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Home , Cinram, Reprise Records, Warner Music Group

STRATEGIC REPORT FOR , INC.

ELIHU BOGAN SAMUEL MEEHAN PATRICK FLEMMING

April 19, 2007

TABLE OF CONTENTS

EXECUTIVE SUMMARY...... 3

COMPANY BACKGROUND ...... 4

COMPETITIVE ANALYSIS ...... 6 INTERNAL RIVALRY ...... 6

ENTRY ...... 10

SUBSTITUTES AND COMPLEMENTS ...... 11

SUPPLIER POWER ...... 14

BUYER P OWER...... 15

SWOT ANALYSIS ...... 16

FINANCIAL ISSUES ...... 17

STRATEGIC ISSUES ...... 20

RECOMMENDATIONS ...... 24

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EXECUTIVE SUMMARY

Since its birth as a in 1929, Warner Music Group (WMG) has managed and produced a wide-range of successful musicians and performers, and now boasts a recorded music portfolio of over 38,000 artists. WMG’s artists include such big names as , , , and The Red Hot Chili Peppers, and the company owns the rights to 29 of the top 100 best selling of all time.i WMG’s business consists of two divisions: Recorded Music and Music Publishing. The Recorded Music business produces revenue through the marketing, sale and licensing of recorded music in various physical and digital formats. The Music Publishing business owns and acquires rights to musical compositions, and markets these compositions and receives royalties or fees for their use. WMG, along with Universal, BMG, and EMI Music, competes in a music publishing industry with a small number of major players, as well as a host of smaller, independent labels. Of the major competitors, all operate internationally and compete in both traditional music markets and in new digital enterprises such as tunes. Industry competition is both price and non- price based, with advertising and marketing playing an important role in protecting firms’ market share.

WMG was purchased in 2003 in a leveraged buyout led by Edgar Bronfmann, Jr., the current Chairman and CEO. In the past two years, WMG has been cutting costs and seeking out new markets in digital goods as the CD market continues a seven-year decline, and has established itself as a market leader in providing content for both MP3 players and 3G-enabled cell phones. WMG and its comparatively sized rival EMI have repeatedly initiated back-and-forth acquisition negotiations, however regulatory uncertainty in the EU continues to stifle progress.

A number of factors affect the performance of WMG, as well as the as a whole. The declining CD market, widespread digital piracy in the U.S. and physical piracy abroad, and the growing importance of digital goods are some of the most important. To date, WMG has been successful in positioning

3 itself aggressively in new markets, offering copyright-protected digital downloads through legal services such as iTunes, as well as marketing music videos and ringtones to 3G cell-phone subscribers. To counter the declining CD market, WMG has engaged in an aggressive cost-cutting initiative, lowering annualized costs by approximately $250 million in 2005. WMG hopes to continue improving its balance sheet, income statement and cash flows through a merger with EMI. Going forward, WMG’s greatest challenge will be to address the changing nature of the music publishing business, as technological advances have threatened to erode the traditional rival, excludable nature of music goods.

COMPANY BACKGROUND

The history of WMG Group can be traced all the way back to 1929 through its publishing arm, . At that time, Jack Warner, president of Warner Bros. Pictures, Inc., sought to acquire music copyrights as a way of providing inexpensive scores and music for his films. Additional publishing firms acquired in the 1920s and 1930s by Warner Bros. were all subsequently sold within a decade, and WMG’s real roots in Time Warner began with the founding of Warner Bros. Records as a division of the Warner Bros. movie studio in 1958. In 1960, Warner Bros. Records signed the world’s first million dollar record contract with the Everly Brothers.

In 1963 Warner Bros. Records acquired , which was founded by in 1960. In 1967, Warner Bros. became Warner Bros.-Seven Arts, when Jack Warner sold his stake in the company (and thus control of the group) to for approximately US$95 million. The same year, the firm purchased , which is now WMG’s oldest label. In 1969, Kinney National, the comics, talent agency, parking lot, cleaning and funeral parlour , acquired the company. Kinney also acquired (founded in 1950) for US$10 million in 1970, and rechristened itself Warner Communications.

