Ongoing Events

This page contains a compilation of articles about ongoing events in the music industry that I found very interesting. Enjoy!

12/6/08 Music Industry Students Feel Pinch of Economy

When Nick Walker started his studies to become an audio engineer, he thought his prospects were pretty good. But, now he says that's all changed.

"It was obviously a lot easier to get work out there three years ago," said Walker, a 2007 graduate from the University of Colorado Denver's Music and Entertainment Industry Studies program. "Now, with the economy and digital downloading that's happening here."

Walker is currently working as a server at Cuba Cuba Restaurant and Café instead of working in the industry he studied for.

"It's hard," said Walker. "Everyone's fighting for the same position."

That's why more than 40 current students with the UC Denver's College of Arts and Media met with assistant professor Storm Gloor less than two weeks before graduation. They wanted to hear about how they can find work once they've gotten their degrees.

"A lot of people will tell you the music industry is in trouble and in some aspects, it is," said Gloor. "They should definitely be concerned, especially given the fact that we don't know how the economy is gonna affect the entertainment industry."

Gloor is advising students to look at all avenues when seeking a job. He admits traditional recording jobs might be scarce, but he says movies, television shows, and commercials are still looking for musicians and technicians. Plus, he says digital distribution and online companies are continuing to grow.

"We talk a lot to our students about how to get demos in the right hands or get your music heard by the most amounts of people and specifically the right people," said Gloor.
"Networking is very important."

Students say they are worried.

"I know it's gonna be tough," said Scott Aller, UC Denver student. "It's mostly the bills that's scaring me."

"Ambiguity," said Genevieve Binder, UC Denver student. "It's like this big cloud of - I don't know what I'm doing."

Walker is working on starting his own business in the music industry.

"Wasn't my plan at all, yeah," said Walker. "I mean, obviously a year out of college, I would have liked a job in the industry."

12/3/08 What Will the Music Industry Look Like in Five Years?

What will the music industry look like in five years? In a new study by Forrester Research, “U.S. Music Forecast 2008 to 2013,” industry analysts attempt to cook up some numbers. No huge surprises here: The U.S. music market is expected to shrink over the next five years from $10.2 billion to $9.8 billion. Digital music sales are expected to grow from 18 percent to 41 percent of the total (as physical product shrinks from 64 percent to 40 percent of the market). Sonal Gandhi, the lead analyst on the study, spoke with Rolling Stone about her findings.

You’re predicting that digital music will grow from 18 to 41 percent of total sales in 5 years. That seems a little low. Last week Atlantic was already claiming that 51 percent of its revenue is already coming from digital.
We built this market in the fall of this year and the Atlantic story just came out last week. The Atlantic story may be an exception. The market has suddenly gone into a recession and we’re hearing stories today how CD sales are not going as expected. We tend to be a little more conservative on our forecasts, but I think we’re going to stick with this number for now.

The flip side to that is that physical format, mostly CDs, will shrink from 64 to 40 percent of the market. So digital and physical product according to your predictions will make up the same percentage of the marketplace in 2013.
Yeah, and the missing portion is the ringtones and ringbacks and we don’t think that’s a growth market either. Ringtones have been more or less flat and ringbacks are small.

Your prediction that the U.S. music market will shrink in five years from $10.2 billion to $9.8 billion also seems like a conservative estimate.
We’re not taking into account some of the new models that are coming into play. We haven’t predicted what the licensing revenues are going to be for something like a Nokia Comes With Music. This is purely based on revenues from direct sales or services to the consumer.

Have cell phones caught on at all?
Right now we’re not seeing a very high listenership on cell phones for music. People who listen to music on their phones are a somewhat wealthier, younger demographic that already has MP3 players. They buy music for the MP3 players and the chances are that they load the same music to their cell phones. So they’re not buying new music for their cell phones.

When does the market for portable MP3 players become totally saturated?
I think we’re seeing it might flatten out towards the end of the five year period.

There was a surprisingly significant bump in vinyl sales this year over last.
Vinyl is such a small chunk that it doesn’t really make a big dent in the overall number.

