Music Majors in the Streaming Economy: Warner Music Group

In its last annual report Warner Music Group (WMG) exhibited a total revenue of US $3.58bn – the highest since the recorded music company was sold by Time-Warner to the Investor Group in 2003. Although overall costs also increased to US $3.15bn (WMG 2017: 38-39), the operating income is remarkably high with US $222m (WMG 2017: 40) especially compared to the disastrous results of the early 2000 years with annual losses of about 1 billion US$. The main driver of the revenue growth is the music streaming boom. In the recorded music segment streaming revenue increased by US $434m to US 1.34bn in the fiscal year ending on September 30, 2017. The music publishing segment contributed a further increase of US $58m of streaming revenue (WMG 2017: 36). Thus, WMG earned almost US $500m more with music streaming in 2017 compared to 2016. The further analysis highlights how the music major’s business model has shifted to the music streaming economy.

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Warner Music Group in the Digital Paradigm Shift

On December 8, Warner Music Group (WMG) released the annual report for the financial year 2016 ending on September 30, 2016 reporting the highest revenue of US$ 3.25bn since Access Industries has acquired WMG in 2011. WMG also reported its best profit performance – measured in operating income before depreciation and amortization (OIBDA) – of US$ 507m since 2006. For the first time after Access Industries’ takeover, WMG will pay a dividend of US$ 54m to its shareholders (WMG 2016: 110). Those key facts indicate a healthy business performance of the smallest music recording major company in the digitalised music industry. Thus, the following analysis highlights the causes for WMG’s economic recovery and the re-structuring of its business model.

How bad is YouTube?

In the past few years several studies on the impact of P2P music file sharing on recorded music sales were published. They came to very different and even conflicting results, as I highlighted in a 25 part blog series. A recently published study now shifts the focus from file sharing to music video online streaming. R. Scott Hiller of Fairfield University and Jin-Hyuk Kim of University of Colorado Boulder analysed the sales displacement effect of YouTube in a paper entitled “Online Music, Sales Displacement, and Internet Search: Evidence from YouTube“. They concluded that Warner Music Group sold significantly more units of its Billboard 200 albums, when the Warner content was removed from YouTube due to a conflict on licensing fees. In addition, they found no evidence that the blackout had a negative promotional effect for Warner artists.

You can read more about this study and my assessment of the results here:

Is Streaming the Next Big Thing? – The Labels’ Perspective

The Beggars Group chairman, Martin Mills, recently told the Guardian that “(…) 22% of the label group’s digital revenues came from streaming – and that the majority of its artists earn more now from track streams than track downloads” in 2012. Though the article does not report absolute figures, the revenue can be considered rather high with a roster including Adele, Jack White and The xx.

A member survey of the global rights agency Merlin representing more than 20,000 indie labels including Beggars Group/XL Recordings, Rough Trade, Naïve, Tommy Boy, Cooking Vinyl and Naxos unveils that “92% of respondents saw streaming and subscription revenues grow between 2011 and 2012, with a third enjoying increases of more than 100%” as recently reported by Musicweek. The same study shows that 24% of indies across the world and 30% of European indies generated more income from streaming than downloads in 2012.

These figures suggest that music streaming seems to be a promising revenue source for record labels. In the following the economic potential of music streaming and the underlying business model are analysed from the record labels’ perspective.

Book Review: “Download!” by Phil Hardy

“Download! How the Internet Transformed the Record Business” by music industry journalist Phil Hardy is a detailed analysis how the majors record companies lost control of the value added chain in the music industry in the digital revolution. He tells the story about self-confident and maybe arrogant music business executives, who had profited from the CD revolution in the 1990s, but were outmanoeuvred by industry outsiders who set up a totally new added value network for recorded music. The once highly profitable record business that attracted investors from other industries in the 1980s and 1990s turned into a laboratory of digitalization with declining record sales, job losses and divestments of pressing plants and distribution networks in the 2000s. “Download!” is, therefore, an important contribution to understand the impact of Internet and new media on the transformation of the recorded music industry.