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WMG has operated internationally through Warner Music International (“WMI”) since 1970. The current logo of WMG was designed for use by WMI since the 1970s. In 1972, the three major labels were assembled into one group then known as WEA (Warner-Elektra-Atlantic). Later Warner Communications merged with Time Inc. to form Time Warner. The company Time Warner remained fundamentally unchanged until it was acquired by America Online in 2000.

In 2003, Time Warner sold their Warner Music arm to an investment consortium led by Edgar Bronfman, Jr. (the former head of Universal) for US$2.6bn. The investor group consisted of Thomas H. Lee Partners L.P., , LLC, Providence Equity Partners, Inc. and Music Capital Partners L.P. In May 2005, WMG became the only stand-alone music content company in the U.S. with publicly traded common stock.

The transition to independent ownership was completed on February 27, 2004. Since establishment, the group has been downsizing the firm, offloading marginal or low revenue units such as record production by closing or selling disk-pressing plants (particularly in the US and the Netherlands). In 2005 WMG sold Warner Bros. Publications (their sheet music business) to Alfred Publishing, founded in 1922. Miami-based Warner Bros. Publications printed and distributed a broad selection of sheet music, books, educational material, and , and tutorials. The sale excluded the print music business of WMG's Word Music (church hymnals, choral music and associated music).

In 2006 EMI and WMG engaged in a bizarre, reciprocal takeover battle with each rejecting an unwelcome US$4.6bn bid from the other. EMI announced that it had rejected the first acquisition offer from WMG, its smaller rival, calling the proposal "wholly unacceptable" and increasing its offer for WMG. That offer was in turn rebuffed. Also in 2006, WMG acquired Ryko Corporation for US$675m from an investment group led by J.P. Morgan Partners, and agreed to purchase a controlling stake in independent label Roadrunner (est. 1980) for US$73.5m. In

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February 2007, WMG made another offer for EMI for $4.1bn in cash, which was also rejected, this time due to regulatory uncertainty.

COMPETITIVE ANALYSIS

WMG is classified as SIC Industry 7929, an all-encompassing genre defined as Bands, Orchestras, Actors, and Other Entertainers and Groups. Other registrants under this code include World Wrestling Entertainment, Inc., Pro Elite, Inc., AVP Inc., IFSA Strongman, Inc., and Paradise Music & Entertainment, Inc. As this market classification does not include any of Warner’s major competitors, we will focus on Warner’s GICS classification, Consumer Discretionary, specifically the sub-industry classification of Movies & Entertainment (2540103), which includes rivals Universal, Sony BMG and EMI. Universal and Sony BMG are significantly larger than WMG, controlling 26% and 22% of world market share, respectively. is a subsidiary of the French S.A., and Sony BMG is a joint venture between Sony Corp. and the German firm Bertelsmann A.G. British firm EMI, with a market cap of $3.5 billion, accounts for another 13% of world market share. With the inclusion of WMG, with a market cap of $2.54 billion and an 11% market share, these four firms account for approximately 72% of worldwide recorded music sales (based on 2004 figures). Each of these companies competes internationally as well as in the US domestic market. In most markets, WMG and its major competitors compete to a lesser degree with smaller boutique and mid- market music publishers. Issues of scale as they relate to the music industry will be addressed in the Substitutes and Complements section below.

