While I was in India in March, Time Warner sold off Warner Music Group to some private VCs. This is more interesting than it sounds…
The whole of WMG was only worth $2 billion – not petty cash, but not a lot in context. Even if you assume Warners will never sign another successful act, the deal implies that the copyright to about 20% of the entire recorded music industry is worth about the same as the worldwide takings of Titanic.
It’s not fair to blame filesharing alone for the low price – total management incompetence is also relevant, as are CD copying and professional pirates. But it’s pretty clear that the expansion of these ways of getting the music you want, when you want it, for free has hit record labels hard (and iTunes and its rivals aren’t replacing free MP3 downloads, but are destroying the ‘pay $15 for an album on which you only like three songs’ model). Hence the RIAA’s deranged crusades against fileswapping students and soldiers.
If I worked in the mainstream movie industry, I’d be scared, and not just from the coke paranoia. Downloading a movie over an ADSL connection is approximately as fast and convenient as downloading an album over dialup (not very) – and as with CD sales in the late 1990s, DVD sales are still growing fast. But in three years or so, home Internet connections will be fast enough to download movies in a few minutes.
This is something the movie industry has long claimed that it’s ready for, and maybe the combination of legal download stores and sueing people’s arses off will mean we don’t see movie studios being flogged to vulture funds for a pittance a couple of years down the line.
But given the ease with which all extant forms of DRM can be subverted, it would appear that either legal download stores will have to charge the DVD price of $20-30 a download (‘hmm, everyone’s using P2P for some reason’), or the standard price of permanent movie ownership will need to fall to the rental cost of $3-5 (‘hmm, our revenues have just quartered’). This doesn’t strike me as a model for long-term profit growth.
WMG makes sales of about $4 billion per year; assume that about a fifth of that ($3 of a full-price CD) goes back to mission control, and their major cost is their staff, then they’re probably making $590 million before tax. $2 billion begins to look like a good deal. That said, presumably a lot of their revenue comes from new acts, and I don’t know if they’re any good at picking those.
Most of the reason for declining record sales in the US, by the way, is simply that there are fewer new releases in any given year — down 25% or so from highs in the mid-1990s. Since most fans buy only one copy of a given CD, this naturally leads to a ~25% drop in sales.
Damn my lack of prior research. I think you’re absolutely right on earnings multiples (for slightly wrong reasons, which I’ll pedantically talk about below); my point was more that I’d intuitively expect earnings to be higher given the content libraries that WMG has.
WMG, being private, doesn’t seem to publish detailed figures (there are probably some archived ones on the Time Warner site, which I can’t face searching through).
However, similar-but-slightly-smaller EMI made £300m (close to your WB estimate) last year on sales of £2.1bn (again, not far off WMG) – and only £147m of that was on recorded music (with a fairly poor 8% margin). Most of the rest of the profit was in music publishing, which has a margin of around 25% on revenues of only around £400m.
They don’t break down recorded music sales between new and archive content… but my hunch is that new releases provide a lot of volume, giving manufacturing and distribution economies of scale, but don’t directly make a profit (there are an awful lot of overpaid middlemen involved, and an awful lot of new deals and new records that flop). Meanwhile, with new releases covering the fixed costs, the back catalogue is the profit centre with margins approaching the publishing business (which is now mostly back catalogue focused).
So if I were running a record company, I’d look at getting out of the new content business altogether, and using Internet distribution to cut the costs on releasing archive material (while possibly also licensing old content to other companies for CD release). However, I suspect the combination of P2P and iTunes may have made this plan unworkable…
"I don’t know if they’re any good at picking those."
Well Decca rejecting the Beatles, but picking the Stones (in desperation) speaks for itself. The mistake turned into the better investment, but that wasn’t intentional.
I’d assumed that CD sales had declined recently because CD owners had bought the CD versions of their favourite old albums by 2000. Roughly. most music buying is done by teenagers and young adults: after a point they slow down, if not stop. There was a craze among (relatively) affluent adults for re-buying vinyl albums as CDs, but that had to die out.
I don’t listen to Radio 3 enough. ("Late Junction" broadcasts just about the only music which interests me.) So the internet is where I get news of interesting new music from.
Record companies are being incredibly daft here. The teenage population (in the UK) is falling: ergo record sales fall. But they’re blinkered and are looking for someone to blame.
The only thing people like Simon Cowell had to offer their tame bands was a record deal. If you can record in your garage, and push your music on the net, you can tell these public schoolboys to get stuffed.
Internet 1, Cowell/Waterman and the rest of EMI etc, 0.
http://www.hoovers.com/warner-music/–ID__103153–/free-co-factsheet.xhtml was the source of my information. $4.2 billion in sales in 2002, and about 5,000 employees. Scaling from the EMI figures gives $600 million profit, very close to my estimate. It’s nice that two different methods give the same answer!
I hadn’t realised that music publishing was so profitable, by comparison to record sales.