group (acquired in July 2007 and good for about £150 million in annual revenue). In 2008, UMG will add to its top line the revenues of Univision's recorded music and publishing divisions.

Posted by Glenn at 2:24 PM | Link
|Earnings Releases||Universal Music Group|

Warner Music Group reported its Q1 earnings today. Revenues were up 7% year over year, but operating income was down 45% and EPS was -$0.11.

What is one to think about these most recent earnings? It depends. You could view it as a solid performance in the industry's most difficult stretch in almost 30 years. Recorded music and publishing revenues were both up. Compared to its peer group, WMG is doing just fine ("given industry doldrums this is pretty good," said Silicon Alley Insider of recorded music revenue) and some like to assess performance relative to a company's competitors. On the other hand, you could look at the lower operating income, the negative cash flow and general gloomy industry outlook and have a different opinion. WMG, like the other majors, requires a lot of patience right now. "Today’s recorded music business is challenged and it may take some time before it returns to growth," said CFO Michael Fleisher.

The market was not very optimistic. Investors probably felt last week's run up, caused by a Merrill Lynch "buy" rating, was too much. (Update: Or, as one knowledgeable reader said, information could have leaked that ran up the price.) The stock dropped 19% to $7.06 this morning and now sits at $7.16. (around where it was five days ago).

Silicon Alley Insider and paidContent have very good recaps of the conference call (with tornado sirens going off until 2:30am this morning, I opted to sleep in).

The company declared a normal dividend of $0.13 per share. Pali Research's Richard Greenfield had warned that a dividend cut was likely.

Final note: Contrary to my opinions expressed here, WMG does not think the 2008 release schedule will be any better or worse than that of 2007. Hard to believe, but it may be true.

(Full disclosure: I was employed by WMG last summer)

Posted by Glenn at 11:35 AM | Link
|Earnings Releases||Warner Music Group|

Sony Corp released its Q3 earnings today (download PDF of full release here). Sony BMG's Q3 sales were flat at $1.47 billion and net income dropped 12% to $208 million from $236 million last year. That figure includes income from a legal settlement and $13 million of restructuring charges.

Posted by Glenn at 8:22 AM | Link
|Earnings Releases||Sony BMG|

Vivendi, parent company of Universal Music Group, released its earnings for fiscal 2007 today. (Download PDF of full press release here.)

UMG's revenues dipped 1.7% to €4.87 billion for the year and dropped 3.1% to €1.6 billion in Q4. Excluding revenue from acquisitions (BMG Music Publishing and Sanctuary) revenues were down 7.2% for the year 10.2% in Q4.

For the year, digital sales rose 51% to €676 million and represent 14% of total revenues. For Q4, digital sales rose 54% (at constant currency).

Nutshell: UMG increased its market share in a shrinking market and revenue was helped by acquisitions. The outlook for '08 is gloomy, but there a couple encouraging things that make the continued fall of the CD a slight bit less grim. One is the speed with which the company is now changing -- or at the very least trying to change -- adapt to current realities. The other is 2007's release schedule, which was pretty miserable. It would be hard for all labels to collectively put out fewer big name albums than they did last year...although it's not totally out of the question (especially if EMI vigorously prunes its label rosters).

Posted by Glenn at 6:42 PM | Link
|Earnings Releases||Universal Music Group|

Warner Music Group released its Q4 and annual earnings yesterday (read 10-K, read 8-K) beating estimates by $0.01 per share while showing mixed results. Q4 revenues increased 2%, publishing revenues increased 7 percent to $137 million and digital music sales increased 9% sequentially and 25% year-over-year.

Annual revenues dropped 4% to $3.385 million, recorded music revenue dropped 6%, digital revenue increased 30%, publishing rose 6%, U.S. revenue dropped 2% and international revenue dropped 4%.

Since cash is king, let's take a look at what happened to cash during the year. During Q4, cash decreased by $63 million. During the year, cash decreased $267 million, due greatly to acquisitions. (Ending cash and cash equivalents balance was $288 million.)

The stock rose 8.1% to $7.73 yesterday. That's higher than the $7.50 target set by Pali Research's Richard Greenfield four weeks ago. With a current share price of $7.38, it looks like the market has judged his most recent target of $5 to be too pessimistic.

As points of comparison, Universal Music Group's Q2 revenues were down 0.8% and first half revenues were down 4.9%. In its last earnings release as a public company, EMI reported a £263.3 million loss and a decrease in revenues of 15.8%.

Others on WMG's earnings:

• Silicon Alley Insider: "Warner Music doesn't formally offer guidance to Wall Street. But read between the lines from its just-concluded Q4 earnings call and it's pretty clear that WMG is going to have a lousy 2008." I haven't heard the conference call replay yet (the link isn't working) so I can't speak for Peter Kafka's interpretation. I will say that during this transitional period, and given competitors' performance, I wouldn't use the word "lousy" to describe a modest or slight profit.
• New York Post: " Warner CEO Edgar Bronfman Jr. said in a call with analysts that both the company and industry remain in transition, with digital remaining a sticking point. 'Digital growth, and particularly mobile, have been on a slower trajectory than initial expectations,' he said. That is putting increasing pressure on the company to find alternative sources of revenue."

Posted by Glenn at 3:27 PM | Link
|Earnings Releases||Warner Music Group|

• Roadrunner Records and music exec Tom Lipsky, formerly the CEO and president of Sanctuary Music Group's North American operations, have formed a joint venture that will release music by classic rock artists. Almost three-quarters of Roadrunner Music Group, the parent company of Roadrunner Records, was purchased by Warner Music Group in January 2007. (Billboard.biz)

• Last week Borders released its Q3 2007 earnings. Same store music sales were down 13.1% over Q3 2006. That's a big drop but not as bad as Trans World's Q3 music sales decrease (21%), and not as bad as the overall CD (about 20%) and album decrease (about 14%) in 2007. (Borders Earnings Release)

• Ben Sisario has an article on the growing number of Western acts performing in China. It's a well-rounded look at an emerging market that may offer clues of the future of the music business (the ubiquity of corporate sponsorships, for example, and labels' acceptance of piracy). (New York Times)

• A profile of Koch Distribution. (Newsday)

• The Winnipeg Sun started a four-part series on the changing music industry. The first installment looks at CD sales in Canada. CD sales dropped 19% from January to August of this year. The cause of that decline is definitely up for debate, and the article examines a few possibilities: piracy, the "today's music is no good" explanation and a consumer backlash against "overpriced" CDs. To no surprise, the article didn't even mention 2007's extremely thin release schedule. Whether compromised of future classics or pop fluff, a busy release schedule would have helped sales this year. (Winnipeg Sun)

• Although there is much debate over file-sharing's impact on sales in Canada, the Canadian Recording Industry Association is not happy with the country's digital laws and wants new laws to encourage investment and improve consumer education. (London Free Press)

• A profile of legendary music exec Frank Dileo, who moved to Music Row in January 2007 and is now starting a management company and plans to launch a publishing company. (Nashville Scene)

Posted by Glenn at 9:28 AM | Link
|Brick-And-Mortor Retail||Earnings Releases||Warner Music Group|

Entertainment retailer Trans World posted a net loss of $14.3 million in the third quarter of 2007. Revenues dropped 12% to $260.6 million from $297.7 million last year. The company operated 13% fewer stores during the quarter, and same store sales were down 4% year over year.

