The recorded music business, currently floating on a sea of red, does not appear to be a solid investment, but that’s not keeping some industry giants from trying either to buy or sell assets. But even a few seconds of thought ought to convince potential buyers that this might not be the right time to plunk down enormous piles of cash for companies that are wounded and bleeding.

Nevertheless, Goldman Sachs has reportedly begun seeking buyers for Warner Music Group Corp. (NYSE: WMG). Warner, with the Universal Music Group of Vivendi (OTC: VIVEF) and the music division of Sony Corp. (NYSE: SNE), are the three largest music companies in the world.  KKR & Co. Ltd. (NYSE: KKR) and Bertelsmann AG have apparently made an offer for Warner, causing the company to hire Goldman Sachs to begin a formal process for selling the music company.

At the same time that it is putting itself on the block, Warner is also chasing EMI Group Ltd., the world’s fourth largest music company, and owner of the rights to the music of the Beatles. EMI, owned by private equity firm Terra Firma Capital Partners Ltd., has more than once been forced to seek cash from investors to meet the interest payments on its $5 billion debt to Citigroup Inc. (NYSE: C).

Currently, the most valuable piece of the music business is a company’s music publishing arm. Sales of CDs have been falling steadily for years as consumers prefer to buy digital music a track at a time from online sellers like Apple Inc. (NASDAQ: AAPL) and Amazon.com (NASDAQ: AMZN). CD sales have been the lifeblood of the music business since they replaced vinyl LPs, but fewer and fewer consumers want them and retailers are reducing the space in their stores that are dedicated to CDs.

The music business has simply not been interested in trying to find a way to work this change to its advantage, preferring instead to file lawsuits in the hope of scaring the daylights out of the very people who buy their products. And now the industry faces the challenge that even single-track download sales will fall.

Streaming music services like Rhapsody and Spotify have made inroads in the music market by licensing rights from music publishers and then making the music available to consumers either through a limited free service or a paid subscription service. Instead of buying either a CD or a digital track and owning it, consumers get the right to listen to all the titles available for a monthly cost that is about half the list price for a single CD. Why buy a few CDs when you can have essentially all the recorded music in the world for the same price or less?

Musicians can now make studio-quality recordings in their basements, but they still need distribution and publishing services. In the not-to-distant future, music companies will be licensing firms and distribution companies. The companies are resisting the change because they know it will severely cramp the rock-and-roll lifestyle that company executives have gotten used to over the years.

News of the possible sale of Warner Music has sent the stock up more than 20%, to $5.74, at the market open this morning. The shares have traded in a 52-week range of $4.00-$8.02.

Paul Ausick

 

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