This morning, EMI announced that it had made an offer of an undisclosed amount for Time Warner's (NYSE:TWX) music business. Time Warner also expects to be offered $2.5 billion on Thursday by Edgar Bronfman, Jr. and Haim Saban.
As a shareholder, I hope Time Warner sells, though I'm not sure either offer is a good one. In fact, I'm just not sure what a good offer would be.
The problem isn't any lack of clarity in how Time Warner's music segment operates. Warner Music Group has had three components for most of its life since the AOL-Time Warner merger:
- The development and production of recorded music worldwide
- The maintenance of a catalog of rights to compositions and the publication of printed music
- The manufacture of CDs and DVDs
The problem with trying to determine a fair value for Warner Music Group is that it has faced a number of factors that make it tough to tell what the future holds.
For example, on October 24, the Canadian firm Cinram completed its $1.05 billion purchase of Warner Music Group's CD and DVD manufacturing unit and other related businesses (like the physical distribution operations of the Warner-Elektra-Atlantic Corporation).
The sale will affect revenues, which will no longer include CD and DVD sales. What's more, the deal comes with "exclusive long-term agreements" that name Cinram as manufacturer, printer, packager and distributor of CDs for Warner Music Group (as well as DVDs for Warner Home Entertainment). If competition for a company's business yields better deals on services, what do exclusive long-term agreements do?
Another factor affecting Warner Music Group's future is the reduction of the amortization period for recorded music catalogs and music publishing copyrights from 20 years to 15, a decision the company made in the first quarter of this year. The resulting increase in amortization charges led to decreases in operating income of about 45% and 59% in the second and third quarters, respectively, and Warner Music Group expects amortization charges of $50 million each year just due to the change.
Finally, with Roxio's (NASDAQ:ROXI) Napster 2.0 emerging and Apple's (NASDAQ:AAPL) iTunes Music Store becoming Windows-compatible (both in October), Warner Music Group may be affected by the online music industry much more in the fourth quarter. And as Time Warner likes to remind its shareholders, there's always music piracy to worry about.
Discuss it on the Time Warner discussion board .
Devan Goldstein owns shares in Time Warner and Apple, and would love to get an iPod this holiday season. He can be reached at [email protected].