Said Robert Higgins, chairman and CEO, in the press release, "We continued to achieve positive comparable store sales in home video, video games, electronics and boutique during the third quarter, however, these results did not offset the decline in music."

During the conference call (read transcript), president and COO Jim Litwak revealed that same store music sales had declined by 21% (same as the Q1 decline, see below) and that music had comprised 40% of total revenues for the quarter (versus 48% last year). Video game sales increased 29% on a comp basis while home video increased 8%.

Trans World's problems mirror those of the music industry, to which it has tied a great deal of its fortunes over the years. As record labels try to offset the slide of the CD with other revenues, Trans World is shifting its focus to other products and away from the CD. The company's transformation is painful, but at least there are other physical formats to replace the CD.

Earlier this month came news that Trans World had received a buyout offer from its CEO, the company's largest shareholder. The $5 per share offer represented a 29% premium over the price at the time. Trans World closed today at $5.19. Said Sherwood Investments' Julian M. Benscher of that offer, "We are highly confident that an auction of the company would result in a sale in excess of $8 per share." Sherwood owns about 4.3% of Trans World's shares. The market obviously has its doubts that a bid of $8 per share is forthcoming. Some may want to take a lower amount and run. The proper restructuring of Trans World will be a process better suited for the long-term outlook and intestinal fortitude of private ownership.

Previously: Trans World's Q1 2007 earnings was a $9.1 million loss. "Music sales were down 21% on a comp basis, and the company's top 50 experienced a 32% drop on a comp basis. Music represents 44% of sales, down from 52% last year."

Posted by Glenn at 4:55 PM | Link
|Brick-And-Mortor Retail||Earnings Releases|

Bertelsmann, the parent company of one half half of the Sony BMG joint venture, reported its financial results for the first nine months of its fiscal year. Both revenues and profits were down. Revenue dropped 2% to €13.27 billion while profits dropped 65% to €132 billion. Profits sank so sharply because fiscal 2007 includes a large special expense related to the company's Napster settlement. (The company settled with Warner Music Group and EMI this year, and with Universal Music Group last year). Operating EBIT was actually up almost 5% to €1.03 billion. Bertelsmann sold its BMG music publishing division to Universal last year.

From Bertelsmann's 2006 earnings report: BMG posted revenues of € 2.0 billion (down 5.2% from € 2.1 billion in 2005) and operating earnings (before interest and taxes) of € 173 million (down 2.3% from € 177 million in 2005). The company said the music division's lower 2006 performance "is attributed solely to the recorded music business." But there was (slight) good news as BMG "was able to raise the revenue contribution from digital formats from seven to twelve percent."

Posted by Glenn at 2:30 PM | Link
|Earnings Releases||Sony BMG|

Circuit City's recently filed quarterly report says the national retailer's "comparable store sales of video software and music software declined by double digits." The earnings release, for the quarter ending August 31, 2007, shows a net loss of $62.8 million on revenues of $2.644 billion.

Guitar Center's Ex. 99.1 filing yesterday reported news that the company's merger with Bain Capital Partners, LLC was approved at a special meeting of its stockholders earlier this week. Stockholders will receive $63 cash for each share of common stock held at the merger date. Guitar Center had net sales of $519 million and net income of net income of $9.6 million last quarter.

Posted by Glenn at 1:34 PM | Link
|Earnings Releases|

• Due in part to amounts paid related to Napster lawsuits, Bertelsmann reported a net loss of €50.9 million ($69 million) for the first half of 2007. Sales were 2% lower after the company sold its BMG Music Publishing division to rival Universal Music Group last year. Sony BMG, Bertlelsmann's music joint venture with Sony, posted an operating loss of €2 million ($2.7 million) compared to an operating gain of €3 million ($4.07 million) last year. (Bloomberg)

• BMI posted record revenue and royalty distributions for its 2006-2007 fiscal year. The performing rights society recorded revenues of over $839 million and will distribute over $732 million to its artists. (Press release)

• LiveNation has release Stuart Galbraith, its U.K. managing director, due to a "breach of contract." (Billboard.biz)

• Warner Music Group announces a quarterly cash dividend of $19.4 million, or $0.13 per share of common stock. (Press release)

• A good article on how Saddle Creek Records has helped transform downtown Omaha. The label owns an entire city block and recently opened a 470-capacity venue called Slowdown. A coffee shop and Urban Outfitters rent space on the block. (Beatrice Daily Sun)

Posted by Glenn at 8:40 AM | Link
|Earnings Releases||Sony BMG||Warner Music Group|

Vivendi released its earnings for the first half of 2007 (read PDF of earnings release). Earnings before interest and income taxes (EBITA) and €2,596 million compared to €2,348 million for the first half of 2006, representing an increase of 10.6% (11.9% at constant currency). Wall Street has mixed feelings, though. While revenue and EBITDA were both up, earnings attributable to equity holders dropped almost 49% (due mainly to a 2006 gain from Vivendi's tax dispute settlement).

Universal Music Group EBITA was €220 million ($301.3 million), down €75 million. (It should be noted that UMG's first half 2006 earnings included €50 million recovery of expense related to a legal dispute with TVT.) At €163 million, EBITA in the second quarter was a 7.6% improvement over last year. Digital sales increased about 50%.

Posted by Glenn at 1:11 PM | Link
|Earnings Releases||Universal Music Group|

• In an interim management statement released today, EMI said its first quarter revenues fell 5.1%. Its recorded music segment was down 13.4% while revenues in its publishing division increased 11.9%. Digital revenues increased by 26%. Physical revenues dropped 19.8%. (Press release)

• Music download site Amie Street, which incorporates dynamic pricing, has received funding from Amazon.com. Having such a high profile investor will help put Amie Street on the map. This is good news for the concept of dynamic pricing. For the greater recorded music industry to accept dynamic pricing -- or even to try it out -- would require the presence of a company like Amazon.com. And it would be nice to have more proof that Apple is either right or wrong when it comes to pricing digital music: Do consumers need one standard, simple price? (Digital Music News)

• Universal Music Group is said to be in the market for Chrysalis's music publishing. (This Is Money)

• John Wenzel of the Denver Post attributes the success of rock band The Fray to MySpace...even though airplay and exposure on "Grey's Anatomy," "Scrubs" and "One Tree Hill" is what drove people to the band's MySpace page. (Denver Post)

• The Times Online looks at the fundraising models of Sellaband.com and Slicethepie.com and theorizes that they could act as a scouting mechansim for majors. "If Sellaband and Slicethepie can unearth credible acts with such committed fans, the big bucks – and all their media buying power – may come calling." I think the touring circuit will continue to be a better place to find potential. (Times Online)

Posted by Glenn at 8:06 AM | Link
|EMI||Earnings Releases||Universal Music Group||Venture Capital|

I browsed through Vivendi's second quarter earnings release (read PDF) this morning. Things look good for Vivendi, but not so good for its Universal Music Group division.

