Music continuing its digital spin

Vivendi finance chief: Long-term trend 'encouraging'

The outlook for the music industry was in the spotlight here Tuesday at the Credit Suisse Media and Telecom Week conference, with executives highlighting their goals of continued margin expansion, improvements in music publishing and digital growth.

Warner Music Group chairman and CEO Edgar Bronfman Jr. admitted that the overall growth trajectory of digital-music sales this year might have underperformed some higher expectations, but said he remains optimistic about continued gains.

"We are still in the early stages," he said.

Similarly, "the erosion of physical sales … is more than compensated by (digital)," Vivendi chief financial officer Jacques Espinasse told investors and analysts earlier in the day. "The long-term trend is rather encouraging for the entire industry."

Asked about the dominant role of Apple Computer as a digital-music distributor, Bronfman said that he expects Apple to remain very successful but also expects WMG to be less focused on one distributor in two to three years.

He said Vivendi's Universal Music Group gets about 10%-plus of its revenue from digital sales, but he wouldn't predict how high this percentage could go in three years.

Bronfman suggested that music business models will continue to evolve in the digital era. "You will increasingly see advertising as a revenue source," especially where music helps brands connect with consumers, he said, calling this growth opportunity "significant."

Asked about UMG's proposed acquisition of BMG Music Publishing, Espinasse said he expects European regulatory approval late in the first quarter or during the second quarter.

He also touted the financial benefits of the deal, highlighting margin upside from BMG's 22% to UMG's 28% in publishing. Bronfman reiterated Tuesday that his management team continues to focus on turning around WMG's music-publishing operation, which he said "was under-invested at Time Warner and in the first year of our ownership." He cautioned that any turnaround in publishing takes time but expressed optimism that his firm will succeed.

Bronfman and Espinasse highlighted the importance of continued margin expansion no matter how the music market performs.

"We continue to focus on cost," Bronfman said. "We need to continue growing margins."

Espinasse pointed out the higher overall margins of the music-publishing business when compared with recorded music.

UMG gets only 8% of its revenue from publishing, but this will rise to 14% thanks to the BMG transaction, Espinasse said.

EMI Group chairman Eric Nicoli originally was scheduled to appear at the Credit Suisse conference but changed his plans amid talk about a potential takeover by private-equity groups.

Bronfman was asked about his views of the regulatory environment in Europe, which he said remains unclear. He predicted that European regulatory clarity over the challenged Sony-BMG combination likely will come "well into 2007," maybe even next fall.