Radiohead Sounds Death Knell For Warner Music

| About: Warner Music (WMG)
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Wednesday morning I received an email with a special code to download the highly anticipated new album from the world’s most popular band: Radiohead. What makes this download different from any other? For the first time in history, I legally paid whatever I felt the album was worth.

Unlike the illegal free download black market that has sparked defensive action such as lawsuits and technological security, Radiohead’s ‘pay-what-you-will’ is a revolutionary move with no conceivable prophylactic to prevent record labels from suffering a fatal epidemic.

As the best talent slowly moves to self-employment, industry goliaths like Warner Music Group (NYSE:WMG), EMI, Sony-BMG (NYSE:SNE), and Vivendi (EPA: VIV) will watch their blue chip products disappear from the balance sheet. If the labels are to convince the best musicians in the world to stay, labels will surely have to negotiate less favorable deals. Not a sweet song for company revenues and margins.

Industry insiders are predicting yet another nuclear attack on the traditional recording industry. gathered some interesting insights:

“This feels like yet another death knell,” emailed an A&R executive at a major European label. “If the best band in the world doesn’t want a part of us, I’m not sure what’s left for this business.” “Radiohead is the best band in the world; if you can pay whatever you want for music by the best band in the world, why would you pay $13 dollars or $.99 cents for music by somebody less talented? Once you open that door and start giving music away legally, I’m not sure there’s any going back.”

I don’t recommend shorting WMG because it has already fallen almost 60% in 52 weeks, and this is a long term play that would require enough capital to weather any short term pops. But if you have the cash and a ton of patience (e.g., institutional investor), you may want to start shorting this dying elephant as its remaining three legs start to give way.

WMG 1-yr chart: