Social networking potentially represents both a threat and an opportunity for the record labels. If, music content companies strike a balancing deal with the social networking sites then the potential opportunities outweigh the potential threats. On Wednesday, Warner Music Group and YouTube struck such a deal.
The deal allows music videos from Warner Music Group to return to the video site after a long nine-month break. Since, September 17, the company's stock has been trading above $5. In few months I see the stock trading at $6 level. Why am I so optimistic?
Negative implications of iTune's dominance allayed
The music industry continues to deal with irreversible declining trend in physical sales. These decreases are predominantly the result of continued piracy and copying, and the proliferation of alternative entertainment activities and products. However, increases in digital sales have not been able to offset the impact from physical sale declines.
Approximately 52% of U.S. industry sales are currently from secularly declining music distribution outlets: mass merchants like Best Buy (BBY), Wal-Mart (WMT), Virgin Media, and independent stores, while 48% is from emerging outlets such as iTunes and Amazon (including physical product on Amazon).
It is estimated that iTunes is responsible for over 70% of legal music downloads. As such, WMG has limited control over pricing and layout of its digital sales. Apple (AAPL) (iTune owner) launched a variable pricing model in April. Under the change, instead of a one-price $0.99 per-song model, songs now have three distinct price points. In addition to $0.99, new releases can also cost $1.29 per single while catalogue songs can cost $0.69 per song. There has only been one quarter of this pricing, but the overall impact has been slightly positive to the industry (slight decreases in volume for new releases offset by higher pricing and increased volume for catalogue). iTune could force irrational pricing on the industry. The fact that the new variable pricing includes a $1.29 component and that the music labels were involved in this decision substantially alleviates this concern.
Sustaining market share in a difficult environment
In such a difficult operating environment, WMG continues to build market share, mostly at the expense of Electric & Musical Industries Ltd (EMI), which was taken private a few years back and has experienced some artist defection. WMG's 2009 year-to-date release schedule has been relatively weak versus prior years'; however, the company continues to maintain market share through its catalogue.