INTERNAL RIVALRY Competition between major firms occurs on both price and non-price (i.e. marketing, advertising, recruitment) levels. To maintain market share, companies seek to recruit and retain popular artists for current music publishing purposes, and to effectively manage growing portfolios for reissuance and other

6 publishing purposes such as licensing. The music industry as a whole has been suffering greatly from a seven-year decline in CD sales, and this decline took an even stronger downturn in the first three months of 2007, falling 20% from a year earlier.ii CDs still account for 85% of all music sold, and sliding sales are eclipsing gains in sales of digital downloads. Falls in CD sales are the result of a number of factors, including consumer substitution, piracy, cross-price competition with DVD purchases, and the closing of a number of prominent specialty CD retailers such as Tower Records. In 2006, about 800 music stores were closed, including Tower’s 89 locations.

As the industry contracts, firms looking to maintain market share often seek to acquire competitors or merge. The 2005 merger of Sony’s music arm and BMG, as well as the on-again, off-again negotiations between WMG and EMI, may be seen as a response to market pressure. Recently accelerated merger activity may continue in the future as profit margins fall due to piracy, and consolidation of market power will have a significant impact on both output and pricing.

Demand for WMG’s products is highly elastic, with competition from other media such as , satellite radio, and illegal copies of both digital and physical goods. Consumers have low switching costs, as purchase of one firm’s CD or MP3 does not preclude purchase of other firms’ products in the future. What brand loyalty is available to WMG is a direct result of loyalty to artists under contract, and as such it is important that WMG continue to augment and cultivate its talent pool. To hedge against unpredictable shifts in consumer taste, WMG has invested in a wide range of music, including hip-hop, country, and classical. Internationally, WMG and its competitors are invested in promoting both Western and local music groups. As each of WMG’s competitors has a similar portfolio, it is unlikely that WMG can reliably leverage exposure in a particular genre into increased profits. The value of each music publishing firm is based primarily on the intangible value of the firm’s music portfolio and retinue of artists and intellectual property. Firms can to increase the value of their portfolios through discovery of artists, or through acquisition of current artists

7 through management changes or mergers and acquisition. To illustrate, in 2006 WMG acquired both Ryko Corporation ($675MM) and the Roadrunner music label ($74MM).

Protecting and increasing market share depends primarily on consumer purchasing decisions, and therefore successful marketing and advertising is very important. Advertising and marketing not only increases awareness of the publishing firm’s artists, but may also lower price elasticity among consumers by ensuring loyalty among listeners.

The relative strengths of various music firms in the digital marketplace have yet to be determined. As the volume of CD sales continues to fall, the importance of digital goods (and digital pricing) will become more important. The distinct nature of digital goods, as well as lack of any excessive property or equipment investment, implies that market dominance will not necessarily go to the firm with the deepest pockets but to those who are able to achieve technological lock- in first. To achieve this lock-in, firms seek a first-mover advantage, marketing a superior technology early enough to capture the network size necessary to discourage competition.

Cooperation between firms directly and through the Recording Industry Association of America (RIAA) has become increasingly important in the industry as new standards for digital goods are agreed upon and legal positions are taken to protect the companies from erosion of intellectual property rights. Currently, the major firms are taking a united stance against music piracy and are attempting to resolve the fate of digital rights management (DRM) technology. It is in the interest of all major firms involved to promote legal sales over illegal copies or file-sharing.

Time Warner spun off WMG in 2003 because the parent firm was having difficulty keeping the division profitable. WMG’s new owners have responded to falling sales volume and downward pressure on prices by aggressive cost-cutting, a strategy common among its competitors. WMG specifically underwent

8 restructuring initiatives in 2005 and 2006, and reduced annualized operating costs by $250 million in 2005. Included in these cuts were significant headcount reductions from consolidation of operations, streamlining corporate and label overhead, as well as exiting leased facilities to consolidate manufacturing and physical distribution.

The maturity of the music publishing industry in physical sales implies that future gains in market share must come at the expense of competitors. Though it is unlikely that any firm will greatly increase market share by increasing physical sales of CDs or records, the creation of new products (such as ringtones, online videos, and other special ‘perks’ such as bundled DVDs) may open new markets. Additionally, firms may choose to increase their market share through mergers and acquisitions, though the already high concentration of industry sales implies that anything short of a high-level merger is unlikely to significantly affect market shares.

