In the middle of October, courtesy of The MBJ, I traveled to New York City for a special event, the 2008 Media and Money Conference. Organized by the Dow Jones Company and Nielsen Media Research, the conference met at the Marriot Marquis in Times Square. The Dutch group VNU, both owner of Billboard Magazine and Nielsen, was a player too, and understandably the event garnered much attention in the music trade. There were keynote speeches from CEO’s of several top media and entertainment companies and pointed panel discussions with top professionals in the field. The panels, in particular, took the form of industry state-of-the union addresses, examining what was working, what was not, and, generally, where entertainment was heading. For instance, Mel Karmazin, President and CEO of Sirius XM Radio could make his case for the increased value of broadcasted music, while a panel entitled “Moving Music into the iTunes Age” considered new frontiers for recorded music sales. Additionally, the proceedings took a poignant turn factoring the consequences of the deepening economic recession.
Moving Music Into The iTunes Age
As the viability of the CD has come into question, consumer interest has shifted to the purchase of singles instead of albums. There has been much discussion as to what significance recorded music will have in an industry experiencing double-digit annual declines in revenue. The business has long held albums to be their iron horse, but the brick and mortar model is slowly giving way to content and artist centric digital models that have yet to offset the revenue decline from their physical counterpart. The two biggest questions of this panel were “What will happen to the CD?” and “Where is the business headed?”
Andrew Lipsher, a former VP at Universal and now a partner at the venture firm Greycroft, believed that the CD is both overvalued and misperceived in the current marketplace, but noted that it serves as a great “container” for digital music that can be ripped into a variety of different formats. He even suggested, although it was met by opposition from the rest of the panel, that by lowering the wholesale price, labels would have the opportunity to sell more CD’s. He drew the distinction between the old and the new model wherein major labels once sold a single product, the CD, and now have the prospect of acquiring revenue from a multitude of streams including digital track and video sales, merchandise, touring, and advertising. Interesting, Greg Scholl, President and CEO of the Orchard, a digital media aggregator, felt that despite the decline of the CD, there would always be a demand for physical product.
Fred Davis, a former VP at EMI and now a partner in the law firm of Davis, Shapiro, Lewit, & Hayes, noted that it in the case of music discovery sites, it was “amazing” that companies such as Imeem and Last FM were even able to get off the ground, citing steep licensing fees that must paid to major labels. Davis, who has been at the forefront of many of these deals, representing companies such as Imeem, iLike, Snocap, and most recently MySpace Music, emphasized that licensing, particularly amongst independent labels, is especially difficult: “When you want to license 80% of the world’s music, you make four phone calls; to license the other 20%, you need to make four-thousand”. Davis did also note that the Copyright Royalty Board’s ruling on October 6th (see The MBJ article in this issue) was a key milestone that provides guidance for online music sites to build their business models around. Still, Davis felt that advertising revenue derived from music discovery sites such as MySpace Music would likely not be significant until some years down the road.
Greg Scholl opined that it was unlikely MySpace would do significant commerce in recorded music, and that ultimately it would depend on advertising and be mainly in competition for audience size. As the only independent distributor to originally sign on to MySpace, Scholl said that the service offers a high benchmark for what independents can get from advertising sales, and was surprised that more did not see it as an opportunity.
The discussion was brought to a head when Mr. Davis posed a question on the real value of music. Though no one actually could give a definitive answer, it was clear that concerns about free music are a problem of sociological dimensions for the industry. Panelists felt that the only way to combat the piracy problem was to compete with it, by offering free music alternatives such as MySpace Music. The thinking was that if there were better alternatives, piracy could be somewhat contained. The panel pointed out that recent legislation appointing an intellectual property “czar,” would give more focus to anti-piracy efforts.
Major record labels, it was agreed, had been the catalyst of their own demise. The biggest problem now was the disagreement amongst executives as to what the new models would or should be. Only those with the right cost structure would ultimately be effective. Still, major labels were also doing a lot of things differently now, and the business could eventually become very profitable again. Panelists also unanimously agreed that, eventually, the industry would reach a point where ubiquitous access to music, anytime-anywhere, could lead to mass consumer adoption of subscription models. Access to all music would eventually be paid in cable, cell phone, or internet bills.
In fact, compared to the other sectors represented at the conference, I found that the music industry, despite mistakes early on, could arguably be considered the quickest and most active of all the media ventures to embrace the possibilities of the internet and digital distribution. The fifteen percent revenue from digital sources derived by the record industry is a much higher percentage than other traditional content-based businesses. Most would argue, nevertheless, that change has come more as a result of necessity than forward thinking.
Mel Karmazin, who had largely been out of the public view since his company’s stock entered the sub-dollar range, offered an optimistic outlook for Sirius-XM despite tumultuous conditions in both the consumer and credit markets. He began by pointing out that Sirius-XM’s had18 million subscribers, an accomplishment. He noted that the only broadcast company who exceeded that base was Comcast. He laid down the facts. Currently, about 50% of cars being manufactured come equipped with satellite radio. Consumers who purchase one of these cars receive Sirius XM’s service free for three months, but must pay $12.95 a month if they want to keep the service. “About half decide to keep it”, said Karmazin. Six million of all cars would come with the service installed, and Sirius-XM could potentially add as many as 3 million subscribers. Though growth and revenue forecasts have been lowered for both 2009 and 2010, Karmazin said that despite slow years for the auto industry, the company is still on track to reach a both a positive EBIDTA (earnings before interest, interest, depreciation, taxes and amortization) and cash flow within the next two years. Karmazin attributes synergies of $425 million a year as a result of the merger, for greatly increasing the company’s operational and financial performance.
Karmazin also confidently affirmed that the company would be able to refinance about $1 billion worth of debt that comes due in February 2009. Unfortunately, the belief that credit markets may not be so friendly to Sirius has already caused many investors to sell off what little may have remained of their initial investment. On more of a personal note, as a Sirius-XM investor, it was reassuring to hear Mr. Karmazin speak so optimistically about the present, but also remind everyone how far the company has come, and that its overwhelming potential it still there.
Sirius-XM, previously Sirius Satellite Radio and XM Satellite Radio, had their proposed merger approved by the FCC in late June. The company’s revenue in 2009 is forecasted to reach $2.4 billion, of which a percentage has to be used to pay performance royalties in the hundreds of millions of dollars a year to ASCAP, BMI, SESAC, and SoundExchange. Sirius XM’s service offers over 60 channels of commercial-free music.
Though there certainly was not a bullish feeling about the economy among the many speakers at the conference, I could not help but notice that feelings of anxiety were seemingly absent amongst most in attendance. However, plenty were willing to voice views about its state. Jessica Reif-Cohen, of Merril Lynch, pointed out that despite the declining of home values and the tightening of credit in the last eighteen months, recession in the consumer market was only just beginning, and the effects on businesses would be felt well into 2009. This assessment was confirmed throughout the conference, although some felt that the recession would not severely alter long-term plans.
John Ricitello, President and CEO of Electronic Arts, argued that a recession could compel more consumers to buy video games, because of their ability to enjoy the game over and over again in their home. The ‘stay-at-home’ factor was a big catalyst used by many at the conference, and the impression was given that some entertainment and media companies were less vulnerable to downturns in the economy than might be commonly assumed.
Fear about the future, though, remained. Robert Thomson, of the Wall Street Journal, noted that newspapers sales have actually increased because of the financial crisis, as consumers want to be better informed. Page views of popular newspaper websites have also gone up. The assessment that entertainment and media companies, struggling prior the recession, are headed for tougher times in 2009 in the end dominated the gathering.
By Kyle Shoemaker