After its disappointing IPO earlier this year, Warner Music Group (NYSE:WMG) is finally starting to look at things differently. The company announced that later this year, it will launch an e-label that relies exclusively on the Internet for its distribution process.
This could be a wonderful move, or a horrible one. The benefits are clear -- if Warner can pull it off. Physical distribution makes up one of the record companies' biggest financial burdens. A CD needs to be pressed and packaged, along with its jewel case and artwork insert, before being sent off to retailers, who are quick to return unsold copies. Relying on digital downloads through popular online storefronts from companies such as Apple Computer (NASDAQ:AAPL), Napster (NASDAQ:NAPS), Yahoo! (NASDAQ:YHOO), and RealNetworks (NASDAQ:RNWK) definitely loosens up the breakeven point. That's the kind of advantage that an e-label could provide.
Being part of an e-label would also mean that artists don't need to wait until they have a complete album's worth of material ready, since songs can be released virtually in smaller clusters. And an e-label would give the struggling Warner Music Group a chance to invest a smaller amount in new artists before committing further to those who pan out. In other words, an e-label becomes like a farm team system for aspiring artists.
Sounds great, right? In theory, yes. Vivendi's (NYSE:V) Universal Music has also tinkered with the e-label concept. However, one is left wondering: What's in it for the musical artists?
The Internet has leveled the playing field. If a promising act is good enough to make the cut with Warner's e-label, why can't that act also go it alone? It can create a page on a social networking site like MySpace.com or music sites like CNET's (NASDAQ:CNET) Music.Download.com to generate buzz, then turn to cheap CD distribution through places like CDBaby.com, which also provides access to digital distribution.
Warner has to prove that it can kick in superior promotional support to justify its piece of the action, above and beyond the carrot of providing its best e-label performers with traditional recording. Besides, that's the kind of costly old-school distribution that the company is trying to eliminate with this e-label experiment.
Warner can't afford to go about this experiment softly. It's already going to upset retailers just by attempting to rub them out of the process with its e-label venture. This is Warner's chance to really flex its muscle and see whether it can matter in the critical dawn of digital distribution. It's already taking a step in a bold direction later this month, when it puts out the debut release of Ohio-based rockers The Sun on DVD, rather than CD.
The company is in a state of flux at the moment. The CEO of Warner's Atlantic Records label resigned two weeks ago. The industry, to put it bluntly, has become a sea of cacophony. But that doesn't have to be a bad thing. This is Warner's chance to wash ashore with the sweeter sound of digital pioneering.
Warner's moves may be seen as a disruptive technology, and that's the kind of sector-shattering event that commands attention in our Motley Fool Rule Breakers newsletter service. If you are interested in high-octane growth-stock investing, you may want to take advantage of the service's free 30-day trial.
Longtime Fool contributor Rick Munarriz once had his band signed to Sony's Columbia Records label. It didn't exactly pan out. T he 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.