In digital media, the iTunes is the preeminent online retailers of MP3s, although some competition has emerged from rival firms such as Napster, Rhapsody and Urge. There also exists an opportunity for music publishers to market their music directly online (through artists’ websites, for ) as an alternative that might allay price-pressure from online retailers and perhaps even institute variable pricing in order to recapture the producer surplus that was common when sales of “singles” were popular. The price discrimination that major labels once enjoyed has been lost under Apple’s $.99-per-track system. Continued growth of legal download services such as iTunes is important to combat piracy, however consumers are increasingly downloading tracks legally for free from artists’ MySpace pages from other sources such as MP3 blogs.

Digital sales of individual songs in 2007 have risen 54% from a year earlier to 173.4 million. Concurrently, CD sales fell 20% to 81.5 million units. Overall sales of music are down 10% this year (physical and digital). Even including sales of ringtones, subscription services, and other “ancillary” goods, sales are still down

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9%.iii Going forward, overall market growth will depend on continued expansion of the digital market.

Possible growth opportunities abroad are being investigated by WMG, driven by positive sales growth in Japan in 2006. However, most emerging markets have the drawback of widespread physical piracy and the difficulty of enforcing property rights makes them an unreliable source of future income. The advantage of international expansion is that the appeal of American artists abroad may translate into lower price elasticities and opportunities for higher profit margins.

In the future, CDs may become no more than advertising for more lucrative ventures such as tickets and t-shirts. If the CD or the MP3 becomes more of a marketing device than a vital source of revenue, it will alter the nature of the music business completely. Strategies for this contingency are discussed below in the Recommendations section.

ENTRY WMG’s market is characterized by large fixed costs and as such there is little movement in and out of the top echelon of firms. While there are many mid-sized and smaller players in the industry (including independent music companies), their limited size and scope suggests little risk to WMG.

In the more broadly defined entertainment market, the role of WMG as a media distributor may be eroded in the long run as the proliferation of decentralized music sharing programs continues and consumers choose to purchase other forms of media, such as DVDs.

A new entrant to the industry would have to offer the same level of quality as existing firms, and given the value of reputation in the business, along with the positive cross-market benefits of signing with a firm that has a proven track record of successful marketing, it is unlikely that new firms will appear to challenge WMG. New competitors would also have to spend a disproportionate amount of money on marketing and advertising to entice artists to switch labels.

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There are significant benefits due to economies of scale and scope, as digital music sales feed off of radio airtime and CD sales, and vice versa.

Economies of scale also exist in production, marketing and distribution. Lastly, potential entrants would almost immediately face acquisition by the major firms, which has been the manner in which the big four firms have managed to maintain such a large consolidated market share. Threat of entry by another major player is low. Entry by smaller players is a lesser threat due to the option of acquisition by larger firms.

While consumers may not choose music by the artists’ label, artist look for labels that have established successful reputations at marketing and promotion through radio deals and music videos, for example, and thus there is an inherent advantage in reputation in discovery and acquisition of new talent. The major players have also established a system of recruitment that is designed to acquire not only the best talent, but also the best talent scouts, and this makes it even less likely that a smaller entrant will be able to compete successfully with the larger firms in the long run.

SUBSTITUTES AND COMPLEMENTS The threat of substitutes is significant for WMG, and for the music publishing industry in general. Illegal piracy produces almost identical products at zero marginal cost, and as such poses a serious threat to the valuation of industry’s intellectual property portfolios.

The cost of illegal copying is expected to grow in both the short and long-term, as the quality of illegal copies increases and converges to that of legal goods sold. This poses a problem because they are direct substitutes, and as such can put downward pressure on the prices that labels can charge without alienating their customer base. A number of economic models exist which contend that producers can incorporate the value of future copies into the original sale price of a digital good, thus capturing the costs of illegal copies, however given the growing price

11 elasticity of demand among consumers it is unlikely that producers will try this tactic anytime soon.iv This growing elasticity implies that the negative affect on volume sold will outweigh the positive effect of increased price per unit.