What’s the biggest surprise in these findings?
Two things are happening in terms of digital music: One is that people are buying MP3 players and the growth is still substantial. Even though we think it’s going to flatten, it’s still growing. Not everybody who has an MP3 player necessarily buys digital downloads, but we have seen that that number has grown and we predict that number will continue to grow. Now, people who were early adopters of MP3 players were also heavy music fans, so they tend to spend more on digital downloads. As more of the mass market starts to own MP3 players and become digital music buyers, they’re not going to spend as much on digital downloads as the early adopters, so the average spending on digital downloads is either going to stay the same or not grow much.

So it’s a wash. There was some talk that that the 99 cent song price may be renegotiated along a sliding scale depending on how popular the song is.
Pricing is going to play a bigger role going forward because Amazon is coming out with all these variable pricing models. People are still locked into the iPod and iTunes mentally. They have an iPod and it works well with iTunes and that’s how they’re used to buying. With variable pricing, Amazon can steal customers away from iTunes. And it will be those savvy music fans that know they’re getting a better deal there.

And Amazon is all DRM-free.
We’ve seen that DRM-free so far only appeals to those heavy music fans right now. It isn’t holding people back from downloading music. ITunes is still the biggest player out there. Once these fans realize they have so much more choice, then the market will follow them eventually.

So a potential end to iTunes’ dominance?
It’s hard to say. They’re so big.

We’re at the end of the year. Did anything happen in 2008 that struck you as particularly noteworthy?
What’s been noteworthy is all these other business models that all these labels are willing to participate in. They’ve shown a willingness to make money from ad-supported music with deals with MySpace, for instance. Hopefully the Webcasting issue will be resolved sooner or later and everyone will go home happy. Definitely 2008 was a good year where labels did try to work with digital music models and come up with terms so that those models can ultimately survive without having to pay huge fees for playing music. What remains to be seen is how well they can support themselves with ads because of what’s going on in the economy today.

11/26/08 Warner Reports Full-Year Results

  • Digital revenue in the quarter grew 28% year over year to $167 million
  • Total revenue of $854 million for the fourth quarter of 2008 decreased 1% from the prior-year quarter, or 5% on a constant-currency basis. Full-year 2008 revenue grew 3% to $3,491 million, and declined 2% on a constant-currency basis.
  • Digital revenue was $167 million, or 20% of total revenue in the quarter, up from $166 million in the third quarter of fiscal 2008 and up 28% from $131 million in the prior-year quarter. Full-year 2008 digital revenue rose 39% to $639 million, or 18% of total revenue.
  • Operating income from continuing operations declined 20% to $66 million in the quarter compared to $83 million in the prior-year quarter. The prior-year quarter included a net benefit of $7 million resulting from a $17 million benefit related to legal settlements, $9 million in expenses related to the company's fiscal 2007 realignment initiatives and $1 million in expenses incurred in connection with the potential acquisition of EMI Group plc (the "Prior-Quarter Items"). For full-year 2008, operating income from continuing operations was $207 million compared to $228 million in the prior year. The prior fiscal year included a net expense of $3 million resulting from a $69 million benefit related to legal settlements, $63 million in expenses related to the company's fiscal 2007 realignment initiatives and $9 million in expenses incurred in connection with the potential acquisition of EMI Group plc (the "Prior-Year Items").
  • Operating income before depreciation and amortization (OIBDA) from continuing operations fell 8% to $134 million from $146 million in the prior-year quarter, which included the net benefit of $7 million from the Prior-Quarter Items. OIBDA from continuing operations in the fiscal year amounted to $475 million, up from $474 million in the prior year, which included the net expense of $3 million from the Prior-Year Items.
  • Income from continuing operations was $0.04 per diluted share compared to income from continuing operations of $0.11 per diluted share in the prior-year quarter. Loss from continuing operations was $0.24 per diluted share in the fiscal year compared to a loss from continuing operations of $0.05 per diluted share in the prior year.

Warner Music Group Corp. announced its fourth-quarter and full-year financial results for the period ended September 30, 2008.

"WMG had a strong year, outperforming the industry, and sustaining revenue and OIBDA over the fiscal year, despite the challenging global recorded music and broader financial environments," said Edgar Bronfman, Jr., Warner Music Group's Chairman and CEO. "We remain confident in our ability to execute on our long-term goals, given that we continue to advance our strategy to lead the industry transformation by pursuing innovative business models, diversifying revenue streams and investing in A&R."

