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Despite these strengths, WMG's revenues have been flat over the past few years due to declining CD sales and illegal music downloading, two factors which have offset gains from increased digital sales. The company's future success will depend on how successfully it adapts to the "digitalization" of the music industry. In addition to selling audio and video content through iTunes and other online media distribution centers, WMG has signed deals with sites like YouTube to receive advertising revenue from its posted video content. The company has also expanded its relationship with cell phone providers in an effort to get its digital content to more wireless subscribers ^[5].

[edit] Business Financials

Formerly a subsidiary of Time Warner, WMG was bought by a group of private investors in 2004 and went public in 2005^[6]. The company carries a substantial debt load (as of 2007 its total consolidated indebtedness was $2.273 billion), a legacy of its buyout from Time Warner^[7]. WMG operates in two business segments: recorded music and music publishing^[8]. Recorded music made up 83% of the company's total revenue in 2007, with music publishing making up the other 17%^[9]. In 2007 the company generated $3.385 billion in revenue, 51% of which came from international markets.^[10]

The recorded music division oversees the sale, and licensing of music in a number of physical (CDs, DVDs) and digital (downloads, ringtones) formats^[11]. Major music companies like WMG have built up substantial recorded music catalogs that they can exploit for years after they stop releasing an artist's new albums, whether through compilations, box sets, special package releases, etc. In a given year, these catalog albums usually comprise around 40% of WMG's recorded music sales^[12].

WMG's music publishing segment owns and acquires the rights to musical compositions, which they then market to others who pay a royalty for their use^[13]. Warner holds over a million copyrights from more than 65,000 composers and songwriters^[14].

WMG Annual Report^[15]

WMG Annual Report^[16]

[edit] Trends and Forces

• Maturation of the CD market leads to declining physical sales for music industry: From 1990 to 1999, the U.S. recorded music industry grew at a compound annual growth rate of 7.6%, a trend that was fueled in part by the replacement of vinyl records and cassettes with CDs^[17]. Since then, it's estimated that yearly sales of physical music product in the U.S. have declined at a compound annual growth rate of 6%^[18]. The recorded music industry as a whole has also seen negative growth since 1999, largely because of digital piracy, but also partly because of declining CD sales^[19]. WMG has not managed to escape this trend, as evidenced from the graph above showing a steady decline in revenue from physical sales over the past few years.

• WMG exploits growth of new formats for recorded music distribution: As the CD market has waned, the market for MP3 players like the ipod and digital music formats has exploded. Although we are still in the early stages of the music industry's digital revolution, Warner has already begun exploiting new avenues of media distribution. It has deals with online stores like iTunes to sell single tracks, albums, and video content. In addition, Warner was one of the first major music companies to enter into agreements to distribute its music video library on video sharing sites like YouTube in return for a chunk of the advertising revenue generated from those videos. The company has also expanded into the cell phone market with ringtones, track downloads, and music video downloads, a strategy it hopes will provide a hedge against the more insecure online market where piracy abounds^[20]. While digital sales accounted for only 3% of WMG's total revenue in 2004, it comprised almost 13% of revenues in 2007^[21].

• WMG and competitors try to contain digital piracy: Illegal music downloading remains the music industry's biggest threat. The International Federation of the Phonographic Industry (IFPI) approximates that almost 20 billion songs were illegally downloaded in 2006^[22]. WMG was originally a firm supporter of digital rights management technology (DRM), which prevents consumers from sharing their iTunes songs with friends. However, because of strong consumer dislike for DRM that had a greater negative impact on sales than it did a positive impact on piracy, Warner has begun to distribute its catalog DRM-free. Nonetheless, the future growth of the company and those like it will depend on their ability to find an accepted way to combat digital piracy. In addition to digital piracy, major record labels also face industrial piracy, which involves the mass production of illegal CDs in factories, mostly in developing countries^[23]. These CDs are sold at significantly lower prices than their legal counterparts. According to the IFPI, these industrial pirated music products accounted for roughly one third of all CDs purchased in 2006^[24].

[edit] Competition

WMG's closest competitors are its rivals in the "Big Four" consortium: Sony BMG, EMI Group, and Universal Music Group. All four operate in recorded music and music publishing.

[edit] Market Share

The graphs below display the 2005 domestic and international market share of the major music companies based on retail music sales. The "Big Four" account for a little over 80% of all retail music sales in the U.S., and just over 70% globally.

Nielsen SoundScan^[28]

IFPI^[29]

[edit] Notes

1. ↑ WMG 2007 10K, Item 1, pg.1
2. ↑ WMG 2007 10K, Item 7, pg.45
3. ↑ WMG 2007 10K, Item 1, pg.1
4. ↑ WMG 2007 10K, Item 1, pg.7
5. ↑ WMG 2007 10K, Item 1, pg.4
6. ↑ WMG 2007 10K, Item 1, pg.5
7. ↑ WMG 2007 10K, Item 1A, pg.31
8. ↑ WMG 2007 10K, Item 1, pg.1
9. ↑ WMG 2007 10K, Item 1, pg.5
10. ↑ WMG 2007 10K, Item 1, pg.1
11. ↑ WMG 2007 10K, Item 1, pg.1
12. ↑ WMG 2007 10K, Item 1, pg.7
13. ↑ WMG 2007 10K, Item 1, pg.1
14. ↑ WMG 2007 10K, Item 1, pg.1
15. ↑ WMG 2007 10K, Item 6, pg.41
16. ↑ WMG 2007 10K, Item 7, pg.50
17. ↑ WMG 2007 10K, Item 1, pg.16
18. ↑ WMG 2007 10K, Item 1, pg.16
19. ↑ WMG 2007 10K, Item 1, pg.16
20. ↑ WMG 2007 10K, Item 1, pg.4
21. ↑ WMG 2007 10K, Item 7, pg.50
22. ↑ WMG 2007 10K, Item 1, pg.16
23. ↑ WMG 2007 10K, Item 1, pg.17
24. ↑ WMG 2007 10K, Item 1, pg.17
25. ↑ WMG 2007 10K, Item 6, pg.41
26. ↑ EMI Group 2005 Annual Report, Consolidated Profit and Loss Account, pg.68
27. ↑ Vivendi 2006 Annual Report, Item 4, pg.8
28. ↑ Wikipedia, "Music Industry"
29. ↑ Wikipedia, "Music Industry"