WMG Loves Spotify And Sees Music Riding The Cloud To Digital Tipping Point

The music industry will soon reach that fabled tipping point at which digital revenue exceeds lost physical sales, Warner Music Group (NYSE: WMG) CEO Edgar Bronfman Jr reckons.

The top line from WMG’s Q3 earnings today is “Digital revenue approaching half (47.6 percent) of U.S. Recorded Music revenue.”

A 13 percent growth in global digital income to $203 million helped push overall revenue up 5.2 percent to $686 million. Sold to Access Industries on July 20, WMG took $12 million from Limewire’s $105 million industry settlement. Net loss improved to $46 million. Bronfman Jr told investment analysts…

“Whilst we steadfastly refuse to call the bottom, because I’m not a clairvoyant, regardless of the positive physical trends in the US in last six months, when you look at our digital revenue, as that becomes even a larger part, it will begin to outweigh declines of physical.

“You can see the turn in the US coming. Europe is anything from 18 to 24 months behind that, but it is inexorable. All of that has happened pretty much up against one business model, which is digital downloads, and pretty much one digital downloads provider (iTunes) overwhelming everyone else.”

Of course, an acceleration in physical’s decline rate will help get us to the tipping point just as much as digital growth will.

But the thing to take Bronfman there – new models like unlimited access, mobile and streaming. For all the kerfuffle about how WMG was supposedly the main sticking point to Spotify’s U.S. launch, Bronfman Jr, who wants to ween WMG off iTunes, has long been the biggest cheerleader for these new models, including Spotify – as long as they can give labels sufficient income through their paid subscription services.

“It’s something we have been calling for and has taken much longer, frankly, than anyone would have hoped,” Bronfman Jr said today.

“(There are) many new digital business models and services – with the advent of the cloud, you’re going to see significantly broader music service introduction, strategic distribution and, I hope, a reacceleration of overall digital growth beyond the growth of digital downloads, which is what the industry has really been living on since their introduction in 2004.”

Asked about Spotify specifically, he showed none of the reluctance which he is often characterised as exhibiting last year.

We’re very pleased with the arc of Spotify’s growth. Their traction has been very encouraging. We’re very pleased with the progress so far,” he said.

“The kinds of levels that Spotify is achieving in Europe with regard to moving free users to premium paid subscriptions is also encouraging.

“If that keeps up, they will be a very profitable company themselves and will generate significant profit to Warner and the industry.”

All of which makes the method by which such services pay labels particularly intriguing, since this increasingly is no longer a per-track-download world.

“We receive a certain percent of the revenues from Spotify and a certain percentage based on a per-stream rate from Spotify,” Bronfman Jr said. “That industry pool is then apportioned on a share rate based on what’s being streamed on the Spotify service. Spotify pays advances which we recoup against the revenue that is earned.”

The CEO cited a “strict confidentiality agreement” precluding him from talking about iCloud terms, but: “We have a retail-wholesale agreement for iCloud that is not dissimilar to the way it works for download,” he said.

U.S. downloads of individual tracks (ie. iTunes Store sales) have flatlined. That’s why labels are seeking new models. Not even lowering track prices has worked. “Where we have lowered price on songs to $0.69, it has not driven any real increase in volume,” Brondman Jr said. “If you don’t particularly want a song there’s not a price at which you’re gonna buy it.”

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