"The volatile global economy and timing of our release schedule may result in back-end weighted fiscal 2009 results," Steve Macri, Warner Music Group's Executive Vice President and CFO added. "From a balance sheet perspective, we're gratified to see the growth in our cash balance continue, further increasing our financial flexibility."

Fourth-Quarter Results
For the fourth quarter 2008, revenue declined 1.5% to $854 million from $867 million in the prior-year quarter, and was down 5.2% on a constant-currency basis. This performance reflects the ongoing transition in the recorded music industry characterized by a shift in consumption patterns from physical sales to new forms of digital music, the continued impact of digital piracy, and to a lesser extent, the company's proactive efforts to manage retailer inventories. Domestic revenue declined 5.4%. International revenue grew 3.7%, but declined 4.1% on a constant-currency basis. On a constant-currency basis, revenue grew in Japan and parts of Europe.

Operating income from continuing operations fell 20.5% to $66 million from $83 million in the prior-year quarter and operating margin from continuing operations was down 1.8 percentage points to 7.7%. OIBDA from continuing operations decreased 8.2% to $134 million from $146 million in the prior-year quarter and OIBDA margin from continuing operations declined 1.1 percentage points to 15.7%. Operating income, operating margin, OIBDA and OIBDA margin from continuing operations for the fourth quarter of fiscal 2007 reflect the net benefit of $7 million from the Prior-Quarter Items, as well as lower annual bonus compensation than in the current-year quarter.

Income from continuing operations was $6 million, or $0.04 per diluted share, for the quarter, down from income from continuing operations of $17 million, or $0.11 per diluted share, in the prior-year quarter. The net benefit of $7 million from the Prior-Quarter Items amounted to $0.04 per diluted share.

The company reported a cash balance of $411 million as of September 30, 2008, a 23% increase from the September 30, 2007 balance of $333 million. As of September 30, 2008, the company reported total long-term debt of $2.26 billion and net debt (total long-term debt minus cash) of $1.85 billion.

For the quarter, net cash provided by operating activities was $119 million compared to $105 million in the prior-year quarter. Free Cash Flow (defined as cash flow from operations less capital expenditures and cash paid or received for investments) was $100 million, compared to negative Free Cash Flow of $48 million in the comparable fiscal 2007 quarter. Unlevered After-Tax Cash Flow (defined as Free Cash Flow excluding cash interest paid) was $122 million, compared to negative Unlevered After-Tax Cash Flow of $33 million in the comparable fiscal 2007 quarter (see below for calculations and reconciliations of Free Cash Flow and Unlevered After-Tax Cash Flow).

Below is the business segment discussion for the quarter.

Recorded Music
Revenue from the company's Recorded Music business declined 3.7% from the prior-year quarter to $707 million, and was down 6.9% on a constant-currency basis. The decline in constant-currency revenue primarily reflects strength in Japan, France and Italy, offset by weakness in the U.S.

Recorded Music digital revenue of $156 million grew 25.8% over the prior-year quarter and represented 22.1% of total Recorded Music revenue. Domestic Recorded Music digital revenue amounted to $99 million or 27.2% of total domestic Recorded Music revenue. Strong digital revenue was primarily driven by growth in global online downloads, and to a lesser extent growth in international mobile.

Major sellers in the quarter included titles from Metallica, Kid Rock, T.I. and Mariya Takeuchi. International Recorded Music revenue was up 0.9% from the prior-year quarter to $343 million, but declined 6.0% on a constant-currency basis, while domestic Recorded Music revenue declined 7.6% from the prior-year quarter to $364 million.

Year-over-year revenue differences in the global Recorded Music business were due to the timing of releases and declines in the physical business, which are not currently being offset by growth in the digital business. In addition, the impact from the company's more active retailer inventory management as well as the changing underlying demand for physical recorded music product is evident in our results.