Vivendi's second quarter revenues were up 6.4% to 5.2 million, while its first half revenues rose 7.4% to 10.22 million.

Universal Music Group's second quarter revenues dropped 0.8% in the second quarter while revenues sank 4.9% in the first half of 2007. The flat second quarter is practically a big win for a music company these days. Let's use the term "relatively optimistic," shall we?

Second quarter digital revenues rose 49% year over year and were up 51% at the year's midpoint.

Driven by the success of World of Warcraft, Vivendi Games' revenues was up 68.9% in the first half of the year. That's a good way for entertainment companies to have a balanced portfolio...have a games division to offset the lagging music division.

Additional reading:

• Vivendi's Q1 2007 earnings release. UMG's Q1 revenues were down 8.7 year over year. Digital sales were up 54% and represented 15.7% of revenues.
• Vivendi's 2006 earnings report. UMG's 2006 revenues were up 1.3%. Publishing grew 3.3%. Digital sales were up 84% and represented 9.6% of 2006 revenues.

Posted by Glenn at 12:51 PM | Link
|Earnings Releases||Universal Music Group|

• Terra Firma, the private equity firm that has placed a bid on EMI, is reportedly going to extend its deadline by which investors must accept its offer. The bid stands at $4.79 billion. (Reuters)

• Those DRM-free EMI downloads with user information embedded within? Privatunes has free software that will render those files anonymous. (Privatunes , via Slashdot)

• Guitar Center has agreed to be acquired by Bain Capital Partners for about $1.9 billion. The music equipment retailer's sales have nearly doubled in the last four five years. Net income rose from 2002 to 2005 and dropped in 2006 only because of an extraordinary charge related to a goodwill impairment. (Billboard.biz)

• Digital Music Group has inked distribution deals with Mush Records, Joyful Noise Recordings and Clockwize Online. (Press release)

• Ringtone sales are flat. Said one executive, "I think the ringtone business is in peril now because the operators have allowed into the market mobile phones which can sideload MP3s and use them as ringtones." What to do about it? "...innovative products are being introduced: EMI, for instance, has just unveiled a remixable realtone for the hip hop artist MIMS, while independent labels such as Ninja Tune are using them as freebie promotional tools. What is certain is that prices cannot remain static. And as with moves to incorporate VoIP services and flat-rate data charges, it is innovation that will move the market forward, rather than the protection of any perceived golden goose." (The Guardian)

• paidContent just posted a video segment of a panel discussion on social media and the music industry that was recorded at its EconSM Conference in late April. On the panel are Josh Deutsch (CEO, Downtown Records), Courtney Holt (EVP, Digital Music and Media, MTV), and Hadi Partovi (President and COO, iLike). (paidContent)

• Merrill Lynch loves Sirius whether or not it hooks up with XM: "We continue to believe the shares have upside potential using our reasonable, and often conservative, assumptions, including: 1) 80-85% of long-term gross adds are from auto 2) declining ARPU (ignores data impact), 3) combined 40mm subscribers in 2014 – comments by both Sirius and XM suggest this level in 2010, and 4) annual FCF exceeds $1bb in 2016." (Radio Ink)

• British music retailer HMV posted a slightly lower annual profit and announced a DRM-free download store that will launch in September. EMI is the only major on board for the download store. (Billboard.biz)

• The question of the '00's: To give away or not to give away? David at Digital Audio Insider lists his pros and cons of giving away his band's upcoming album. "If we're primarily doing all of this for the enjoyment of the creative process -- and we're not making much money from it -- would we be better off giving the music away?"(Digital Audio Insider)

Posted by Glenn at 6:45 AM | Link
|Digital Distribution||EMI||Earnings Releases||M&A||Sirius|

Entertainment retailer Trans World filed its 10-Q yesterday, which show its 2007 Q1 earnings. (Download PDF.) Those figures were released last month, and the new filing offers some information that was in the Q1 earnings conference call.

On page 18 we see that music represented 44% of sales in 2007 Q1, as opposed to 52% in 2006 Q1. Music sales dropped 16.7% and sales of the CD format dropped 20.8%. (In the conference call, the COO said comp music sales were down 21%.) Comparable store sales (total) were down a whopping 10.1%. Any way you slice it, Trans World's music story is a bad one.

The company operates over 800 stores under the brands f.y.e., Coconuts and Wherehouse Music.

Posted by Glenn at 10:54 AM | Link
|Brick-And-Mortor Retail||Earnings Releases|

• Universal Music Group's $87 million bid for Sanctuary Group was approved by the Sanctuary board of directors. (Reuters)

• musicFIRST, a coaltion of labels, industry groups and recording artists, has been formed to lobby for terrestrial broadcasters to pay performance royalties. Currently, only songwriters are paid when a song is broadcast on terrestrial radio. (AP)

• Sony BMG and Nickelodeon have a four-year agreement to produce and finance music-themed television shows. (Variety)

• Billboard's Brian Garrity has an article on labels' push for more environmentally friendly products. Some are being helped by the Natural Resources Defense Council. (Billboard.biz)

• Labor intensive cease-and-desist letters have moved music blog Idolator to cease posting leaded MP3s unless they come with the label's blessing. (Idolator)

• Navarre filed its annual report yesterday. Good reading if you have a ton of free time. In fiscal 2006, Best Buy and Wal-Mart/Sam's Club accounted for 23% and 11% of Navarre's billing, respectively.

• Seems like everybody is moving to Nashville these days. USA Today looks at Bon Jovi's rock-to-country transformation as well as the many other older rock artists who are growing roots in Music Row. Two things I didn't know until today: Darius Rucker (Hootie and the Blowfish) signed to Capital Nashville, and Jewel has been shopping an album produced by Big & Rich's John Rich. (USA Today)

Posted by Glenn at 7:58 AM | Link
|Earnings Releases||Sony BMG||Weblogs|

Borders announced its Q1 2007 results yesterday (read press release or 8-K). Losses deepened, music sales were down and gross margin dropped. The company reported a 2% increase in consolidated sales and a loss of $35.9 million (compared to a loss of $20.2 million last year).

Comp Borders Superstores sales were down 1.9%. DVD sales were flat and music sales declined (no figures were given for either segment).

The fact that Borders' music sales dropped comes as no surprise. National chains such as Borders and Barnes & Noble have been suffering through slumping sales and a tepid new release schedule. There was no mention yesterday of the company's plans for the music segment, although CDs are generally expected to be playing a lesser role in the chain's plans. In March, Borders issued a press release about its strategy and said it will be incorporating digital centers that will emphasize digital content and hardware.

Posted by Glenn at 8:28 PM | Link
|Brick-And-Mortor Retail||Earnings Releases|

Entertainment retailer Trans World reported Q1 2007 earnings today (read press release). Total sales dropped 1% to $286.3 million and net loss increased to $9.1 million from $7.1 million last year. Comp store sales dropped 10%. Said chairman and CEO Robert J. Higgins, "Our first quarter sales remained difficult, while positive comparable store sales in DVD, electronics, accessories and boutique could not offset worsening music results."

Improved margins on music and movies resulted in improved gross margin (36.5% versus 34.8%), but sales of both were down. Music was way down and other segments are being given more emphasis to make up for the decline.

A transcript of this morning's conference call offers some insight into the company's results and strategy.

• Music sales were down 21% on a comp basis, and the company's top 50 experienced a 32% drop on a comp basis. Music represents 44% of sales, down from 52% last year.
• DVD sales dipped 6% on a comp basis and now represent 38% of total sales, up from 31% last year.
• Games dropped 12% on a comp basis and represent 7% of sales, the same as last year.
• The company has expanded space for DVDs, electronics, accessories, boutique and games. It has implemented measures aimed at improving customer service.
• The in-store, mix-and-burn digital kiosk testing has offered "promising, but still inconclusive results." Said president Jim Litwak, "...we want to have the stores increase where they are at right now by about 25 to 30% what they are burning currently."
• The re-branding of f.y.e. stores is on schedule and will be completed in Q2.

A few analyst noted that executive compensation seemed high relative to company performance. The message was pretty clear: Investors want to see the executive team lead by example and keep costs down.

Trans World operates almost 972 retail stores under the names f.y.e., Coconuts Music and Movies, Strawberries Music, Wherehouse, Sam Goody and Spec’s.

Posted by Glenn at 4:37 PM | Link
|Brick-And-Mortor Retail||Earnings Releases|

• Warner Music Group's Rhino Records has laid off 15 employees as a part of WMG's greater restructuring plans. (Billboard.biz)

• Multimedia retailer Hastings Entertainment, Inc. reported improved net income on slightly lower revenues for Q1 2007. Overall it was a good quarter that showed the company is properly retooling its product mix. Net income increased 29% to $2.5 million year over year while revenues dropped to $128 million from $131 million. Cost of revenues decreased to 62.7% from 64.5% last year. Comp store revenues dropped 3.9%. Music sales were down 13% while electronics rose 17.5%. (Press release)

• Paul McCartney''s solo and Wings catalog made its herladed debut on online stores and services yesterday...but for whatever reason it wasn't on iTunes. (PC World)

• Pandora, the online music recommendation engine, will be available through Spint Power Vision phones (for $2.99 per month) as well as Sonos home audio systems (as 32 different Pandora radio stations). (MP3.com)

• PassAlong Networks is powering a music download store by MP3Car.com, which offers an in-dash application to discover and purchase songs. (Press release)

• Joost announced a deal with Creative Artists Agency. (Press release)

Posted by Glenn at 12:40 PM | Link
|Brick-And-Mortor Retail||Earnings Releases||Firings||Online Stores/Services||Warner Music Group||iTunes|

On the same day it announced a winning takeover bid, EMI announced its results for the fiscal year ending March 31, 2007. Revenue dropped 15.8% (12.1% on constant currency) and a £118.1 million gain in fiscal 2006 turned into a £263.3 million loss in 2007.

Included in operating profit are an exceptional gain of £50.2 million (sale and leasebacks of offices in Tokyo and Los Angeles, plus Bertelsmann settlement money) and an exceptional costs of £191.5 million (restructuring charges) and £164 million (balance sheet review).

Key items:

• Total cash from operations was a paltry £7.3 million (versus £188.3 million last year).
• Gross margin dropped to 34.9% from 37.2%.
• EMI has suspended dividend payments (this was announced on April 18th) and an interim dividend of 2p per share has been paid.
• Recorded music sales dropped by 15%. Digital represented 10.4% of recorded music and 9.4% of total company revenues.
• By region: North American dropped 7.7% (digital up 80.1%); UK & Ireland dropped 11.8% (digital up 79.7%); and Japan dropped 2.4% (digital up 69%).
• Publishing operating profits increased 4.2% (at constant currency) while revenue, dragged down by lower physical sales, dipped 0.9%.
• Publishing revenues related to digital music increased 35.5%, although "growth in digital revenues in music publishing continues to lag the recorded music industry."
• Performance revenue increased by 10.1% and synchronization revenue increased 5.6%.
• EMI's interest coverage ratio dropped to 1.9 as EBITDA decreased to £174 million from £275.8 million.

Conclusion: Extraordinary events killed operating profit and restructuring charges were a big hit to cash flows from operations. Publishing shows potential and is the company's current strength. Sync and performance revenues are up. Digital revenues are up big. The problem remains: Nothing can overcome the drop in revenue from falling CD sales. EMI was smart to begin a restructuring program, but it came too late. Chalk that one up to the slow-to-react leadership of the Munns/Levy era.

Posted by Glenn at 2:09 PM | Link
|EMI||Earnings Releases|

Napster reported its fiscal and Q4 2007 numbers yestserday (read press release). For the year, revenues increased to $110 million from $90 million. Subscribers increased 37% to 830,000. Net loss improved $37 million from $61 million. Gross margin improved to 29.38% from 28.06% in fiscal 2006.

For Q4, revenues mildly improved to $28.9 million versus $26.4 million in Q4 of fiscal 2006.

Looking at a few ratios indicate the company is becoming more efficient in generating sales: Sales & marketing is a percent of revenue decreased to 30.8% in 2007 from 54.6% in 2006. R&D as a percent of revenue improved to 9.9% from 13.9%. G&A as a percent of revenue, though, was basically flat: 21.8% in 2007 versus 22% in 2006. For a company that requires scale for profitability, these ratios are encouraging.

Napster has been a whirlwind of business development recently -- some look good, some look questionable. The joint marketing agreement with Motorola and its partnership with AT&T will test the potential of subscription services via mobile handsets. The deal with Circuit City seems years late and uninspired.

Posted by Glenn at 5:28 PM | Link
|Earnings Releases||Napster|

Vivendi reported its 2007 Q1 earnings yesterday (read PDF of Vivendi's release or Reuters' article). Driven by its pay-TV and video game segments, the French company reported a profit of €1.3 billion. The story from its music division mirrored recent earnings results from other major music groups: It wasn't good.

Universal Music Group's revenue declined 8.7% to €1.027 million (4.2% on a constant currency basis). While sales were strong in the UK, weak sales in the US, Japan and France pulled down the division. Earnings before interest, taxes and amortization fell €84 to €57. (Last year's figure included an extraordinary item, the recovery of €50 from the company's lawsuit with TVT.) UMG said the downturn was "due in part to the timing of international and domestic releases in a difficult recorded music market and unfavorable currency movements."

Here's the ol' digital silver lining: Digital revenues were up 54% and accounted for €161 of revenues. Digital now accounts for 15.7% of UMG's revenues, up from 9.9% last year.

