2Q digital growth slows at Warner Music

LOS ANGELES — Warner Music Group Corp. Chief Executive Edgar Bronfman criticized digital music efforts Thursday, as the recording label reported online sales growth slowed, losses widened and wrote down investments in two Internet startups.

Warner said digital music sales in the second quarter through March grew 7 percent to $166 million, far slower than the 48 percent growth posted a year ago. Physical music sales such as from compact discs fell 25 percent, pulling down all music sales 18 percent to $537 million.

Bronfman said its minority investments in 2007 in music-streaming site imeem.com and download site Lala.com “have not met expectations” and vowed not to fund any more digital ventures in the future.

The company wrote off all of its $16 million injection into imeem and more than half of its $20 million in Lala.

He also criticized News Corp.’s MySpace Music service, a joint venture with all the major record labels that launched in September, for not bringing in enough new revenue.

“MySpace Music has been slow to create monetization tools and to be able to impact, in a revenue-generating way, the massive audience that they have been able to attract,” Bronfman told analysts on a conference call.

“That needs to change, quite frankly. It needs to change for MySpace, and it needs to change for the music industry. And it certainly needs to change for Warner Music.”

Warner’s losses widened in its second fiscal quarter to $68 million, or 45 cents per share. A year ago, the company’s losses totaled $37 million, or 25 cents per share.

One-time charges amounted to 22 cents per share, mostly because of the write-downs but also from a $4 million cash receivable from imeem it no longer expects to receive.

The company’s revenue from music publishing fell 13 percent to $135 million from the prior-year quarter.

Overall revenue fell 17 percent to $668 million during the quarter.

The adjusted loss of 23 cents per share narrowly beat analyst forecasts of a loss of 25 cents per share, according to Thomson Reuters. Its revenue was far short of analysts’ expectations of $739.2 million.

Warner Music’s shares fell 55 cents, or 10 percent, to $4.90 in afternoon trading Thursday after the results were announced. For the year, the shares are up more than 60 percent from $3.02 on Dec. 31.

Wedbush Morgan analyst Chris White said the shares will likely give up most of those gains.

“We believe the rally in the shares implies an improvement in industry fundamentals that we just do not foresee in the near-term, and may in fact be several quarters away, at best,” he said in a research note.

The company noted that its fiscal 2009 performance will be weighted toward the back end of the year due to the timing of its releases, including a new album from Green Day, which is rolling out this month.

It also cited some bright spots, including that about half its global roster of artists had agreed to multiyear rights deals that give Warner a stake in their touring and merchandise revenues, up from about a third a year ago.

Despite challenges in the digital arena, digital revenues of all kinds increased to 26 percent of total revenue, up a percentage point from the December quarter.

Bronfman also said Apple Inc.’s move to allow variable pricing of songs sold on its iTunes online music store last month had boosted revenues.

“Although we priced down a far greater number of tracks than we priced up, early results show a net positive impact,” he said.