Quarterly Recorded Music operating income from continuing operations fell 22.2% to $56 million, resulting in an operating margin from continuing operations of 7.9% compared to 9.8% in the prior-year quarter. Recorded Music OIBDA from continuing operations fell 13.8% to $100 million for the quarter. Recorded Music OIBDA margin from continuing operations contracted 1.7 percentage points to 14.1% from the prior-year quarter. Recorded Music operating income, OIBDA, operating margin and OIBDA margin from continuing operations for the fourth quarter of fiscal 2007 reflect a portion of the Prior-Quarter Items — a $12 million benefit related to legal settlements and $5 million in expenses related to the company's fiscal 2007 realignment initiatives. The margin contraction reflects higher third-party distribution costs partially offset by lower product costs from a shift to higher-margin digital products.

Music Publishing
Music Publishing revenue increased 13.9% from the prior-year quarter to $156 million, and was up 6.1% on a constant-currency basis. Music Publishing revenue grew 12.0% domestically and 14.9% internationally, and increased 3.3% internationally on a constant-currency basis. Digital revenue from Music Publishing grew 57.1% to $11 million, representing 7.1% of total Music Publishing revenue.

On a constant-currency basis, the decline in mechanical revenue of 5.6% was offset by a 31.0% increase in synchronization revenue, a 6.1% rise in performance revenue and the strong 57.1% increase in digital revenue. The increase in synchronization revenue was due in part to timing of receipts while mechanical revenue weakness reflects the industry-wide decline in physical record sales partially offset by a more stable performance by catalog offerings.

Music Publishing operating income amounted to $36 million, down 7.7% from $39 million in the prior-year quarter, resulting in an operating margin of 23.1%, down 5.4 percentage points from the prior-year quarter. Music Publishing OIBDA was essentially flat at $54 million compared to $55 million in the prior-year quarter and OIBDA margin of 34.6% declined 5.5 percentage points from the prior-year quarter. Music Publishing operating income, OIBDA, operating margin and OIBDA margin for the fourth quarter of fiscal 2007 reflects a portion of the Prior-Quarter Items — a $3 million benefit related to a legal settlement and $1 million in expenses related to the company's fiscal 2007 realignment initiatives, as well as modest severance costs.

Full-Year Results
For the full year 2008, revenue grew 3.2% to $3,491 million from $3,383 million last year, and fell 2.2% on a constant-currency basis. Total revenue in 2008 was split 46% domestic and 54% international. Domestic revenue declined 3.9% over the prior year while international revenue climbed 10.3%, but fell 0.5% on a constant-currency basis. Total digital revenue rose 38.6% year over year to $639 million and was 65% domestic and 35% international. Digital revenue represented 18.3% of total revenue for the fiscal year compared to 13.6% in the prior fiscal year.

Operating income from continuing operations of $207 million decreased from $228 million in the last fiscal year and operating margin from continuing operations contracted 0.8 percentage points to 5.9%. OIBDA from continuing operations for the fiscal year amounted to $475 million, essentially flat against $474 million last year while OIBDA margin from continuing operations contracted by 0.4 percentage points to 13.6%. Operating income, operating margin, OIBDA and OIBDA margin from continuing operations for fiscal year 2007 reflect the net expense of $3 million from the Prior-Year Items, as well as lower annual bonus compensation than in the current year.

Loss from continuing operations for fiscal year 2008 was $35 million, or $0.24 per diluted share, compared to loss from continuing operations of $8 million, or $0.05 per diluted share, for the 2007 fiscal year.

This fiscal year, net cash provided by operating activities was $304 million compared to $302 million in fiscal year 2007. Free Cash Flow amounted to $137 million compared to Free Cash Flow of $22 million in the prior year. Unlevered After-Tax Cash Flow was $286 million, compared to $158 million in fiscal year 2007 (see below for calculations and reconciliations of Non-GAAP Free Cash Flow and Unlevered After-Tax Cash Flow). Free Cash Flow and Unlevered After-Tax Cash Flow for fiscal 2008 include the previously disclosed investment in Frank Sinatra Enterprises. Free Cash Flow and Unlevered After-Tax Cash Flow for fiscal 2007 include previously disclosed investments in Front Line Management and Roadrunner as well as $63 million in restructuring-related charges and $110 million in cash received from our settlement with Bertelsmann AG regarding Napster.