Posted by Glenn at 1:07 AM | Link
|Earnings Releases||Universal Music Group|

Warner Music Group announced today its results for Q2 2007 that ended March 31, 2007 (read press release and 10-Q). The numbers were down in every important category except digital sales. The press release and 10-Q mention WMG's restructuring and place on it a price tag of $70 to $80 million (severance-related expenses and related consulting fees and cost of temporary workers).

Total revenue dropped 2% to $784 million and the net loss was $27 million. Revenue from recorded music dropped 4% and digital recorded music revenue increased 22%. Music publishing revenue increased 11%. Through the first two quarters, total revenue dropped to $1.7 billion from $1.84 billion.

Digital revenues now account for 14% of total company revenues.

WMG has started a restructuring plan and incurred $16 million in related expenses in Q2, $15 million of which was in the recorded music division. Resources will be redirected to growth areas in Europe. The press release says the restructuring is so WMG's "continued evolution from a record and songs-based business to a music-based content company and the ongoing management of its cost structure." Billboard.biz has reported that WMG plans to cut 400 jobs, a number that was confirmed in the 10-Q.

The 10-Q mentions the Napster settlement on April 24th, 2007. WMG has received $110 million from Bertelsmann and "will be sharing with its artists and songwriters." No further details were given.

Posted by Glenn at 9:53 AM | Link
|Earnings Releases||Warner Music Group|

• Muzak reported a 3.0% increase in fourth quarter revenue and a 0.7% increase in annual revenues. Net losses improved to $39.2 million from $48.6 million. CEO Stephen Villa called the turnaround a "dramatic improvement." (Press release)

• Pump Audio and Snocap have entered into a client-sharing agreement. (Digital Music News)

• The only places in Greenwich, CT where you can find a CD is the public library and Starbucks. (Greenwich Time)

• The lesson here is, Music fans shouldn't live in Greenwich. In Seattle, Silver Platters is showing the CD is still a viable format. The indie retailer recently added 42,000 square feet. (Seattle Times)

• San Francisco area indie retailers are surviving in their respective niches. Mod Lang moved to El Cerrito and has found it "liberating" to no longer cater to university students. Aquarius Records uses its exhaustive staff reviews to attract sales. Amoeba is Amoeba. (San Francisco Chronicle)

• In England, Rough Trade is expected to soon open Britain's biggest music-only store -- a 5,000 square foot store in London's East End that will "reflect the public appetite for exciting new music." (The Independent)

Posted by Glenn at 9:00 AM | Link
|Brick-And-Mortor Retail||Earnings Releases||Snocap|

• XM narrowed its loss to $260 million on revenues of $257 million. Subscribers increased 29% for the year to 7.6 million. (Forbes.com)

• Guitar Center reported a fourth quarter net loss of $40 million (which included special items) on sales of $628.5 million. Sales were up 11.7% year over year. (Press release)

• Ministry of Sound has accused indie label trade associations Impala and AIM of "a complete departure from the stated constitutional aims of both companies." (Billboard.biz)

• Coming to a Jetta commercial near you... Universal Music Publishing Group inked a worldwide arrangement to administer Joy Division's catalog. The company says it will "aggressively promote" the post-punk band's song for sync licensing in film, television and advertising. (Billboard.biz)

• Kalefa Sanneh discovers that "rappers are learning to consider Koch a second home, or even a first one." This line ties in perfect with my posts about rap's continued sales decline: "As record sales keep sliding, the rise of Koch coincides with the lowering of rappers’ expectations." Good article. (New York Times)

• Watch out, Warner, Universal Music Group is stepping up the eco-pressure. The company is a sponsor of a Honda Formula One car that replaced its corporate logos with a picture of the earth. (Stuff.nz)

Posted by Glenn at 1:51 PM | Link
|Earnings Releases||Indies||Publishing||XM|

Univision Communications reported its third quarter results (PDF of press release). The Univision Music Group division posted a loss of $1.7 million (before depreciation and amortization) on revenues that decreased 42% year over year. For the nine months ending September 30, 2006, music division revenues were down 34%.

Univision Music Group had 33 of the top 100 Latin albums sold in the quarter but blamed its poor performance on "underperforming releases, slippage in the release schedule and a continued high level of returns compounded by political and economic factors impacting music sales in the industry." The label has on its roster such artists as Los Tucanes de Tijuana and El Papa de los Pollitos.

Posted by Glenn at 5:37 AM | Link
|Earnings Releases|

I've looked over Warner Music Group's 10-Q filing and a few things stand out.

• SG&A decreased 10% and as a percent of sales were basically even -- maybe a quarter percentage point higher -- with last year. As a gauge of selling efficiency, staying level is a good sign.
• Cost of revenues, as a percentage of total revenues, increased to 55% from 51% last year. That number is going in the wrong direction. This is a time for labels to keep a lid on their wallets as best possible.
• In the risk factors section, WMG admitted that the decline of specialty music retailers "could increase" the negotiating leverage of large retailers like Wal-Mart, Target and iTunes. That's pretty much guaranteed. Also, WMG noted as a risk factor its dependence on a "limited number of online music stores." Those few stores, WMG insists, "are able to significantly influence the pricing structure for online music stores." That's the ol' variable pricing beef.

Posted by Glenn at 1:46 PM | Link
|Earnings Releases||Warner Music Group|

Today Warner Music Group announced its earnings for the first quarter ending December 31, 2006. (Read press release.) Results were not positive, but unlike some of its competitors, WMG is not losing money. Total revenue was down 11% to $928 million. Net income dropped to $18 million from $69 million.

Broken up by division: Recorded music revenues dropped 13% year over year. Digital revenue was 12% of recorded music -- 17% in the U.S. Music publishing revenue increased 2% year over year. Digital accounted for 5.3% of publishing revenue -- up 40%. For the entire company, digital accounted for 11% of revenue. That was a 45% increase year over year and a 4% drop from the previous quarter.

Posted by Glenn at 9:18 AM | Link
|Earnings Releases||Warner Music Group|

Vivendi announced its full-year 2006 results yesterday (download PDF of full press release). Vivendi's total revenues were up 2.9%. Revenues were up 1.2% in the fourth quarter.

Universal Music Group's revenues rose 1.3% in 2006 but dropped 1.5% in the fourth quarter. The company attributed the growth to "strong digital sales growth, higher license income in the U.S. due in part to legal settlements and strong sales growth in the U.K. and Japan." Part of the legal settlements include revenue from the Kazaa settlement. Digital sales rose 84%. Vivendi does not offer information on operating income for its divisions, only total revenues.

In contrast to the music division's mediocre year, Vivendi Games -- its video game divison -- increased revenues by 25.4%.

