Rap Coalition

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Wednesday, February 10, 2010

FROM BOB LEFSETZ BLOG:

The Warner Music Group is making money. The publicized loss is due to accounting, having to do with amortization and other issues Wall Street understands and lay people do not. But what is the future?

You can read the transcript of the Warner earnings call here:

http://seekingalpha.com/article/187591-warner-music-group-f1q10-qtr-end-12-31-09-earnings-call-transcript?page=-1

And if you trudge through it, you'll learn some fascinating things.

Like Warner is not about to authorize Spotify in the U.S. That's big news on the Interwebs today. Edgar Bronfman, Jr. said no free streaming. Hell, let me quote exactly what he said:

"Well, first of all we don't know what consumer behavior is going to be in the cloud and whether we can correlate purchase to sort of subscription or other kinds of models. But we do a lot of sort of modeling work here to talk about what – to think about what kind of scale is necessary at what pricing and we do see that the opportunity to expand music consumption and music purchase, whether that's by track, by album or simply by service across a vastly greater number of consumers is net extremely positive for the industry. That having been said, free streaming services are clearly not net positive for the industry. And as far as Warner Music's concerned will not be licensed. So this sort of get all the music you want for free and then we maybe we can – with a few bells and whistles move you to a premium price strategy is not the kind of approach to business that we will be supporting in the future."

Actually, it's not as bad as it appears. Because Bronfman is for licensing at the ISP level, or bundling the cost of music into a mobile device. This is not a bad strategy, one that Spotify itself is trying to employ. Maybe you get music with your Internet access. Might seem free to you, but someone's paying Warner and other rights holders for that content. Is this imminent? One would hope so. And a far better strategy than Bono and his manager beating up on the ISPs. Better to come up with a business solution than to jawbone someone into accepting a responsibility they don't think they have. But we see how long it took Nokia's Comes With Music initiative to launch, and it was a bust upon final release. Speaking maybe to software. Which augurs for a relationship between music companies and third party software companies, allowing streaming and possibly downloading of music easily. This could come tomorrow, but will it? Every day there's no reasonable solution is
another day people steal music.

Then there's Vevo. Which Universal is trumpeting as a savior and Warner refuses to join. Bronfman says there's more value to be extracted by monetizing individual bands on Websites. I like that he believes in his acts, but is the future about aggregation or individuation? About subscribing to everything or cherry-picking? I'd say the former, which makes me wonder whether Bronfman wants to keep Universal at arm's length, whether that's the real reason he refuses to join the Vevo consortium. That's an excellent strategy, for Universal is both a bully and old school. It's Warner that's pioneering digital initiatives, it's Warner that makes the highest percentage of revenue via digital, not Universal. Vevo is a minor step by a rearguard company. You don't want to be pulled down by a slow enemy.

Which brings us to 360 deals. Warner wants 'em. And will pay dearly for these rights. But they won't overpay for the flavor of the moment without them. Bronfman says they've lost acts to competitors who are willing to make these deals. But, without 360 degrees of revenue in the future, the company cannot thrive.

And Bronfman says that 360 rights are not always tied to the length of the recording agreement. In other words, you can make five albums and be free to record elsewhere, but you might be paying a percentage of touring and merch for years thereafter. Smart on Warner's behalf, good for an act? Try selling your recording rights to another company without these other rights... Probably difficult. Meaning that you will probably be signed to Warner for the length of your career. Because in order to release more records, you renegotiate the entire deal, extending it even further. That's how renegotiation works, you get more money for more time, for a greater commitment.

So should you sign a 360 deal?

This is where the call gets truly fascinating. Bronfman is asked about the Live Nation/Ticketmaster merger:

"Yeah. Look, I think we think of Live Nation-Ticketmaster largely as a complimentary business to the business that we're in. I think Live Nation-Ticketmaster is a business of scale, it's a business of consumer relationships and venue relationships, and it deals almost entirely with artists that have proven that they have a significant ticket purchasing capability.

Our business, on the other hand, is essentially a venture capital business where we're betting on a bunch of unknown artists who have yet to develop that opportunity. And when we sign those artists we sign, as I said, essentially all of them to expanded rights deals which means whether they go through Ticketmaster-Live Nation when they're eventually touring or through some other form, we're going to partner with the artists in the revenues derived from their tours. So our sense is that these are largely complimentary businesses, not really competitive businesses. I think Live Nation-Ticketmaster has the opportunity to be a very strong and powerful company, but in an area of the business where we do not currently compete, although we do expect to derive significantly increased revenue over time."

What Bronfman is saying is Warner invests in its acts, Live Nation does not. Live Nation wants to tour established acts, Warner establishes them.

But does it have to be this way?

Make no mistake, Live Nation is strapped. Is it willing to invest in artist development? Is it willing to pay to build artists who can play its venues?

It all starts with the manager, and in this case, Live Nation has the largest management company, Front Line. If you've got a manager, do you need a label?

Managers today have radio promotion departments, marketing departments, but they've always looked to deep pockets to fund their acts. Should they step up and risk money themselves?

Boutiques will not, they haven't got access to capital, the risks are too heavy. But Live Nation? Can Live Nation build acts, that will tour their buildings, make exotic merch and distribution deals, leaving out the major label completely? It takes money, will Live Nation/Front Line pony up? And will Live Nation require said acts to tour its buildings? Its own 360 deal? Are we robbing Peter to pay Paul, or is Irving Azoff going to save the artist from the big bad labels, keeping all the money for the talent?

This is the big question.

Warner has attempted to enter the promotion sphere. We see whenever the company ventures from its core capabilities there's trouble, whether it be Bulldog or LaLa. I don't think Live Nation has much to worry about here.

Whereas Azoff knows every element of the business. He's run a major label and has been a manager, to say he's familiar with live entertainment is an understatement. But is Azoff in for the long haul, or does he want to get another paycheck and ride off into the sunset with Don Henley?

If Azoff wants to continue to play, watch out. Sure, he'll make a major label deal on exorbitant terms. But really, it all comes down to what's best for his artists. And why pay a third party if you can do it yourself? Anyone can distribute one's music online. Anybody can hire a radio promotion and marketing team. But are Azoff and Front Line willing to risk, signing unknowns and investing in them? Hell, managers always sign unknowns, but are they willing to pay for development? If they are, Warner should be very afraid. Warner will have its catalog, and..? Live Nation might be able to offer an act more, a hell of a lot more, the act giving up less in the process.

In other words, are we on the verge of a revolution, or are managers just too cheap and will continue to make onerous deals with deep-pocketed labels?

We're gonna find out.


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