Bronfman Points To Industry's Growth Potential September 18, 2007
By Ed Christman, N.Y.
Warner Music Group chairman and CEO Edgar Bronfman Jr. conceded the music industry is experiencing difficulties, but painted a bright future once the emerging digital and mobile revenue streams begin to gel, during a Q&A interview today (Sept. 18) at the Goldman Sach's Communicopia held at the Grand Hyatt in New York.
Bronfman Jr. said he still sees a future for digital rights management and physical product in the music industry, although maybe not in their present forms. And while he's not sure the free download, advertising-supported music service can work as currently structured, he still foresees a role for the model.
During a one-on-one with the investment bank's media analyst Anthony Noto, Bronfman also said the Warner Music Group has abandoned the old model of only exploiting recorded music and will now invest in new and mid-tier artists with the expectation that it will share in all the artists' revenue streams.
"Our industry is going through a 'massive transformation,' maybe even much greater than any other industry has ever faced," Bronfman said. "But the industry has yet to realize the full implications from the impact of mobile, which so far is just ringtones. The industry has yet to see the implications of what impact digital downloads will have once competitors to iTunes are established. Nor has the industry yet seen the impact of subscription models, which are still in the early stages of development."
While some say that digital growth has slowed, the WMG chairman pointed out that's inevitably a function of the base getting larger because the industry still enjoys healthy growth. But that growth could become more robust when some online competition to iTunes is development. He cited Wal-Mart, Amazon and LALA as possible challengers to iTunes thus far dominance.
The chairman's remarks came the same day WMG's stock traded at $11.06, well-off its 52-week high of $27.24.
Retail
When asked why the major companies didn't form a consortium and build a Web site to offer all music, like the airlines did, he answered the labels "are not retailers" and the margin that retailers work on are not attractive. "I like our margins better than theirs," Bronfman said. "Since we are not retailers, why would we have an advantage over Wal-Mart and Amazon," which have specialized skillsets?
Mobile
Besides downloads, Bronfman expects mobile to grow dramatically once the other carriers and the mobile equipment manufacturers react to the iPhone. The mobile carriers won't want there subscribers going elsewhere because of the iPhone so the cell phone manufacturers and the carriers will be under pressure to build a "strong user interface."
Once that happens, he believes that the mobile devices, since the communication element will be just one application, will probably build itself around a subscription model, which could offer however many minutes with some songs and ringtones, all at one price.
But currently, the content interface if still below par for most mobile devices, he added. Once the carriers create a program and a consumer interface with the right device, the subscription model will really come into its own once it has a device and he believes that the phone companies will eventually dominate that model.
Physical
Noto tried to get Bronfman weigh-in on exactly when digital would overtake physical during the session, something that he sidestepped. But Bronfman had no problem predicting that DRM and physical product have a role in the industry's future.
In pointing out one of the reasons why CDs sales are down, he said the labels didn't anticipated the impact that the new game platforms like PlayStation2 and Wii would have on the consumers spend for CDs.
But whatever happens in the digitalization of music, there will still be a role for a physical format in the mix. "You can do things on physical that doesn't happen in the virtual world," he said.
"We need to revitalize the physical experience," he said. "If you look at what has happened, the LP was an experience and that got dumbed down to the CD, which has now been dumbed down to virtual music where the consumer is buying music song by song, and with inferior sound quality." The physical future will be DVD based, he said.
He noted that the WMG introduced MVI, as part of an effort to redefine the consumer's relationship with music. "It should be a connectivity experience for the consumer so that in addition to the music and videos and whatever else artists choose to put on the disc, the fans should also have a chance to get the good seats and maybe even discounts for other products through the connection.
DRM
As for DRM, fundamentally, it is "here to stay," but will it be applied to every digital model is a different question, Bronfman noted. DRM will be needed for the mobile world and the subsciption world, Bronfman said.
He says that DRM is also needed for physical product connectivity, or how would you know know which consumer you are dealing with? In that role, DRM gives the consumer value, he said, that allows them to tap into other propositions.
Ad-Supported Services
Bronfman believes the ad-supported download model will work, but he's not sure it will work as is. But he added that it has the potential to drive its audience to make pay transactions. He said that if this model works, then the labels should be equity owners in such sites. "I don't think the industry wants to see a kind of an online MTV model emerge," he said.
But when Noto pressed him on why the Warner Music Group didn't press jobs for a stake in the iPod, he said. It's easy to make that call with 20/20 hindsight. But "I am not sure we should have or could have forseen that the Ipod would do," he said. "Never before in the industry has the hardware been more valuable than the software. Jobs took the model and turned it on its head."
Publishing
He also says publishing is holding up well despite the decline of mechanical revenues due to the CD decline. But he suggested that at WMG stock's current pricing levels, it may only be recognizing the value of the company's publishing asset, Warner-Chappell. He said its management's responsibility to mine the company's value for the assets that the market is not giving it credit for.
He said WMG management continues to focus on margins and growing market share and trying to mine new revenue streams beyond the traditional recorded music business.
Indies
While EMI never merged as a topic during the session, Bronfman did respond to a question about acquisitions by citing the company's role as a powerful innovator in the independent label sector. He acknowledged some modest acquisitions, which would likely continue, but added that WMG is focused on being the "most relevant company" to the independent label community.
Finally, he said WMG is through with the old paradigm of only deriving returns from recorded music. "That is the old model and we are not going to play that game anymore," he said.
Afterall, "we are providing the seed money" that helps build the artist's career, Bronfman said. Consequently, the Warner Music Group wants to share in all other artist revenue streams, from touring and merchandising through helping to build other revenue streams, whether that be hosting and selling off of an artist's Web site. "Right now we are set up to exploit artist recorded rights," Bronfman said. "We need to be in the position to share in other artists rights streams."
Sure, there will be potential competition down the road from companies like TicketMaster and LiveNation. But that will be with the established artists who contracts come up. In those types of deal, "you are paying retail" and theire will be very little margin left.
But the Warner Music Group sees artists at a much earlier stage than the above potential competitors, so we are focusing on the new and mid-tier artists on our labels. They represent a "better investment."
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