Is the Recording Industry Worth Saving?

The fiscal fourth-quarter report that came out of Warner Music Group (NYSE: WMG  ) on Tuesday isn't pretty. Revenue dropped, despite a 28% increase in digital music sales and a healthy advance on the publishing side.

However, even digital salvation is a beast of burden these days, as growth is decelerating. High-margin downloads were supposed to beef up the bottom line, but Warner squeezed out a mere profit of $0.04 a share from continuing operations, and a loss for all of fiscal 2008.

"WMG had a strong year, outperforming the industry," CEO Edgar Bronfman Jr. noted in the release -- with a straight face, even. I guess what he should have said is, "If you think this is bad, check out the other major labels."

It's certainly not going to get any easier for Warner. The company expects near-term weakness, as a result of global economic weakness and a release calendar that favors the latter part of fiscal 2009.

With CD sales in a seemingly perpetual free-fall and MP3 sales not picking up the slack, one has to wonder if the labels will ever bounce back into favor.

The first thing we need to do is finger the culprit. The labels would love to point at widespread piracy. Surely the labels would never point to their own talent or model. Peer-to-peer file swapping has always been the easy scapegoat, but why is it that digital music growth is decelerating as legal downloading sites like Apple (Nasdaq: AAPL  ) and Amazon.com (Nasdaq: AMZN  ) are gaining traction?

To get this autopsy right, we need to dig deeper.

Is it the platform? If so, where do you pin the blame? CDs were a winner at first, as audiophiles updated their vinyl collections, but it's an easy format to duplicate. I'll make an educated guess and bet that CD sales began to fade once computers adopted the CD-ROM as the storage media of choice. It made it all too easy to rip and burn a CD, and pass it along. It's not as complicated as turning vinyl or cassette tapes into MP3 files or even mix tapes.

However, pointing the finger right back at the labels, isn't it true that our consumption habits have changed?

  • The popularity of genre-specific programming on Sirius XM Radio (Nasdaq: SIRI  ) and Internet radio opened aural appetites for more obscure artists.
  • Even on the pop scene, where the labels cornered Top 40, many of today's hottest acts are being introduced to the masses on American Idol or the Disney Channel.
  • Established artists are also going it alone. Between locking in deals like the one Madonna signed with concert promoter Live Nation (NYSE: LYV  ) , finding forward-thinking indie hubs like The Orchard (Nasdaq: ORCD  ) , or connecting directly with fans through social networking sites like MySpace and Facebook, the "getting signed to a major" goal is no longer the universal dream.

So investors in the languishing publicly traded major-label companies like Warner and Sony (NYSE: SNE  ) need to ask themselves if the labels have what it takes to matter again. Has the playing field been leveled to the point where they will never be as relevant? Deep down inside, you know the answer, and it's not music to the labels' ears.

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Longtime Fool contributor Rick Munarriz once had his band signed to Sony's Columbia Records label. It didn't exactly pan out. He does own shares in Disney, but he can't stand the Jonas Brothers. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 27, 2008, at 12:25 PM, We7Hannah wrote:

    Surely fingering culprits is not the most constructive way to curb piracy. Providing people the consumer with what they want in a business model that works is more sensible. So by giving the consumer the choice of free ad-funded music which is legal, easier and safer to use, like We7, rather than punishing them works.

    Steve Purdham

    CEO - We7

    www.we7.com

  • Report this Comment On November 27, 2008, at 3:53 PM, joeldenver wrote:

    Having been involved with the radio and music business since 1968, I've seen a lot go on -- both good and bad.

    First, I should disclaim that today, I run a music promotion and maketing company, All Access Music Group and a highly successful site, www.AllAccess.com, which does business with the record labels.

    The appetite for music has never been greater, and while consumption habits have changed, the newly formed Sirius/XM is in financial danger, commercial radio audiences are not being eaten alive by iPod and Internet listening -- and radio is still by far the #1 music discovery source.

    While MySpace and Facebook have milions of users and there millions of bands and their fans, name me one Internet spawned band that has been financially successful without the help of a record label. Right -- the number would be zero!

    Labels, while not as profitable as they once were, are working through new ways of doing business. Is anyone doing great out there right now? Damn few.

    And, ask most up and coming bands are they looking forward to being aligned with a label -- even a small one with big label ties -- and the answer will be yes.

    The labels still have the best teams in place to handle publicity, artist development, promotion, marketing, etc. to help creative musicians really become successful.

    Perhaps it's time for all of us to stop blaming, pointing fingers, and discussing whether a company or an industry is "worth saving" ... if you use that yardstick, it's time for Fool.com, the other investor sites, and Wall Street and the banks to pack it in, too.

    You haven't done a very good job lately, have you?

    -- Joel Denver

    President/Publisher

    All Access Music Group, Inc

    www.AllAccess.com

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