Finance and The Majors: Dangerous Times

Peer-to-peer download sites, coupled with a crippling and consistent drop in physical record sales have left Universal Music Group, Sony Music Entertainment, Warner Music Group, and EMI struggling to hold on for dear life.  On May 19th 2010, Music & Copyright supplied the most up-to-date financial information on the majors, and made some predictions for the months ahead.  While the recording industry still seems to be in an apparent nose-dive, the first quarter of the new decade has revealed a few glints of hope that could keep the industry airborne, at least for the time being.

In the first three months of 2010, UMG has pulled in $1.23 billion in total revenue as reported by its parent company, French media group, Vivendi.  While this seems to be a healthy start to 2010, it really is a 13 % decrease from the $1.3 billion that the company earned in the first quarter of 2009.  And when it comes to actual operating income, things get worse; the company’s EBITA (earnings before interest, tax, and amortization) suffered a 38 % drop, i.e. from $135million in 2009 to just $83 million this year.  Vivendi attributes these declines to a fall in recorded music sales due to fewer major local and international releases and diminished demand for physical product.  Physical sales, which account for 48% of UMG’s total revenue, were down 18%, and digital sales, 32 % of total revenue, were down 2.7 %— making UMG the only of the Big-Four to report a decline in digital sales.

The only positive claim that the company can make for 2010 so far is a 10 % increase in Artist Services and Merchandising revenues.  According to Music & Copyright, UMG’s merchandising company, Bravado, has “recently signed deals with many high-profile artists like Rihanna, Mariah Carey, Alicia Keys, Whitney Houston and Susan Boyle; in addition, they have teamed up with the Rolling Stones to create a line of merchandise to commemorate the rerelease of the group’s album, “Exile on Main Street.”  More than 60 premium items, including T-shirts, caps, sweatshirts and a range of limited-edition luxury goods will be available from several retailers, including Bloomingdale’s, Target, H&M, Hot Topic, Cache and Zara International.

WMG started off the year with a first quarter decline of just 1.3%, grossing $662 million in total revenue, down from $671 million in 2009.  This can mostly be attributed to a 0.9% decrease in recorded music sales, which accounted for over 80% of total revenue.  The company indicates that the decline is the result of a light release schedule, financial uncertainties in the global economies, and the effects of transitioning sales from physical product to digital.

However, despite its overall losses, WMG boasts a number of significant and promising advances made this quarter.  Most notably, its operating income rose 60%, to $24 million, lowering net losses to only $25 million.  In addition, digital sales ended the period at $199 million, which marked a 15% increase from 2009 and accounted for 35 % of total revenue. This compared to 30% in the first quarter of 2009. Its physical and artist-service revenues (including monies from expanded rights deals) fell by $18 million or 6 %, although this decline was offset by a revenue of  $23 million in digital gains.

So far, Sony Music Group (SME) is the only of the Big-Four companies to report any sort of significant progress this quarter, with a remarkable revenue increase of 35%— ending the period with $6 billion generated since the first quarter of 2009.  This compared with the $4 billion accrued over the prior 12-month period ending in the first quarter 2009.  SME’s operating income has also seen a substantial rise of about 31% to $403million.

However, and according to Music & Copyright, “the sharp rise in sales was due to the fact that the results for the 12 months to end-March 2010 included the full-year results for SME, which was consolidated as a wholly owned subsidiary at the beginning of October 2008. Had SME been fully consolidated for the 12 months to end-March 2009, sales for that year would have been $6 billion, a decrease of 5%”.  Comparing only first quarters 2010 and 2009, SME still experienced a 4.5% increase, with sales rising from $1.33 billion to $1.39 billion.  Operating income however, took a $6.63 million hit, which according to Sony, was due to increased talent and restructuring costs.  Sales in the recent financial year also took a sizable hit due to the death of Michael Jackson, and while his new releases and catalog product are still consistently selling, Sony’s top albums this year have included Susan Boyle’s “I Dreamed a Dream”, Alicia Keys’ “The Element of Freedom and the Music Vol. 1 & 2”, and collections from the hit US television show, Glee.  SME is also benefiting from the series of re-mastered Beatles albums that they currently own the rights for, which according to Nielsen SoundScan, were the best-selling group works in the US last year— grossing over $3.3 million.

The details of EMI’s financial standing are currently unknown, as the company has not yet disclosed its report for first quarter, 2010.  While each of the Big-Four labels has their problems, EMI’s struggles are by far the most serious, considering the gut-wrenching $2.6 billion crash they took into the red last year.  EMI has been in trouble for quite some time, but things got significantly worse in 2007 when Terra Firma paid out $6.2 billion for control of the company just before the credit crunch began to take hold.  Having taken out over $4 billion in loans from Citibank, Terra Firma is now faced with enormous payments that it is unable make— leaving the label just as vulnerable as it was before their acquisition.

The sobering facts are that if Terra Firma can’t come up with the money soon, Citibank will effectively take control of EMI.  Nevertheless, EMI is still going on with business as usual, and despite its debt, the company has been putting up some very promising numbers ever since being taken under Terra Firma’s wing.  In fact, the company’s EBITA income has more than tripled over the past three years thanks to its high-profile artist catalogue— with names like Coldplay, Slash, Katy Perry, and Kylie Minogue.  The company has also increased its market share by nearly 3 percentage points since first quarter 2009, from 9%, to just under 12%.  Lady Antebellum, currently one of EMI’s top artists, has already sold over 1.7 million copies of her latest album, “Need You Now”— making it one of the top-selling records of 2010 according to the Billboard charts.  Under the lead of new CEO, Elio Leoni-Sceti, the company has been reshaping its approach and is recognized for its adaptation to the new realities of the music business.  Still, financially, EMI’s health continues to be precarious.

While there are no promises for any sort of timely turnaround for the four majors, each of them is trying to identify new business areas. With demand for physical product slumping, the testing and evaluation of new markets becomes imperative—as will be the maintenance of healthy income positions.
By Evan Kramer



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