Warner Music whittles its losses on brisk digital sales

Strong international sales and higher digital music revenue narrowed losses for Warner Music Group Corp. in the fiscal third quarter, surpassing analyst expectations in the face of the industry’s rocky transition to digital distribution.

The music company whose artists include rock bands R.E.M and Disturbed, and pop star Katy Perry, reported a net loss of $9 million, or 6 cents a share, in the three months ended June 30, compared with a loss of $17 million, or 12 cents, in the same period last year.

Revenue rose 5.5% to $848 million, surpassing the $792.2-million average estimate of analysts polled by Bloomberg. Accounting for the weak dollar, revenue actually fell 1.1%.

“Warner Music seems well-positioned to continue to drive aggressive growth in digital revenue,” said Tuna Amobi, an analyst at Standard & Poor’s. “They seem to be leading the industry in terms of making digital partners.”

Warner’s digital revenue jumped 39.3% to $156 million, which comprised 22.7% of the company’s $686 million in total recorded music revenue. Sales of physical CDs fell 5% and licensing revenue rose 27%.

The New York-based company was acquired by a group of private equity investors in 2004 from Time Warner Inc. It is the third-largest of the four major record labels, but ranks second in market share for digital album sales, according to Nielsen SoundScan.

Warner Music Chairman and Chief Executive Edgar Bronfman Jr. credited the company’s strategy of offering special bundles of content online -- such as a collection of singles and extended plays by folk rock singer-songwriter Jason Mraz on iTunes -- and pursuing new distribution models through deals with online retailer Amazon.com Inc., music subscription service Napster Inc., and mobile phone maker Nokia.

“The economics I think are extremely favorable to us and to the industry generally,” Bronfman said in a conference call with analysts, referring to distributing Warner’s music on cellphones. He said distributing music over cellphones would allow Warner to reach “markets that we’ve never been able to deal in before,” such as India and China.

Although Bronfman acknowledged the growing video game market offered revenue opportunities for music companies, he blasted game producers for paying “paltry” fees and threatened to withhold licensing songs to them unless they paid more.

“I think the industry as a whole needs to take a very different look at this business and participate more fully and in a much more partnership way,” he said. “And if that does not become the case as far as Warner Music is concerned, we will not license to those games.”

Internationally, Warner’s revenue grew 3.6%. Hit albums, including from Luis Miguel, propelled international sales. Warner said its domestic market share gained one point on sales from Madonna and other top artists, and a new compilation of Frank Sinatra, but that was not enough to overcome a 6.5% slide in revenue.

Madonna signed a deal last year with event promoter Live Nation Inc., but Warner retained the rights to her latest studio album, “Hard Candy,” and an upcoming greatest hits CD, along with rights to sell and license previous work.

Nickelback, another popular Warner group, also jumped to Live Nation in July.

Bronfman downplayed the defection, saying “the band’s music, the band’s brands, the band’s writers will remain with Warner for quite some time to come.” He said that Warner continues to invest “almost like a venture-capital business” in new artists.

“When it comes time to renew, if the price is too high and the economic burden too great, we will simply pass,” Bronfman said.

Amobi said Warner’s decision to let expensive artists go was wise. “Companies can’t do these big deals because Wall Street might penalize them, as it has Live Nation,” he said.

Despite the better-than-anticipated results, investors didn’t find much to cheer about against a backdrop of the gloomy music industry. Warner shares fell 17 cents to $8.27 on Thursday.

“We do not see any drivers of near-to-immediate term improvement for the music industry,” Goldman Sachs said in a report, noting it was continuing its “sell” rating on Warner shares as it expects the company to face a difficult second half of the year.

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swati.pandey@latimes.com