10/14/08 Music Publishing for Today's Market

Before the invention of the phonograph, songwriters earned income by relying on music publishers to sell sheet music and piano rolls of their songs. Even as radio and television replaced the piano in the parlor, music publishers continued to play an important role as popular singers continued to rely upon established songwriters to provide their material. (Tin Pan Alley) However, with the advent of R&B (and especially the Motown era) popular recording artists began to write more of their own songs. Since that time, the music publishing industry has taken on a less important role for singers and a much more important role for revenue growth.

Publishers traditionally acquired revenue through several different means.

Performance Rights: A copyright owner has the exclusive right to authorize the "public performance" of that work. This is why radio and television broadcasters must enter into licenses with performance rights organizations such as BMI, ASCAP and SESAC. These performance rights organizations collect income on behalf of songwriters and music publishers whenever a song is publicly broadcast.

Synchronization Rights: Whenever a song is used with a visual image, it is necessary to obtain a "synchronization" (or "synch") license permitting the use of that song. Music publishers issue synch licenses to television advertisers, motion picture companies, video manufacturers and CD-Rom companies. A portion of this money (usually 1/2 the net proceeds) is paid to the songwriter.

Mechanical Rights: Mechanical royalties" refers to royalties paid for the reproduction of songs on CD, DVD, jump drives, DAT, audiocassette, flexi-discs, musical greeting cards, and other devices sold on a "per unit" basis.

However in today’s new music business model publishers have begun to adjust their business practices to the new digital paradigm. The two main areas that are seeing significant growth are:

1. Wireless Broadband which is allowing the acceleration of device convergence. Now the iPhone has the capabilities of a computer, a PDA can be a music player and video game consoles can now access the Internet.

2. Mobile phones have become basic mini-PC’s and there are over 3 Billion mobile phone users in comparison to only 1 Billion internet users.

What is happening worldwide is that the idea of “selling copies” of music (mechanical license) has become secondary to having access to music. The Internet has become a huge machine that is allowing individuals to have access to and copy music, movies and other forms of entertainment instead of buying physical copies. Wireless Broadband access is opening up huge international markets in South East Asia and Latin America and this new access is creating shifts in how publishers must do business.

Publishers can no longer wait for companies to pay them for mechanical rights or even synchronization rights. This is a model based on consumer usage and this model is dying. Publishers must act quickly to license their catalogs to emerging technologies first; in fact recorded music and publishing licensing should now MARRY and be marketed together.

A good publisher must be able to license his catalog for internet and live music performances, background music, printed and digital sheet music, ringtones, lyric services, on-demand services, flat rate revenue sharing and ALL types of synchronization deals.

Physical sales of CD’s are declining quickly while more and more music users see music as a “free service” to be traded among other users. Couple this idea with an emerging international high economic growth, a young population and massive mobile phone usage and you have a perfect case for conceiving a new publishing model.

Gerd Leonhard has spent over twenty-five years in the technology and entertainment industries, both in the U.S. as well as in Europe, and recently, in Asia. In 2005, Gerd co-authored the critically acclaimed book "The Future of Music" which has become a must-read for music industry professionals around the globe, and which is now available in German, Italian, and Japanese. Recently he presented the following statistics.

a. In the past 12 months over 300 MILLION people joined online communities that use music

b. About 75,000 different devices can play MP3 files

c. In 12 – 18 months, digital broadcasting with “drag & drop” TV and radio stations will be widely available.

d. In the next 12 months high-capacity wireless devices such as the iPhone will be widely available.

The music business has changed into the licensing business; will you be a part of the new paradigm?

10/5/08 Record Industry Digital Growth Doomed

100 years ago when Henry Ford introduced the Model T it became the biggest selling car of 1908. It's success came mostly from the fact that it sold for $850 that year, making it the least expensive vehicle on the market.

But just being number one was not enough for Ford, who outsold second place Buick that year, 10,202 units to 8820. He saw price as the key to big growth and strived to lower the selling price of the vehicle through efficiencies in mass production. By 1923 the price of the Model T dropped way down to $250 and the end result was it made Ford richer. Ford sold 1,831,128 in 1923. Chevrolet came in at number two, but was way behind at 323,182 cars.

I use this example not as some historical iPod parallel, but to illustrate why prices on pay digital media need to be lowered dramatically to truly succeed. The Model T is the example schools held up to school children for decades as a basic lesson in economics. Price low for mass consumption and volume will generate both greater revenues and profits.

