CNET wrangles with shareholders. CNET Networks (CNET) had a "tense and uncomfortable" meeting with the private-equity consortium that has amassed a 21% stake in the company in an effort to stave off a proxy fight. Sources say CNET's board is in a "state of denial" about the seriousness of its situation. The group wants CNET to focus on updating its aging technology platform, while CNET is looking instead to aggressively expand its international business.

A buyer for Motorola's cell unit? Chinese mobile phone maker ZTE Corp. is in talks with Motorola (MOT) about deepening the companies' relationship. There is speculation it may be looking at buying MOT's cell phone unit, which could be worth $9B-$12B.

Warner Music Group saw its net income fall 58% from a year ago but still managed to top consensus analyst estimates by a penny. CEO Edgar Bronfman, Jr. said in the press release, "As expected, this has been a challenging quarter, reflecting the difficulties in any industry transformation of this scale," (full earnings call transcript later today). The company's continued struggles highlight the music industry's ongoing struggle to remain profitable, amid growing piracy and cheap (legal) digital downloads that cut into profits. Net income in Warner's latest quarter (Q407) was $5 million, good for EPS of $0.03, versus net of $12 million (EPS of $0.08) during the previous year period. Revenue was up 1.8% to $869 million, helped by favorable forex conversions, but actually fell 1.5% on a constant-currency basis. Wall Street was looking for EPS of $0.02 on sales of $875 million. An 8.9% rise in U.S. sales was offset by an 8% fall-off in international sales. Digital revenue rose 25% to $130 million.

The debate over DRM has raged since the inception of digital music and the growth of Apple (AAPL) and its iTunes Store. Even Apple's head Steve Jobs wrote a letter discussing DRM on Apple's website. Apple's first partner into the DRM-free world was EMI (EMIPY.PK) and together they launched iTunes Plus. An additional service for music that gave customers better quality tracks that were free of restrictions. These tracks could be played, burned or used anywhere, virtually on any device.

Warner Music Group has decided not to bid for EMI Group plc, according to a statement released by the company Tuesday, ending a courtship that lasted several years years. Warner shares gained 2.3% in regular trading Tuesday and another 1.8% after hours on the news. EMI shares are down nearly 2% in London trading Wednesday. Warner's decision leaves EMI Group to private equity group Terra Firma's 265 pence ($5.40) a share offer, though thus far, only 5% of EMI's shareholders have accepted that offer on the assumption Warner would try and outbid Terra. Warner's decision to pass on EMI will likely have negative ramifications for the entire recording industry. The Financial Times says Warner executives "were wary of increasing their exposure to the music business" with decreasing record sales and uncertainty of the profitability of digitals distribution, as a result of new players like Apple, whose iTunes dominates digital music sales. Warner was also concerned it wouldn't be able to unload EMI's publishing division, generally felt to be more profitable than its recording division, at a cost that would justify a bid above $4.9 billion. Warner retains the possibility of buying EMI's recording divisions, including the much sought after Capitol Records in the U.S. and Parlophone in the U.K. In 2006, Warner overtook EMI to become the number-three recorded music company globally with a 13.8% market share to EMI's 12.8%. Both trail leaders Sony BMG and Vivendi, who have a global share of 25.7% and 21.2%, respectively.

The attendees included EMI (EMIPY.PK), Mercury Records, Sony BMG, Universal Music, and Warner Music Group (WMG), along with a host of other companies in different parts of the industry.

It's Like a Royal Navy Symposium, circa 1740
Naturally, at the top of everyone's agenda was piracy, and that got a lot of play. Reading the coverage each music executive sounded like a cross between Babbit and Marvin the Paranoid Android, spinning tales of woe about how they are all getting ripped off by those bad kids ripping their pirated CDs.

As expected, Apple and EMI Group announced a deal yesterday to sell a large selection of the latter's music catalog on Apple's iTunes online music store, without anticopying (digital-rights management [DRM]) software. From next month, iTunes will sell DRM-free EMI songs with higher sound quality at 256 kbps, compared to the 128 kbps standard, but at a 30% premium: $1.29/song vs. $0.99/song. In a press release, Apple said iTunes customers can upgrade previously purchased EMI songs to DRM-free versions for $0.30/song. DRM-free means such songs from iTunes are playable on devices other than iPods. Also, due to the higher quality, songs will take up twice as much space. EMI also plans to offer DRM-free tracks to other digital music services. Analysts seem to agree other record labels will have to offer DRM-free tracks, especially if EMI's sales increase. Separately, The Wall Street Journal reports the European Commission sent a statement of objections to Apple and four music companies including EMI last Friday, regarding possible antitrust violations with the pricing structure of iTunes, in which prices vary by country. "Apple has always wanted to operate a single pan-European iTunes Store ... and we don't think Apple did anything to violate EU law," said a company spokesman. Shares of Apple gained 0.8% to $93.65 and EMI's OTC ADRs rose 3.5% to $9.00.