Posted by Glenn at 11:31 AM | Link
|Earnings Releases||Universal Music Group|

• EMI's restructuring has eliminated an "indefinite number of positions" at EMI Christian Music Group. Regional sales offices in Atlanta and Chicago have been closed. EMI CMG's will continue with its deal with Midas Records, which gives EMI CMG worldwide rights to to general market, Christian and digital distribution of Midas' Christian roster. One of the label's highly touted new acts is Rush of Fools. (Read article at Christian Post)

• Sanctuary Group reported an operating loss of £56.7 million ($111.7 million) for the year ending September 30, 2006. It included £8 million for refinancing and restructuring. Revenue was down to £133.2 million from £148.1 million. That was quite an improvement from the previous year's loss of £136 million. Rough Trade, which is partially owned by Sanctuary, posted a loss for the year. The company said it is considering selling off some assets. Management sees a return to profitability by "2008 or later." (Read article at The Guardian and the press release)

• According to co-founder Chad Hurley, YouTube will start sharing revenue with its users. This applies for videos for which the user owns the copyright. Sounds like a lot of police work to make this happen. (Read article at BBC, via paidContent)

• Must be a lot of paperwork involved: The University of South Carolina has hired a full-time employee to receive the RIAA's copyright complaints. (Read article at The Charlotte Observer)

Posted by Glenn at 7:55 AM | Link
|EMI||Earnings Releases||Indies||P2P||YouTube|

Trans World Entertainment, which operates such music retailers as FYE, Wherehouse and Sam Goody, announced yesterday a comparable store sales decrease of 6% for the five-week period ending December 30, 2006 (read press release). For the nine-week period that ended the year, comparable store sales dropped 5%. Chairman and Chief Executive Officer, Robert J. Higgins, said sales were below expectations and the company will report lower than expected earnings.

In a conference call yesterday (read transcript at SEC.gov), president and COO Jim Litwak revealed comp sales were down 12% in music and only 2% in video. (Music improved a bit, though, as third quarter comparable sales were down 14%.) Growth came from electronics and accessories. Music represented 37% of Trans World's business during November and December. Future emphasis will be given to DVDs, portable media devices and accessories.

Answering an analyst's question on its digital music strategy, Litwak described Trans World's plans to roll out a limited in-store test later this month.

"We’re going to be testing -- we’re going to roll out in January to 25 stores our mix and burn strategy, which enables us to either burn CDs in stores, or to download to specific portable devices. So, you can do one or the other, depending upon what portable device you have. Or if you don’t have the one that works, you’ll be able to burn a CD, bring it home, and upload it and download it into another device. That’s going to go into 25 stores. ... Ultimately, the feeling is is that if this is successful, it’s something that we could migrate into the LVS system. In fact, we’ve got a few where we are testing it through the LVS system now. But ultimately that will be the play; that we could bring it all the way through into the LVS system."

LVS is the tag for Trans World's next-generation listening and viewing stations that allows customers to sample CDs and DVDs by swiping the product's barcode at the LVS. Asked what portable devices would work with the digital program, Litwak said,

"It could be a Coby player; it could be a Sandisk player; it could be an [iRipper] player. It is not an iPod player. But in fact, what you could do there is you just burn the CD, you bring it home, and then you could upload it to your iPod."

And there's the problem. Asking iPod owners to take an extra step is a poor way to serve your customers. Litwak pointed out that the stores will stock compatible MP3 players. "That's the beauty of it," he told an analyst, as if stores will cash in on demand for both hardware and software. But the cart is coming before the horse. In order to take part in Trans World's digital strategy, most of its customers will have to first purchase a new MP3 player. That's a big assumption.

Posted by Glenn at 2:14 PM | Link
|Brick-And-Mortor Retail||Earnings Releases|

Circuit City, one of the country's biggest sellers of recorded music, announced a loss of $16 million for the third quarter ending November 30, 2006. (Read press release.) That's in contrast to a gain of $10.1 million last year.

No specific number for recorded music sales was given, only a mention that "comparable store sales in music software declined by double digits." Video sales declined by "mid-single digits." Music-related hardware fared better. Sales of portable digital audio products were flat and accessories grew by "high-single digits."

The big decline at Circuit City echos recent results from Borders, where sales of recorded music were down 17.8% over the same period last year.

Posted by Glenn at 1:14 PM | Link
|Brick-And-Mortor Retail||Earnings Releases|

This morning Warner Music Group reported results for the year and quarter ending September 30, 2006 (view press release, download PDF of 10-K) Full-year revenue increased a mere 0.4% to $3.516 billion. Though a very small improvement, WMG showed its recorded music segment is keeping its head above water, and that's a very good sign. Digital revenues are healthy but growing at a much slower rate. And look, it's money from the Kazaa settlement.

CEO Edgar Bronfman put a cheery face on the results. "The increase in our digital Recorded Music revenue for the fiscal year more than offset declines in our physical Recorded Music revenue," he said. It's true. Revenue from recorded music rose 2.8% for the year to $3.005 billion, which offset a disappointing 11.4% decrease in publishing revenue, though it wasn't really that bad. Excluding revenue from the sale of a sheet music business in 2005, publishing revenue dropped only 6.1%.

For the quarter, sales of recorded music were down 5.7% rom the prior year. Music publishing revenue dropped 6.6% for the quarter.

For the quarter, digital sales were up 96% from the same quarter last year but only 13% over the previous quarter. Digital accounted for 12.2% of revenues in the fourth quarter; digital accounts for 5.5% of publishing revenues. For the year, digital accounted for 11.1% of recorded music revenues and 3.7% of publishing revenues.

Money from the Kazaa settlement finally hit the books and helped operating income balloon even though revenue fell 5.6%. In the fourth quarter, WMG reported $13 million of income related to the Kazaa settlement. That amount was an estimate of amounts it expects to receive net royalties due to its artists.

Another nonrecurring item was a $7 million expense for restructuring charges related to rolling Lava Records into Atlantic Records as well as a $24 million expense "related to the departure of an Atlantic executive and the expensing of certain other amounts."

Posted by Glenn at 11:29 AM | Link
|Earnings Releases||Warner Music Group|

Today EMI announced its results for the first half of 2006. (Read press release.) It wasn't pretty. The company recorded a loss of £30.6 million versus a gain of £36.7 million last year. The previously reported accounting scandal in Brazil resulted in a one-time charge of £9 million.

Revenue was down 4.1% (constant currency) over last year. EMI Music revenues were down 5.2% (constant currency) while EMI Music Publishing were in line with last year. Its operating profit rose 5.8%.

Digital revenues represent 8.5% of EMI's total revenues and 5.6% of the publishing division's revenue.

EMI spent £6.2 million related to the "potential acquisition of Warner Music Group."

Oddly, Reuters has an article titled "On-song Robbie, Norah boost EMI." While EMI is pubicly upbeat about its fourth quarter schedule, a Bridgewell analyst is keeping his rating at "neutral." Smart. It would take three Colplay albums -- not a Robbie Williams and a Norah Jones -- to catch up. EMI should be feeling the pressure to get the Beatles' catalog into digital stores. It desperately needs a spark, and I get the sense that the market feels the digital age will not come of age until the Beatles are online.

Posted by Glenn at 6:49 PM | Link
|EMI||Earnings Releases|

Napster released its results for the fiscal second quarter ending September 30, 2006. The financials show a company that continues to grow, continues to better its positiion, but continues to land in the red. The launch of a mobile service shows a foreward-thinking strategy but was too recent to make a financial impact.

