Warner Bros Settles Payola Investigation for $5 Million

Warner Brothers (NYSE: WMG) has agreed to pay $5 million to settle the Payola (bribes paid by record companies to radio stations in return for airplay) probe that NY Attorney General Elliot Spitzer has been spearheading for the past few months. Warner is the second music industry corporate to settle, in July Sony BMG Music Entertainment (NYSE:SNE) settled by paying $10 million. The money will be used by the Rockefeller Philanthropy Advisors to fund music education in New York State.

Traditional Music Outlets Take a Back Seat to iTunes

The NDP Group (a research company that tracks digital downloads as well as music purchases through retail outlets) has just released a report stating that Apple’s iTunes now sells more music than both Tower Records and Borders. In 2005 iTunes also got 70% of the legal music download business. The big box retailers however still outsell iTunes – these include Wal-Mart, Circuit City, Best Buy, and Target.

Music Industry Ups and Downs

The company Nielsen Soundscan has released a report revealing that while digital music downloads tripled in size by May of this year – to 6.6 million downloads a week – by the end of October, that number had remained relatively stable at 6.7 million downloads per week. This news is alarming for the fact that the digital download business was expected by analysts to offset the fall in CD sales. Global music industry profits have been shrinking for the past six years falling by 6.7% in the first half of 2005.

Shares of Apple (NASDAQ: AAPL) – manufacturers of the iPod – have however skyrocketed – from $9.50 in 2001 to $64.95 at close of business today. Apple shares reached an all time high this week after an analyst at Bear Stearns upped his earnings estimate for Apple based on the thriving demand for iPods and the fact that the holiday gift buying season is coming up around the bend.

EMI Group PLC, (EMIPY.PK) just announced that revenues are on an upward swing for the first time in five years due to an increase in the company’s legal downloads and the fact that the groups Coldplay and Gorillaz released profitable CDs this year. Sales for the six months ended September rose by 5.8% to $1.6 billion.

Virtual Record Deals on Virtual Record Labels

Further to the news in my blog of a few days ago that MySpace.com was launching its own record label, news came out today that Warner Brothers is launching an “online label”. The company, called “Cordless Recordings” will be run by Jac Holzman (the guy who signed The Doors to Elektra back in the Sixties). Groups signed to this label will release music in three song ‘clusters’ that will be available for download at iTunes and Rhapsody. If the music becomes profitable as a download, then physical CDs will be manufactured and released. Cordless Recordings will be employing a person whose job it will be to troll the web looking for popular online bands and music.

An announcement was also made by Lycos, to the effect that they would also be launching an online record label. It looks like the music industry is experiencing a shift in how music and musicians become popular and produce recordings. It’s about time!

A Cultural Shift - The Firsthand Account

In speaking with Dawn Van Zant, the president of Econ Corporate Services, this morning (the owner of MusicIndustryStocks.com and InvestorIdeas.com) she described what she called "a cultural shift" after seeing a Rascal Flatts concert last night. What Dawn described ties in perfectly to the current integration of cell phones into every facet of daily life, including music. All of the major telecommunications companies have introduced cell phones with downloadable music players. What Dawn described from last night's show brings home the point of just how integrated cell phones have become into the mainstream of society.

I asked Dawn to write down her first hand observations for our blog readers:

"Last night I attended the Rascal Flatts performance at GM Place in Vancouver and felt like I was a witness to a cultural shift. I am a 46 year old avid fan of country and rock music and attended concerts frequently throughout my teens and twenties. I now make a point of seeing a concert every now and then when I feel like I can handle the crowds. My last concert previous to Rascal Flats, was Bruce Springsteen's acoustic tour this fall. At his concert, I sat quietly with my peers listening to a legend sing out his life story. There were moments of complete silence as we soaked him in. It did not prepare me for last night's concert at all.

Despite the cheap cowboy hats, drunk girls and too many people, the musical performance was great. The phenomenon that made me stand back as an observer and pause, was that instead of an audience that I remember in my twenties holding up their lighters in the air, I saw thousands of cell phones with cameras being held up by fans.

I had no idea that every teenage girl and everyone under 30 had a cell phone with a camera. I have to say I had one in my purse too, but I don't know how to use the camera.

The wireless wave took on a whole new meaning for me last night as I saw cell phones waving rhythmically in the air to Rascal Flats, taking photo after photo."

MySpace Starts Record Label For Independent and Unsigned Artists

The website www.MySpace.com has launched its own record label in connection with Universal’s Interscope Records. The label will concentrate on unsigned and independent artists as well as compilations by artists from other record labels. The new label’s first release will be a compilation of tracks that have become popular among visitors and users of the MySpace.com internet phenomenon. MySpace Records has already signed its first act called Hollywood Undead, a band that has been listed on MySpace.com since June of this year.

According to the Hollywood Undead’s blurb on their MySpace page, “After 1 day of dropping their sound onto Myspace, their account exploded like TNT. The Hollywood Undead space grew in size in a matter of hours—starting out with an audience of 10 and blowing up into one that included several thousand users just in their first day of entry into the space. Thousands of adds per day on average. Tens of thousands of profile views. Close to 4000 DOWNLOADS PER DAY.” The band reached number one on the MySpace top bands chart after only 1 week, beating out bands like Nine Inch Nails, Coldplay, and System Of A Down.

Sad Songs Say So Much for the Music Industry

Year end music industry sales totals look set to be about 7% behind 2004 numbers. This disappointing result has been blamed on poor album sales, which has in turn been blamed on both legal and illegal downloads, and competing entertainment delivery systems. The truth is that 2005 hasn’t had any blockbuster sellers like 2004’s LPs by U2, Shania Twain and Eminem (and what a sad state of affairs when Eminem is considered a blockbuster… but that’s another article entirely).

Time Warner Increases Share Buyback, Posts 80% Increase in Third Quarter Earnings

Time Warner announced today that the board of directors had voted to approve raising their stock repurchase program from $5 billion to $12.5 billion. This news was hot on the heels of a third quarter earnings report showing an 80% increase over the same quarter last year. The increase in earnings was attributed to strong cable TV business – especially with syndications of “Sex and the City” and gains in advertising. Time Warner shares have been on the decline – share prices are still 75% lower today than they were in 2000 prior to the company’s agreement to be bought out by AOL.