I stated back in 2001 that the best way for the major labels to profit from digital downloads is to price them very cheap, around the ten cent mark. At that point it is easier to promote the value of paying for music as opposed to trading it for free. Indeed, the true dollar value of music has plummeted since Napster first appeared in 1999, but the traditional record industry as a whole has refused to recognize this fact let alone adjust to it. Music simply isn't the artificially scarce commodity it once was.

Many of the digital pundits I have talked to over the years have agreed with me that $0.99 a track on iTunes is too much and that the optimum price is something well below that. Unfortunately, The recent decision by the Copyright Royalty Board (CRB) updating rates for mechanicals on downloads makes the dime-a-track pricing scheme, or anything resembling it, impossible.

Recently, the CRB ruled that the mechanicals rate for each song download will remain at 9.1 cents for tracks under five minutes in length. Mechanicals are the song writers share of the sale, distributed through the Harry Fox Agency. By making these rates a fixed dollar amount rather than a percentage of the sale price of the item, it artificially inflates the purchase price. Of course, the price demands of the record labels themselves are even more inflated, but unlike a federally mandated royalty rate, these numbers can theoretically be negotiated lower as per the demands of the market.

The environment created by the industry itself has left us with a landscape where a digital track is either $0.99 or free, but little in between. (WalMart does sell tracks for $0.89 and eMusic has worked bundles with the independent labels that cost less. But, $0.99 is the defacto standard right now for major label fare). Even a quarter-a-track is unobtainable unless the labels and digital stores like iTunes are both willing to take a cut less than what Harry Fox gets.

At the $0.99 mark consumers aren't buying in big enough numbers, with the average iPod holding about a dozen paid tracks among the thousands that are stored on it. My own experience with iTunes, which I described in the article "iTunes: Still on That First $20 Gift Card" unconsciously bears this fact out. As Paul Resnikoff has noted frequently on Digital Music News, digital revenues are starting to flatten out and are therefore unlikely to compensate for the fall in sales of physical media.

Without a significant drop in prices growth in the digital arena will stagnate and the opportunity for the traditional record industry to thrive under the disruptive technologies of the Internet will be lost. We all witnessed Wall Street change forever in a few days, the disintegration of Merrill Lynch, Lehman Brothers, and Bear Stearns was that fast and unexpected. It is not unreasonable to imagine one or all the Big Four record labels disappearing within in a few years.

If any major labels do disappear, it will not be all because of file trading, either. It will come from a much more complicated and convoluted scenario, where pre-existing licensing arrangements are a major culprit, because they prevent the industry as a whole from adjusting fully to market change (at least when the players are finally able and willing to adjust).

iTunes has sold billions of songs over the past few years, but there was and still is far more money left untapped. When you buy a song file what you are buying is not a stamped product, but permission. Permission to copy a track from a sanctioned vendor. But it is just as easy if not easier from people to copy from one another. Who needs a middle man unless they offer an added value and do it at a motivating price point?

Bottom line, $0.10 tracks will never be and the one who loses the most from this is not the consumer this time. Henry would tell you that.

9/15/08 Napster Sold to Best Buy

Back in July rumors were circulating in financial circles that Napster was ripe for the plucking. Today, Best Buy announced that it has acquired Napster for $121 million.

As Wall Street reels from last night's announcement that Lehman Brothers has bitten the dust, Best Buy picked up the digital music company for $2.65, double its $1.36 close on Friday. The purchase of Napster gives Best Buy access to 700,000 digital media subscribers that it hopes to cross-sell other electronic and digital items to in the future. In a statement Best Buy President Brian Dunn said, "Best Buy intends to use Napster's capabilities and digital subscriber base to reach new customers with an enhanced experience for exploring and selecting music and other digital entertainment products over an increasing array of devices,"

Napster lost $4.4m in it's most recent quarter on revenue of $30.3m. The company did have some $65 million in cash, more than what the stock was valued at back in mid-summer. Best Buy's job is now to turn that loss around. As Best Buy is also closely linked to SanDisk, the number two seller of Digital media portables, one wonders what synergies the acquisition will bring to those three companies. Hopefully, they will be able to stimulate growth for Napster, which has remained stagnant these past two years.

Sources

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