Revenues were up 9% to $25.5 million while the net loss improved to $9 million from $13.6 million. (Read press release.) About Napster's outlook, the company's CFO said the company continues "to expect solid double-digit annual revenue growth for fiscal 2007." Revenue in the next quarter is expected to be $27 million, although marketing expenses will increase as well.

A look at the balance sheet reveals one important change: Cash and cash equivalents declined to $31 million from $46.8 million since the end of the second fiscal quarter of 2005. Working capital -- the difference between current assets and current liabilites -- dropped to $60.1 million from $74.4 million in the last six months.

Napster reported 9.0 million registered users; Its paid subscriber base is 518,000 and it has 31,000 university subscribers. The company claims the launch of its free, ad-based Napster.com website has "increased the user traffic to Napster.com to over 4 million unique visitors per month."

Posted by Glenn at 12:26 PM | Link
|Earnings Releases||Napster|

Digital media company RealNetworks announced the results of its third quarter ending September 30th, 2007 (read press release). The company's net income was up 276% to $42,153,000. It should be noted that a generous chunk of that the Microsft impact plus other items items -- equity investment gains, stock-based comapensation expenses and tax impacts of the items -- net income was $8.7 million.

RealNetworks recorded revenue of $30.3 million in its music division, $29.5 million in media software and services and $22.5 million in games. Seventy-four percent of its revenue came from the United States. Music subscribers rose 350,000 in the quarter to 1.65 million.

paidContent has excerpts from RealNetworks' analyst call. On the company's acquisition of WiderThan, CEO Rob Glaser said, "Unlike pure content-based businesses such as ringtone aggregation which are vulnerable to commoditization, Real and WiderThan’s carrier services are technology-based and thus deeply embedded in the carrier’s network. Further, combining the strength of Real’s Rhapsody music service with WiderThan’s successful mobile music service will help us realize our vision of the future of digital music."

Posted by Glenn at 11:27 AM | Link
|Earnings Releases||RealNetworks|

Nothing like an earnings release to try to put a positive spin on a grim situation. Entertainment retail chain Transworld emphasized what it could in its press release, mentioning its 18% increase in revenue in the second quarter. The problem is that the increase came entirely from Transworld's acquisition of Musicland stores. Adjust out sales from Musicland stores and you've got what's important: a "comparable store sales decrease of 7%."

Bottom line: Transworld had a net loss of $7 million on revenues of $298.3 million.

Another telling figure: Same store music sales (which means music sales at all locations other than the newly acquired Musicland stores) dropped 16% and accounted for 48% of total revenues. In the second quarter of last year music revenues represented 58% of Transworld's revenues.

Revenues from other products rose in the second quarter. Same store DVD revenues were up 6%, same store game revenues were up 10% and same store revenues for the remaining categories (electronics, accessories, etc) were up 10%.

President and COO Jim Litwak expects stronger music sales in the second half of the year to be fueled by releases from Janet Jackson, OutKast, Diddy, Beyonce, Justin Timberlake, Ludacris and Jay-Z. During the earnings call he told an analyst that the company is "we're being very, very aggressive in terms of promoting the rest of the music category for the fourth quarter" and that labels are being aggressive with Transworld in their fourth quarter promotional push. He later told another analyst that he thinks a $9.99 is the key new release price point for at least the first few days of release.

Posted by Glenn at 11:30 AM | Link
|Brick-And-Mortor Retail||Earnings Releases|

• DMX's Year of the Dog...Again, on Columbia, is in a tight race with NOW 22 to top the album chart on Wednesday. Hits predicts both albums will do about 125,000, which would be far lower than the 312,000 of first-week sales achieved by his previous album, Grand Champ, which came out on Def Jam.

• Guitar Center reported its results for the second quarter last week. Net sales were up 13.8% while net income was up 4% over last year. (mi2n.com)

• A rumor that Bizzy Bone "might have signed a 3-album deal with Virgin Records." (All Hip Hop)

• Country labels have done well with comedy albums. "It's also a very efficient market," said one executive. "You don't pay a lot to make a comedy album, but if one hits, the payoff can be big." (The Tennessean)

Posted by Glenn at 8:38 AM | Link
|EMI||Earnings Releases|

Napster reported earnings yesterday for the quarter ending June 30th, 2006 (read press release). The company narrowed its losses to $9.6 million (a mere 0.2% of Somalia's GDP) from $19.5 million last year. Revenues grew to $28 million from $21 million a year ago and $26.8 million in the previous quarter.

But if a one-time $1.9 million gain for "pre-paid card breakage" -- which represent those Napster prepaid cards that have expired without being redeemed -- is taken out, the most recent quarter's revenue would have been a shade lower than the previous quarter. Another $300,000 of expired prepaid card money was realized in the quarter. That's good money.

Possibly due to its free service, Napster's subscriber base decreased by 49,000 last quarter, to 508,000 from 547,000. The company expects a lag time in coverting free service customers to paid customers. "In the near term," reads the quarterly report, "we expect service revenues to decrease as prospective customers continue to delay subscribing to our premium music services while trying the free music services, which we experienced in the first quarter of this year." That is...if the carrot works.

The press release also mentioned the company will roll out Napster Mobile with SunCom Wireless next week in the Southeast United State. The service will offer over-the-air downloads with a dual delivery to the consumer's PC.

At the end of the day, this line from page 33 of the quarterly report says a lot about the company's prospects: "Our digital music distribution business has a limited operating history and a history of losses and may not be successful." No kidding.

Posted by Glenn at 8:33 PM | Link
|Earnings Releases||Napster|

Warner Music Group announced today its results (read press release) for the third quarter ending June 30th, 2006. Results were mixed.

Interpretation of the results depends upon on how one looks at things. The bottom line, which is really what matters: WMG lost $14 million on revenues of $822 million. There are a few points for optimism: Revenues were up 11% over the previous quarter, and its operating income of $28 million compares nicely to its operating loss of $92 million a year ago. Revenues from recorded music was up 15%. Net cash flow from operating activities was $18 million (versus -$120 million last year).

On the negative side, cost of revenues (the direct costs associated with products sold) rose 12%, music publishing revenue dropped 7% and synchronization revenues were down 36%.

The quarter was an improvement over a year ago, though, when WMG lost $175 million ($73 million of which was an expense related to a cancelled contract).

Digital revenues accounted for 11% of the company's revenues -- up 109% from the previous year. That's great growth and a good number, but digital revenues were also 11% in the prior quarter. (Read that press release here.) Digital revenues from recorded music rose 132% and represented 13% of total revenues. Digital music revenues account for only 3% of music publishing's revenues.

Posted by Glenn at 3:31 PM | Link
|Earnings Releases||Warner Music Group|

Vivendi, the parent company of Universal Music Group, announced its earnings for the first half of 2006. (Download a PDF of the seven-page press release.)