In what is expected to be a groundbreaking announcement today, music company EMI Group plans to announce the sale of large parts of its music catalog today to Apple's iTunes store, without the digital rights management [DRM] software that prevents buyers from illegally sharing their music over the internet. The move comes in the midst of a growing debate within the music world over the best strategy to recoup falling record sales. Apple CEO Steve Jobs has urged the music industry to drop its insistence on selling digital music with DRM software attached, arguing the software has been ineffective at combating digital piracy since most music is still bought on unprotected CDs. EMI also plans to sell its music on other labels. Sources in the know say the one major exception to EMI's music sales will be the Beatles catalog, which it has no plans to release as of yet.

The London Observer, citing Wall Street sources, reports that Warner Music CEO Edgar Bronfman is prepared to sweeten his offer for struggling London-based music company EMI, provided EMI confirms it will consider a revised offer. On March 2, EMI announced that it had turned down a non-binding offer from Warner Music to purchase the company for 260 pence per share on the grounds that it "wasn't in the best interest of its shareholders and undervalues the company." EMI also cited regulatory uncertainty that would accompany the proposal and operational risk the company would incur. EMI, which suffered poor holiday sales from major artists like Robbie Williams and is facing a weak U.S. market, has issued two profit warnings since the start of 2007. Warner Music is not commenting on the development.

EMI's London-listed shares are up over 5.5% in intra-day trading following the firm's acknowledgement it received an "approach" from U.S. rival Warner Music Group. Some analysts believe a merger will pass regulatory scrutiny following recent profit warnings from EMI and continued struggles for the music companies. In a brief statement, EMI explains there is no proposal for its board to consider and says, "There can be no certainty that this approach will lead to any proposal or offer being made for the Company." Furthermore, EMI says, "If a proposal is made, it will be considered with a particular focus on conditionality, the regulatory and operational risk profile, and on valuation in relation to the Company’s stand alone value and the value creation available from a combination." EMI has previously rejected offers from both private equity and Warner. The ongoing attempt between EMI and Warner to join forces began in 2000.

· Baidu Partners with EMI to offer advertising supported music. Baidu has entered into a partnership with EMI Music to launch an advertising-supported online music streaming service in China. Under the agreement, Baidu will set up a special “EMI Music Zone” in its popular music search channel. EMI Music is the largest music label company in China and the 3rd largest globally.

Warner Music has announced that it will purchase 73.5% of heavy metal label Roadrunner for $73.5 million. The Dutch label was founded in 1981 and has been distributed by Vivendi SA's Universal Music Group since 2001. With popular artists such as Slipknot and Nickleback, Roadrunner is the third-leading heavy metal label in the U.S. by sales volume and has been thriving as other labels have faced a decline in the past six years. Managing Director Cees Wessels is expected to remain with Roadrunner which will be joined with Warner's Atlantic Records Group in the U.S. and with Warner Music International overseas.
• Sources: New York Times, Wall Street Journal
• Related commentary: Warner Music Partners With Apple on DVD Albums; Stock Implications, Warner Music on Publishing Acquisitions, YouTube's Warner Music Group Deal , Warner Music Discusses its Digital Milestone. Conference call transcripts: Warner Music Group F4Q06
• Potentially impacted stocks and ETFs: Warner Music (WMG). Competitors: Sony (SNE)

Traditionally, the company made its money from investment banking activities. But that has changed over the years; that is, the growth has come from trading in equities, commodities, fixed income and derivatives.

Although things are looking pretty good in terms of reaping big gains from M&A, LBOs and even IPOs. For example, the company had a huge payday from its investment in Industrial & Commercial Bank of China Ltd., which recently went public. The firm also was the adviser on Mittal Steel Co.'s $38.3 billion buyout of Arcelor SA.

In fact, according to Goldman's CFO, the backlog for deals is the highest since 2000.

The releases come as some high-tech and music-industry executives are becoming increasingly concerned about Apple's growing clout in the music business. Only online music files purchased from iTunes, ripped from users' own CDs or downloaded from pirate services can be played on the popular iPod. Copy-protected songs purchased from Yahoo and other legitimate sources don't work on it. By selling music in the MP3 format without copy-protection software, Yahoo can offer music that works easily on iPods.

We here at Blackfriars have previously advocated Apple taking the same approach to satisfy upcoming laws in France and Denmark designed to promote competition and compatibility in the music market. And to be fair, this is just a baby step along that path; the labels will need a lot of convincing with sales numbers before they'll embrace MP3 music.

EMI Buyout Approach Raises Chance of Breakup [Wall Street Journal]