Spotify, iTunes Expansion Helping WMG Hit Digital Music Milestones

Recent roll-outs to new countries of download and streaming services helped Michael Bublé’s Warner Music Group (NYSE: WMG) offset physical declines with digital growth in its October-to-December Q3.

In recorded music (ie. sales of tracks to users), digital revenue grew 15 percent after iTunes’ expansion to 12 new European and 16 Latin American countries in 2011.

In music publishing (ie. licensing to services), digital revenue grew faster, by 36 percent, on consumer adoption of Spotify, which rolled out to four new European countries and the States, and Deezer, which expanded from France to the UK and announced further globalisation plans.

The digital growth meant total, cross-platform quarterly revenue (both within each division and for their group as a whole) finished flat compared with the previous year – an encouraging achievement for an industry that has long sought the point where digital gains make up for physical’s downfall.

At home, Warner Music Group hit another milestone, as U.S. digital music unit sales surpassed those from physical for the first time. “We’ve crossed the threshold of 50/50 in the U.S.,” new CEO Steve Cooper told analysts. “The rest of the world is still about two thirds to a third.”

Global revenue from streaming services (36 percent) is growing faster than that from downloads (15 percent). But streaming revenue is still relatively peanuts for WMG compared with download sales – $15 million compared with $205 million in recorded music’s digital revenue. In the latter, digital now makes up 28 percent of recorded music revenue.

“The Deezers are coming on strong,” Cooper added, talking about the rise of streaming to counter the dominance of iTunes-dependent download sales “You will eventually see those lines cross. But, right now, the lion’s share is in downloads.”

WMG was a late convert to the unlimited-subscription model, having negotiated hard with Spotify. But it is now a big exponent, hoping new music subscriptions services and bundled mobile offerings will reduce labels’ iTunes dependency, boost industry growth and restore a payment, if not an ownership, habit in consumers.

“That flow of dollars is substantially greater than the average annual purchases with respect to an iTunes user,” CEO Cooper told analysts, repeating Spotify’s own observation that its subscribers effectively pay a relatively high $120 a year.

“Both downloads and streaming provide us with meaningful economics. I’m personally agnostic – although you can draw your own conclusions from the streaming payments versus average iTunes users’ (payments).”

Despite the company posting flat revenue of $779 million, however, WMG’s Q3 losses deepened by 44 percent to $26 million because interest grew on loans relating to WMG’s acquisition by Access Industries.

Other costs included $3 million spent trying to acquire EMI, which ended up agreeing a break-up sale to Universal Music Group and Sony (NYSE: SNE) Music Entertainment – sales WMG plans to fight.

“It would significantly impair the competitiveness of the recorded music and music publishing business, harming … songwriters, physical and digital retailers and our emerging digital services,” Cooper said, vowing: “We will continue to share our view with the relevant regulatory authorities.”

Release | Webcast