Warner Music on China Unicom and Mobile Growth

Aug. 7.06 | About: Warner Music (WMG)

On Warner Music's (NYSE:WMG) Fiscal Q3 conference call, executives discussed a deal with China Unicom and the future of mobile internationally:

Edgar Bronfman, CEO

We are particularly excited this quarter about being the first major music company to strike a direct catalog-wide content deal with China Unicom, the world's third largest mobile operator. Our new partnership will provide them with ringback tones, master tones and artists' greeting from Warner Music artists.

This is important, not only because China's digital music business is forecast to grow at a 30% compound annual rate to $1.6 billion by 2010, but also because mobile offers us a valuable legitimate business solution in a territory where physical piracy is so pervasive.

And in South Korea, perhaps the most aggressive mobile music market in the world, we reached an innovative joint venture with SK Telecom, the leading wireless provider and largest distributor of recorded music in that country. Together, we will leverage Warner's expertise in signing and developing artists with SK Telecom's strength in the digital delivery of content...

William Drewry - Credit Suisse First Boston

Two questions. One, Edgar I'm just wondering if you could share any metric or any data that you guys might have in terms of user consumption of media online or MP3 device versus mobile? You're citing mobile as this big opportunity and now you're moving into China. Just wondering if user data indicates that the mobile consumption will be bigger?

Edgar Bronfman

Sure. On the first question, it's still very early days for mobile and I don't think we've got any kind of substantive data that would compare online media consumption with wireless media consumption. But I certainly would point you to the dramatic rise of ring tones that the industry has been experiencing as an indication of people's appetite for content on the mobile platform. But as I said, we don't have any statistically significant facts that I think we could share with you...

Bishop Cheen - Wachovia

... What parts of the globe do you think offer the most promise for online music download growth outside of the U.S.?

Michael Fleisher - CFO, PAO and EVP

As far as global online growth, I really do think that the significant advances outside the U.S. are going to be more wireless growth than online growth because fundamentally outside the U.S. it's a wireless world. There's a fairly small amount of physical wired infrastructure. There is some in Western Europe. But even there, wireless distribution is greater.

Clearly, I would point you to the markets where the music business really have essentially no sales but a lot of interest. Places like China, India, Russia where the physical business is really so pervasive in terms of its piracy. If we can, like our initiative with China Unicom, begin to build a business with an economic partner who has an economic interest in retaining or achieving commerce and maintaining it on its network, that I think is a huge opportunity for the music industry. But I would say that's a mid-term opportunity, not a near-term opportunity.

Bishop Cheen - Wachovia

One follow-up. So the 50/50 kind of parity that we saw in this last quarter between international and U.S. with U.S. more online and international more wireless; do you see that same parity ahead as international wireless grows?

Edgar Bronfman

Well, Bishop, actually, we had about approximately three-quarters of our digital revenue in the U.S. and approximately a one-quarter outside the U.S. But we did say in the U.S. that the distinction between mobile and online was about 50/50.

Having said that, I do think over time you're going to see international as a total percentage grow. And therefore, since most international revenue is mobile oriented, mobile as a percentage will also grow. But as Michael mentioned, those distinctions will blur over time. It will become more of a digital revenue pie than a specifically online or mobile revenue.

Michael Fleisher

Just to clarify. 74% of our digital revenue is generated in the U.S., 26% in the rest of the world. If you look at the global business, it's about 50/50 between online and mobile with a heavier online component in the U.S. and a heavier mobile component internationally. And that's the distinction that's blurring.

The other thing I would note is that as the mobile market moves to more full track downloads to the mobile phone, or to a mobile device, and in many cases to dual delivery, the distinction really blurs between what's mobile and what's online.

Eric Handler - Lehman Brothers

... Album sales are down 5% year to date but if you include digital U.S. is down about 1%. So, I'm just trying to figure out if you include mobile -- and I do not think -- correct me if I'm wrong. I do not think mobile is included within the SoundScan data. So would you say it's safe to say that including mobile, the U.S. market is up 3%, 4%?

Edgar Bronfman

... I don't think we can say because SoundScan is based on units, mobile is based essentially at the moment on ringtone sales. I think it's very difficult to sort of put the two together to give you an absolute picture. But certainly mobile is becoming a more and more significant part of our business. Just to say that internally now when we're evaluating investments traditionally two or three years ago we would look at how many albums do we expect someone to sell? Now we're looking at how many albums do we expect somebody to sell, how many ring tones do we expect them to sell, how many video tones, et cetera, et cetera. So, we're looking at a much broader content pie and therefore hopefully a larger revenue opportunity as well.

Michael Fleisher

It's very difficult to decompose, but clearly digital revenue accounted for 50% of our year-over-year revenue gain. We are significantly outperforming the market both on physical and in digital. As I mentioned, I think an important metric is that essentially 80% of all premium priced digital album bundles are Warner Music album bundles. That increases both revenue and margin and is an example of the kind of innovation. I think it is difficult to be precise and to decompose, in your words, that into absolute revenue growth.