Internationally, piracy issues exist on a wider scale. Though digital piracy online may not be as widespread in countries with less developed high-speed internet and data networks, less effective copyright enforcement abroad, especially in Asia, has led to a proliferation of illegal pirated copies of CDs and other physical goods. To maintain prices and distinguish their products from illegal copies, the major labels have acted in concert and through the RIAA to launch marketing campaigns emphasizing the negative effect of piracy on artists’ incomes, and stressing the legal ramifications of copyright violations.

In the , the majority of industry effort to deter piracy has been concentrated in pursuing legal and regulatory measures, as well as employing technological barriers to piracy. WMG in particular has instituted a campaign to educate potential copyright violators about the unambiguous illegality of their actions. Though WMG cites the success of this campaign over the years 2005- 2006, any reduction in reported abuse based on survey data might be merely the result of increased reticence on the part of survey-takers to admit any wrongdoing. The success of WMG’s legal battles depends ultimately on the deterrent effect or secondary, word-of-mouth influence that lawsuits have on consumers. In 2006, one billion songs were traded monthly on illegal file-sharing networks, compared to the 173.4 million songs purchased legally during the entire year.v

The use of DRM technology has been somewhat effective in curbing individual file-sharing, though a number of consumer complaints have arisen due to incompatibility between different firms’ DRM technology and various MP3 players. In 2007, EMI announced that it would begin selling unprotected MP3 files on iTunes for $1.29 per track, explicitly to avoid these compatibility issues, as well as to offer higher quality music with the same file size. The high likelihood that the other firms will follow suit makes future innovation or

12 cooperation in DRM technology uncertain, at least for the type of music files currently in use.

Another main substitute that has been cited by some as the cause of the recent CD sales decline is the growth of DVD sales over the same period. DVDs are an imperfect substitute for CDs, however the two markets do affect each other by occupying similar spaces in consumer budgeting. Music labels have responded by researching new CD formats that would offer music enthusiasts new compelling features (such as including videos of live performances). With technologies such as DualDisc, DVD-Audio and SACD, labels are offering better-than-CD quality stereo audio and high-quality surround sound, as well as promoting free digital music downloads with a physical purchase. These features are also being touted to address competition with satellite radio, another substitute for CD and MP3 sales.

Demand for music is not only dependent on incomes, but also depends on radio penetration, access to music clubs, movies, etc. For example, movie sales are directly linked to the popularity of the movie.

There are a number of complementary markets for music. The success of 3G cell phone networks in the US will determine how many ringtones and music downloads Warner is able to sell to potential customers. WMG currently has a partnership with Motorola to provide content for the “MOTO Experience Pack.” Motorola’s revenue grew 21.6% in 2006, and gross profits grew 11.36%. Motorola is expanding aggressively, and through its partnership WMG will benefit from increased market exposure. The profitability of legal online music providers like iTunes and Napster is also important for ensuring a legal alternative to piracy continues to exist. Websites such as YouTube that offer free access to music videos on demand can also spur demand through network effects.

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SUPPLIER POWER Labels offer a fair amount of value added through production, remastering, packaging, tours, and ring-tone production, and therefore should continue to maintain consistent margins. However, as they operate in a superstar business, some artists may have localized effects through negotiation of contracts, royalties, and advances. As the revenue expected from CD sales continues to fall, contract renegotiation with artists may become a bigger issue.