Universal Music Group's revenues (on page two) were up 2.2% for the second quarter and were up 5.3% for the first half of 2006. Credit was given to increased digital sales, higher license income and strong performances from Jack Johnson, Ne-Yo, NOW 21, Rihanna, Nelly Furtado, Keane and Andrea Bocelli.

Digital sales accounted for 10.1% of total revenues for the first half of 2006 and 10.3% of total revenues in the second quarter.

Posted by Glenn at 3:21 PM | Link
|Earnings Releases||Universal Music Group|

With sales of recorded music up 1.9%, EMI's profit rose 20% for the year ending March 31st to $169 million. Revenue was up 3.9% to $3.9 billion. Market share was up in all territories.

Digital sales grew to $210 million from $88 million during the year, and more than doubled in the fourth quarter. In North America, digital downloads accounted for 70% of digital sales, but it was sales from mobile products that grew at the fastest rate -- increasing by a factor of over nine.

EMI's publishing arm saw revenues increase by 2.6% for the year. Mechanical revenues increase by 3.2% and operating margin rose 25.1%. The company emphasized the potential of the mobile market. "The use of songs in mobile phone products remains the most significant early digital revenue contributor for EMI Music Publishing and continues to enjoy very strong growth."

The list of upcoming releases includes Chingy, Tiziano Ferro, Janet Jackson, Norah Jones, Stacie Orrico, RBD, Renaud, Joss Stone, KT Tunstall, Keith Urban, Hikaru Utada and Robbie Williams.

For the full financials, read EMI's press release. Watch the webcast of the earnings presentation from this page.

Posted by Glenn at 11:27 AM | Link
|EMI||Earnings Releases|

Vivendi, Universal Music Group's parent company, announced first quarter numbers yesterday and rejected a shareholder's proposal to break up the company.

Universal Music Group improved its operating income by 136%, improving to $115 million from $48 last year, the best earnings growth of the company's business units. (This year's number includes a $64 million sum from a successful appeal against TVT Records.) Revenues rose 8.4% -- 2.8% at constant currency.

Read PDF of earnings press release here.

Posted by Glenn at 11:18 AM | Link
|Earnings Releases||Universal Music Group|

Napster reported its fourth quarter and fiscal year today. The verdict? Sales growth of 100% for the year, improved losses for both the quarter and year.

• Fourth quarter loss was $4.4 million compared to $24 million the previous year.
• Sales and marketing costs for the quarter decreased by almost half for the quarter but increased for the year.
• Loss from continuing operations decreased to $10 million from $24 million for the quarter, and improved to $61 milion from $67 million for the year.

Shares dropped, though, as analysts expected a better estimate for first-quarter revenues. The company expects first quarter revenues to be in the $25 million to $28 million range. Fourth quarter revenues were $26.2 million. Given the fact that Napster just introduced a new ad-based model, it's not irrational to expect a bump in revenues for the first quarter.

Posted by Glenn at 7:58 PM | Link
|Earnings Releases||Napster|

• Loudeye reported its first quarter results yesterday. Bottom line: A loss of $4.6 million on revenues of $8.4 million. Last year the company lost $7.4 million on revenues of $5.2 million. (PR Newswire)

• Mobile executives discuss mobile file sharing at the WINMEC Forum 2006 in Los Angeles. (Digital Music News)

• And yet another example of big league marketing that will prevent the major labels from ceding their entire market share to a sea of mid-level and long tail indie albums: Island Def Jam's FeFe Dobson and St Martin Press's Sarah Mitchell will take part in a cross promotion parnership. Dobson's album Sunday Love will be out June 20th. (NY Post)

• Koch Distribution has signed an exclusive deal with Good Charamel Records, which is owned by Goo Goo Dolls bass player Robby Takac. The first release will be the "Music is Hope" benefit compilation that has tracks by Good Charamal bands Last Conservative and the Juliet Dagger as well as unreleased tracks by Goo Goo Dolls and Ani Difranco.

• Warner Music Group and South Korea's SK Telecom have announced a joint venture called WS Entertainment. (Press release)

Posted by Glenn at 8:52 AM | Link
|Earnings Releases|

Warner Music Group announced its second quarter results this morning: a loss of $7 million compared to a $4 million gain last year.

Naturally, other aspects of the numbers were emphasized, such as the 4% rise in revenue and the 67% rise in operating income.

What will really be highlighted by the media is the fact that digital revenues rose 30% from the previous quarter and now represent 11% of total revenue.

Posted by Glenn at 9:45 AM | Link
|Earnings Releases||Warner Music Group|

A few days ago RealNetworks announced its earnings for the first quarter of 2006. How nice of them to break out the revenue for the music division and offer previous quaters for comparison. Here they are:

• 2006 Q1: $28.9 million
• 2005 Q1 2005: $22.2 million
• 2005 Q2 2005: $24.1 million
• 2005 Q3 2005: $25 million
• 2005 Q4 2005: $26.1 million

RealNetworks had record revenues of $86.6 million for the quarter ($11 million more than the first quater of 2005).

Here's where it gets interesting. Net income for the quater was $24.9 million. Excluding the impact of the Microsoft litigation -- which added over $31 million to operating income -- net income was only $3.4 million. Yeah, not so much. But subscribers are up to 2.4 million.

Listen to the earnings conference call (MP3) and read the financials (PDF).

Posted by Glenn at 6:25 PM | Link
|Earnings Releases||RealNetworks|

RealNetworks announced its third quarter earnings on Thursday, and the numbers look pretty solid. The company reported net income of $11.2 million on revenues of 82.2 million. (The income statement had an $11.74 million gain on the sale of equity investments.) Music revenue grew 39% to $25 million while games revenue grew 62% to $14.7 million.

Of interest is the release of subscription numbers going back through years. In the last year, Real has added over 700,000 subscribers to its Rhapsody and other music services. (The company did not break down the subscription numbers any further.)

- Q3 2005: $25 million/over 1.3 million subscribers
- Q2 2005: $24.1 million revenue, over 1.15 million subscribers
- Q1 2005: $22.2 million revenue, over 1 million subscribers
- Q4 2004: $21.6 million revenue, over 700,000 subscribers
- Q3 2004: $18.8 million revenue, over 625,000 subscribers
- Q2 2004: $15.6 million revenue, over 550,000 subscribers
- Q1 2004: $12.3 million revenue, over 450,000 subscribers
- Q4 2003: $7.9 million revenue, over 350,000 subscribers
- Q3 2003: $4.7 million revenue, over 250,000 subscribers

Extra credit:

• Earlier this month Rhapsody settled its antitrust litigation with Microsoft for a $478 million cash payment and another $301 million in the future. The latter number can be reduced by credit earned by Microsoft for delivering subscribers to Rhapsody during an 18-month period during which the two will collaborate on promotions and marketing.
• Techdirt's take on the settlement: Real will attempt to take some of Apple's market share, and it will try to maintain its relevance by getting its name on valuable properties like MSN Messenger and MSN Search.

Posted by Glenn at 8:30 PM | Link
|Earnings Releases||Online Stores/Services|