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On Warner Music's F4Q06 conference call, CEO Edgar Bronfman reported that the company met a "digital milestone" exceeding $100 million for the quarter while sales of physical recorded music were soft and lagged behind digital. Bronfman and CFO Michael D. Fleischer discuss Warner's emphasis on digital and the future of physical recording.

Eric Handler - Lehman Brothers

... Could you just dig a little deeper on the disparity in the growth rates between physical and digital? Was there anything that really occurred in the quarter, be it new video revenue, expansion of master ringtones, anything along those lines that you just seem to be up from quite a bit, relative to the industry, on both sides. I’m just curious on that ...

Michael D. Fleisher

On your digital question versus the physical business, I think part of our out-performance on the digital side continues to be our laser focus on that business and that being an integrated part of everything we do. In particular, things that we have talked about in the past, like digital album bundles, continue to be a place where we dramatically outperform our competition, and in fact our market share there is even greater than our larger digital market share. I think we continue to see just great strength across the entire digital product line.

In making the comparison between the digital and the physical, I think it is also important to understand on the physical side that there is some timing. Our revenues are calculated when we ship physical product and we calculate revenues on the digital products when we sell it, and when it is sold through to consumers because there is no inventory. Last year’s physical quarter had large shipments that went out at the end of September for early October, the big Q1 releases ...

Michael Savner - Banc of America

Good morning, thanks very much. Just a follow-up again on the physical questions. Is there anymore leverage in that model? I know you run it pretty lean right now, but as you see the physical numbers really not showing much signs of stabilization, do you have the opportunity as you are allocating more resources to digital to pull more resources away physical, and shore up that business ever farther?

Edgar Bronfman

On the physical side, let me make a couple of comments. One is we have been successful so far in focusing resources on growth and being very, very sober about how many resources we want to apply to declining businesses. In the middle of an industry transformation, the history is the incumbents often look forward to turnarounds and maintain resources against traditional business models while failing to put too much cost against that and then insufficient resources up against opportunities.

I think we have been pretty good so far at balancing and we are going to continue to balance by making sure we have plenty of resources to grow the businesses that are growing and we do not over-provide for businesses which are not growing. That is a process which will continue.

So to answer your question, there will be additional leverage, there must be additional leverage as one revenue stream declines and other revenue streams [pick up].

Having said that, I also want to say that we feel it is important that we innovate, that we bring our level of innovation on the digital side to the physical side. In the first quarter of calendar ’07, so in other words, our fiscal second quarter, we are going to begin releasing quite a number of titles not only on CDs but on DVDs, and ultimately even on other platforms that are not in that quarter.

DVD albums will be towards people who buy a physical platform and put it into their computer. We are going to give them a much richer experience. We are going to give them video, we are going to give them links, we are going to give them all kinds of things that are not available on a physical CD, so that we begin to innovate in the physical space.

Quite honestly, we are selling the same physical platform that the industry has been selling for 25 years. If the television industry were doing that, it would be down too. We have to innovate in the physical space and we are going to innovate in the physical space. But having said that, we are also going to be very focused on how much resources we devote to it.

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  • Source: Warner Music Discusses its "Digital Milestone" and the Future of Physical