Music continuing its digital spin


NEW YORK -- The outlook for the music industry was in the spotlight here at the Credit Suisse Media and Telecom Week conference Tuesday 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 may 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 more than compensated by (digital)," Vivendi chief financial officer Jacques Espinasse had 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 Tuesday said 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 currently gets about 10%-plus of its revenue from digital sales, but 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 the growth opportunity of this "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 frm 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 his firm will succeed.

Both 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 to recorded music.

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

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

EMI, nonetheless, was the object of some discussion Tuesday.

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

And Espinasse said Vivendi had bought a stake of about 2.9% in EMI earlier this year, which it previously reported. He said his firm later sold it at "a nice gain."

Bronfman earned laughs at the end of his appearance, telling follow-up speaker Richard Parsons, chairman and CEO of Time Warner Inc., "thank you for selling us the business." He also complimented Parsons on how well TW has done this year.