WMG’s physical music business relies almost entirely on contracts with , a manufacturer that was also spun-off from Time Warner when WMG was sold to Bronfman. Previously, Time Warner’s CD production was all in-house, and therefore was not subject to the same market effects that WMG deals with today. Contracts with Cinram begin to expire in 2007 vi and it is unclear at this point what effect price negotiations will have on operating costs. The market for physical inputs is competitive and market determined, and given the declining importance of the CD medium it is unlikely that Cinram or other suppliers will be able to hold WMG “hostage” through contract negotiation. As WMG continues to look for cost-cutting opportunities to compensate for volume losses, future contracts with suppliers will no doubt be targeted. Unless mass production of music DVDs become commonplace, there are few if any substitutes for CDs. Digital goods can be produced in-house for the most part, and thus the growing importance of digital sales will decrease the risk of supplier power.

Negotiations with artists can often lead to unexpected costs, and artist advances account for a significant amount of operating expenses. Although firms can be at the mercy of new, popular artists who may threaten to change labels, the longer a musician is under contract with a firm, the more of the artists’ catalog is owned by the firm and thus greater leverage is available to the firm. Up-and-coming artists have little bargaining power and increased firm leverage, as well as personal relationships, is responsible for a fair amount of artist loyalty later in their careers.

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There is little threat of forward integration of suppliers into the product market, due to the differences between the two businesses, as well as the barriers to entry mentioned earlier.

BUYER P OWER The effects of buyer power are becoming more important as WMG’s distributors become increasingly concentrated in both the CD and MP3 industries. As CD sales are in an increasingly concentrated number of retail stores such as Wal- Mart and Target, these “big box” retailers have leveraged that power to drive down prices. Growing buyer power has put increased pressure of WMG’s operating margins. A merger with EMI might help to alleviate the problem. Wal- Mart has significant power to control the prices of products it purchases for resale, and can pull products or give preferential treatment to competitors if a company is unwilling to cooperate. A merger with EMI may help to alleviate this problem to the extent that Wal-Mart would have fewer alternatives with which to threaten WMG.

Online, iTunes is responsible for the vast majority of WMG’s online sales, and as such has a significant amount of power over determining track pricing. As online music sales continue to grow in popularity, it is possible that more alternatives to iTunes may become available, including the marketing and sale of MP3s by the labels themselves on their own or artists’ websites. This would significantly decrease the amount of buyer power online. Songs purchased on iTunes use Apple’s propriety version of DRM, known as “FairPlay,” which makes songs purchased from rival online stores using different DRM technologies incompatible with iPods. After the recent announcement that EMI will be selling DRM-free MP3 downloads through iTunes, it is unlikely that iTunes will be able to exploit its monopoly on iTunes-compatible DRM for much longer.

The ability to buyers to recognize weakness on the part of music publishers depends in part on how the industry reacts to falling CD sales volumes. If it becomes apparent that the industry may move away from physical formats, then

15 there is less opportunity for suppliers to benefit, but if the industry recommits to CD sales and promotion, then buyers may negotiate harder.

SWOT ANALYSIS

Strengths • Large firm, diversified labels (Atlantic, Elektra, Rhino) • Strong artist portfolio in a number of genres • Aggressive positioning vis-à-vis the digital music business and related new markets • Successfully restructuring to cut costs • Low threat of entry by new firms • High value added • Growing exposure to worldwide markets (also a negative)

Weaknesses • Declining CD retail environment, low growth opportunities • Main product is becoming non-rival, non-excludable. • Must make strategic acquisitions for growth • Low switching costs for consumers • Costly legal and regulatory issues • Highly leveraged ($2.26b in debt) • Pricing issues with iTunes and Wal-Mart • Subject to unpredictable changes in consumer preference

Opportunities • Recorded Music digital revenue may offset declines in Recorded Music physical revenue. • Room for international growth • Development of new digital markets, new technologies • , paid for by advertising

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• CDs can be unbundled into ringtones, video downloads, etc. allowing for more variable pricing

Threats • Illegal copying, both physical (developing countries) and digital (US and Europe) • Increased ease of piracy given ubiquity of computer technology and the Internet, as well as P2P services. • No room for increased leverage • Challenges from DVD industry and other non-music substitutes • Unpredictable cash flow • Growth is contingent on complementary markets (3G phones, YouTube, iTunes, etc.) • Unfavorable litigation outcomes, high legal fees.

