Warner Music Partners With Apple on DVD Albums; Stock Implications

by: David Jackson

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

Music You Can See: Warner Plans to Sell Albums on DVDs

  • Summary: Warner Music Group is planning to launch DVD music albums which will contain stereo and surround sound audio tracks plus video footage, song remixes, ringtones, photos and other digital extras. Initial discs will be sold in October, with full launch in early 2007. The new discs will be more expensive than standard CDs, will not be playable on CD players, and will need to contain separate, un-enhanced audio tracks to allow users to load the music on to PCs. Warner is reportedly close to a deal with Apple Computer to use Apple's copyright protection and encoding for the un-enhanced audio tracks.
  • Comment on related stocks/ETFs: A Pali Research media analyst, quoted in the article, says that the new format is unlikely to succeed. Other surround-sound formats -- Super-Audio CD, DVD-Audio and DualDisc -- all failed to get traction with customers. However, if the new format does become popular, a number of companies (and stocks) stand to benefit. (1) Music companies Warner Music (NYSE:WMG), EMI and Universal Music, which is owned by Vivendi Universal (NYSE:V). (2) Music retailers Trans World Entertainment (NASDAQ:TWMC), which owns the Coconuts, Wherehouse and FYE chains, and Best Buy (NYSE:BBY) would benefit from higher music revenue. (3) Replacement of CD players by DVD players should benefit the consumer electronics vendors and their suppliers. (4) The spread of surround-sound audio would benefit Dolby Labs (NYSE:DLB) and Digital Theater Systems (NASDAQ:DTSI). (Full disclosure: long DTSI at the time of writing.) However, most of these stocks are more impacted by the rollout of the next generation DVD standard, and are thus suffering from the unresolved standards war between Blu-ray and HD-DVD. On its conference call last night, Dolby issued guidance for single-digit revenue growth and said: "we will be considering the anticipated slow adoption of next generation DVD given the competing formats and high initial price points. Also we are cautious of the fact that in the PC market, OEMs and ISVs are under pricing pressure which may cause them to evaluate whether or not to bundle DVD playback software into base models." If Warner does indeed adopt Apple's proprietary standard for the un-enhanced audio on the discs, that would be incrementally positive for Apple (NASDAQ:AAPL). Resources: Warner Music's Q2 conference call transcript; Dolby's Q2 conference call transcript discusses the outlook for next generation DVD players; Digital Theater Systems' Q1 conference call transcript discusses the surround sound market in cars and other applications.