Warner's Broken Record

Shares of Warner Music Group (NYSE: WMG  ) opened 8% lower this morning after another terrible quarterly report.

Don't be surprised. Only those who aren't paying attention should be shocked by Warner's downward spiral. Revenue tumbled further than expected, 14% to $789 million during the record label's holiday quarter. The music marketer's loss widened during the charge-laden period. Deficits are as common as groupies backstage. Warner has now delivered nine consecutive quarters of red ink on the bottom line.

There was a time when the labels clung to hopes that downloads would save the day, but that's just not happening. Digital sales climbed less than 2% over the past year, certainly not enough to offset the continuing fade in CD sales. The more problematic metric here is that digital revenue has now taken a sequential hit for three consecutive quarters. In other words, buckle up for downloads to begin clocking in with year-over-year declines starting next quarter if the trend continues.

Spoiler alert: It will.

Warner isn't in very good shape right now. Citigroup (NYSE: C  ) has reluctantly inherited EMI Group, but Warner's unlikely to come up with the kind of scratch to win back its old flame. Warner has $1.7 billion in net debt, and it would be insane to sell off its publishing business for the chance to double down on more musical acts.

The launch of Apple's (Nasdaq: AAPL  ) iTunes Music Store helped usher in the era of digital monetization. Obviously it didn't eradicate piracy entirely, but it made it socially acceptable to pay $0.99 for a song.

However, the same tools to cash in on digital distribution are also now the same weapons being used by unsigned artists to gain audiences without the need for restrictive label deals.

Did you catch the Simon Cowell ad during the Super Bowl? News Corp.'s (Nasdaq: NWS  ) (Nasdaq: NWSA  ) Fox is going to introduce Europe's popular X Factor here in the fall. It will be another singing competition between the American Idol programming lulls. Yes, it will be more new stars pushing out the aging label artists.

The music industry is changing. Live Nation (NYSE: LYV  ) didn't combine the country's largest event promoter with the top dog in ticketing through its Ticketmaster acquisition on a whim. Vertical integration is what will separate the survivors from the tombstones in this industry.

On the current path that Warner's on it doesn't appear to be warming up to the survivors.

How would you save WMG? Share your thoughts in the comment box below.

Apple is a Motley Fool Stock Advisor choice. The Fool has written puts on Apple. The Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz once had his band signed to Sony's Columbia Records label. It didn't exactly pan out. He does not own shares in any of the stocks in this story. 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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