FINANCIAL ISSUES

The Recorded Music business consists of the discovery and development of artists and the related marketing, distribution and licensing of recorded music produced by such artists. In addition to the more traditional methods of discovering and developing artists, firms often grow their music portfolios by acquiring competitors and smaller labels that cater to niche markets. Below we will look at some of WMG’s most recent performance data, then address the financial issues surrounding it’s large debt levels and a potential merger with EMI.

Warner’s market capitalization, at $2.54 billion, is significantly below that of Universal and Sony BMG, both of which benefit from parent companies that dwarf WMG in size (Sony Corp. currently has a market cap of $55.5 billion). Warner is also relatively smaller than rival EMI, which has a market cap of $3.5 billion as of March this year. Warner’s smaller size is a liability when attempting to negotiate future partnerships with mobile phone companies, music retailers,

17 and internet groups. Potential strategic partners, in search of stability, may look to WMG’s larger competitors for more lucrative contracts.

Warner’s price-to-earnings ratio, at 279.8, is extremely high, and may reflect high expected growth in the future. More likely, this is the result of takeover expectations, or is due to the recent drop in earnings, which lowered the denominator sharply. Such a high P/E ratio may also account for the steadily declining share price observed recently.

First quarter performance was disappointing in 2007, as profits fell 74% due to fewer albums released during the period and soft domestic and European sales. The importance of first quarter performance cannot be understated, as it represents holiday sales and typically accounts for 32% of all sales. Net income declined to $18 million, or 12 cents per share, from $69 million, or 46 cents per share, during the same period a year ago. Such a drop in profit margins may abate as cost-cutting efforts come into effect, or as digital revenues begin to pick up later in the year. Total revenue fell 11% to $928 million from $1.04 billion during the prior-year period. WMG announced that 2007 results would be weighted to the back end of the year.

Digital revenue of $100 million in 2006 grew 45% from $69 million in the prior- year quarter, but slid 4% from $104 million in the fourth quarter of 2006. Digital revenue was 11% of total revenue and 17% of total domestic recorded music revenue. Revenue for WMG's recorded music business decreased 13% to $800 million on softer domestic and European sales. On a positive note, CEO Bronfman also noted that Warner gained market share during the quarter.

This digital shortfall may cause some analysts to reconsider their future revenue estimate. "Our valuation model assumes continued deterioration in physical sales, but a much higher future growth rate for digital sales," said Morningstar analyst Jonathan Schrader after the 1Q results. "Given this, we'll be revisiting our growth assumptions and probably lowering our fair value estimate."vii Other reports predict that earnings will climb for the remainder of the fiscal year, and

18 physical sales will deteriorate to a much lesser extent than in the December period. These optimistic reports assume much-improved sales figures due to the release of numerous CDs and DVDs during the March quarter, so second-quarter results should be valuable for predicting the rest of the year’s performance.

WMG’s continued expansion into new music on mobile phone and online formats should further enhance sales. Analysts are relying on growth in digital sales to fuel improved results, and margin expansion should also benefit from a heightened level of digital sales. This will be offset partly by price declines on CDs.

WMG’s major financial concern is it’s $2.27 billion in debt outstanding as of 12/31/06. With a current (4/15/07) market cap of $2.5 billion, Warner’s debt-to- cap ratio is currently 0.91, high enough to raise bankruptcy concerns and Warner’s low current ratio implies an inability to pay back short-term debt without additional financing. A continuation of the sales slowdown coupled with the declining share price may indeed hurt cash flows enough to make the current debt situation unsustainable, particularly given the company’s relative lack of diversification. A list of Warner’s long-term debt, along with interest rates, is included below:

