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Nail In The Coffin: RIP WMG

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Hello there and welcome once again to SMCD. Thanks for checking back in after last week’s break in the action.

This past week, there was glaring evidence that the traditional business model of the music business is all but dead. These discussions and debates have been happening for several years now, with myself leading several of them for at least the last year and a half (boo yah!). Much of the discussions have included dropping sales info for the corporate labels, but not much else in the way of hard evidence, admittedly.

Now, we may have just that, as three separate stor—actually, make that two stories. One has a bearing on the matter at hand, but the decision was not made with the label in mind. So, we’ll call it two-and-a-half stories this week that all point to one glaring fact: Warner Music Group is in dire shape—to the point that Warner’s may be selling WMG to cut their losses.

First, the tale that ties in. Or the half story, as it were. Noted technology company Cisco, which has mainly been known for networking resources, has branched out in the past few years to other ventures. This past week, they’ve decided to eliminate those other ventures and go back to straight networking.

Problem is, one of those “other ventures” was its website-building EOS platform, which powered the websites for a lot of Warner Music Group artists. The websites for Lupe Fiasco, Bruno Mars, Travie McCoy, Sean Paul, Plies, Cee-Lo, Flo Rida, T.I., Trey Songz, Christina Perri, Kid Rock, B.o.B., and many others are going away, and Warner’s has no contingency plan for this sort of thing worked outbrilliant move, I know. The cost involved in having to re-build those from scratch (which is the only option they really have) is going to be huge.

As it turns out, it’s money WMG does not have to just throw around out there. The company has turned a profit once in the last 10 years. After taking a look at the books, Digital Music News surmises that the company has lost—Are you sitting down? Good.$10.14 billion in the last 10 years.

There you have it. A hard statistic as to how one of the biggest record labels in the world is doing in the digital age of music. The answer: not very well at all. To expand upon the woes of WMG, securities analyst SmarTrend has pointed out that WMG is now $1.9 billion in debt and has the worst debt-earnings ratio in the entire entertainment industry.The fact that one of the big labels is suffering this badly is, in and of itself, a glaring indicator to the fact that the old ways are coming to an end.

If you need another, that same report mentioned that Wall Street analysts are expecting to hear any moment now that Warner Bros. is selling off WMG. And why wouldn’t they? $1.9 billion in debt? Almost a decade of bleeding money? We’re talking about the same company that couldn’t wait to sell World Championship Wrestling for losing a tenth of that total inside of less than two years!

And to add insult to injury, Amazon.com sent out a letter to all of the labels regarding licensing for Amazon’s recent launch of Cloud Drive and Cloud Player. The letter…well, Digital Music News’s headline for the story sums it up as: “Dear Labels, Go F**k Yourself. Love, Amazon.”

The letter, in part, read:

There has been a lot of discussion as to whether Cloud Drive and Cloud Player require licenses from content owners. Here’s why they do not:

(1) Cloud Drive is a general online storage service for all digital files, not unlike Google Docs, Microsoft SkyDrive and any number of other internet file backup services. It’s your external hard-drive in the cloud. It requires a license from content owners no more than those other internet file back-up services do and no more than makers of external hard drives for PCs do.

(2) Cloud Player is a media management and playback application not unlike Windows Media Player and any number of other media management applications that let customers manage and play their music. It requires a license from content owners no more than those applications do.

It’s really that simple.

There has also been speculation that we are looking for licenses for Cloud Drive and Cloud Player. We are not looking for licenses for Cloud Drive or Cloud Player as they exist today—as no licensees are required.

Translation: Hey, record labels. If you’re expecting us to have to fork over any licensing money from hosting a cloud-based storage service, you can forget it. We’re not legally entitled to, nor are we looking into it at the moment. Thank you, please drive through.

Another income source for major labels cut off—that has to hurt. WMG, in particular, had to feel that sting, because they could use the money the most out of anyone. Warner Music Group, despite all of its history and landmarks in the industry, is a dying beast that Warner Bros. will soon send out to pasture and put out of its misery. Three contenders are in the running to pick up the once grand dame, with Yucaipa Companies being in the lead with a bid of $3 billion.

So, what about the other labels? How are giants such as EMI, Universal Music Group, and Sony, among others, doing in this time of music industry upheaval? That will take some looking into, something I wasn’t able to do by the time this piece was published.

I smell another two-parter. Be here next week for more word on the overall state of the industry then, and thanks again for reading.

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About Michael Melchor

Michael Melchor has covered pop culture in all its forms for several publications and websites, including BackStage Pass magazine, 411Mania.com, and Examiner.com.
  • Da Maya

    Contrary to your blog, Warner Bros. does not own Warner Music Group. Neither does Time-Warner. Warner Music Group has been an independent company since around 2005.

    Warner Music has been signing more and more artists to “360 deals” where they take a percentage of the artists’ touring, merchandising, endorsement and other revenue. This is probably why so many people are interested in bidding for WMG. So basically I disagree with you because the business model has changed on the recording side, and that is far from a “nail in the coffin”.

    WMG’s other business – publishing, is a money printing machine, by the way.

  • Fair enough. Thank you for the info; that will certainly come in to play next week.

  • Da Maya

    Thanks for responding, Michael.

    You can find many articles on the web indicating that sources said Warner Music Group received offers to buy it in January. IMHO the reason the company is having an auction to sell itself, may be due to “the Revlon Rule”, which you can read up on Wikipedia.

    Warner Music is a Delaware corporation, and once it becomes clear to the board of directors that the company is in play, they must hold an auction to sell the company to the highest bidder, based on my interpretation of the rule.

  • Brian aka Guppusmaximus

    It’s a shame only because these companies could have taken the bull by the horns, did the necessary research (including education) and offered the consumer what they wanted (Mp3s) until the bandwidth was cheaper for most consumers (which it is now). Then they could have started to offer lossless formats right along side those Mp3s to maintain a diverse option for all of their consumers. Let’s not talk about 24 Bit – 96kHz flac files which are not all that much bigger in size.

    But, they still haven’t learned their lesson because I haven’t been seeing them make any strides to offer HD concert downloads by using .mkv and H.264 methods of compression.

    Sorry, just a bit of a rant because all these record companies care about is money and now that their hurting, we’re supposed to care??

  • Simon Daniel

    If you thought Warner Music Group was owned by Warner Bros. then you’re obviously not qualified to write an article about it.