WMG Debt Schedule 2006 2005 Senior Secured Credit Facility $1,413 $1,430 7.375% Notes due 2014 465 465 8.125% Notes due 2014 187 177 9.5% Notes due 2014 191 174 TOTAL 2,256 2,246 Less current portion 17 17 Total Long Term Debt 2,239 2,229

The majority of WMG’s debt is the result of the first credit facility, which was used to help finance the original purchase of WMG from Time Warner in 2003. WMG’s current debt-to-equity ratio is above 41, making the company particularly susceptible to market volatility. For further ratio information, DCF information,

19 and comparables with other US-based companies registered under SIC 7929, please refer to Appendix A.

WMG’s S&P corporate credit rating of ‘BB-‘ was put on S&P’s CreditWatch with negative implications following the announcement of the potential acquisition of EMI in February. Despite analysts’ opinions that the synergies from such a merger would exceed $150 million per year, the question of how Warner would finance such a deal overshadowed future benefits. Warner’s most recent offer of $4.1 billion in cash would most likely have required the company to not only take on more debt but also to sell off some of its assets to raise the necessary funds.

Though WMG is again beginning to make operating profits (EBITDA), interest expense is incredibly high. In 2006, interest expense was $180 million, down from $182 million in 2005. With a reported $337 million in cash, Warner is spending over half of it on interest payments.

Investment interest in WMG may be generated by speculation on the potential sale of the company, given that growth prospects are not particularly strong and previous results have been unsatisfactory. Digital sales may well increase to about 25% of industry sales by the 2009-2010 timeframe, however, and successful positioning may make WMG a stronger company in the future than it is now. viii

STRATEGIC ISSUES

WMG has been seen increasingly as an inadequate stand-alone company that would benefit immensely from either acquiring EMI or being acquired itself. WMG has entered negotiations with EMI, with a $4.7 billion dollar offer in 2005 and a $4.1 billion dollar offer in February this year. Though both offers were rejected, the regulatory uncertainty that was given as a reason will likely be cleared up by the end of the year and new merger negotiations may be more successful.

The viability of the merger hinges on the outcome of the European Commission’s investigation of the 2004 merger between Sony and BMG. EU courts threw out

20 regulators’ approval of the merger that created Sony BMG in 2004, saying the European Commission, the EU’s antitrust regulator, had only carried out “an extremely cursory examination” of the effects of the merger.ix The court ordered the regulator to review the case again, and to present findings on March 1, 2007. WMG’s second offer to EMI was made before the committee’s expected ruling on March 1st, but was rejected when the committee postponed its ruling until July 1, 2007. In the process of courting EMI in 2007, Warner gained the support of the Independent Music Publishers and Labels Association (IMPALA), an influential group representing over 3500 independent music publishers. This blessing came after Warner’s promise to divest “certain recorded music assets” and promising to fund a digital rights management system for independent recording labels.x The regulatory risk of a possible merger will be much clearer following the EU review of Sony BMG, though the profitability of such a merger must not take into consideration not only cost-savings but also the effects of any promised divestitures. xi There has been some concern that the “distraction” of a potential merger has been having a negative effect on management’s ability to handle day- to-day operations.

One of Warner’s major handicaps is the lack of diversification in its product portfolio. While competitors Universal and Sony BMG offer a wide range of products that allows for cross-subsidization through other media formats such as movies and video games, the lack of transfer-pricing opportunities and over- weighted exposure to a volatile music market is troublesome. Because of the importance of quickly increasing network exposure in capturing rents from music that is current in vogue, Warner must rely on other companies to help it market its contemporary music portfolio effectively. Time Warner, the parent company of WMG before its sale in 2003, no longer holds an equity stake in the company, and thus it is unlikely that Warner will benefit from any better-than-market offers for services to Time Warner’s television or film divisions.

Transitioning from a focus on CD sales to digital media sales will be a tricky issue for WMG. Compact discs were originally rival, excludable goods, and as such it

21 was a simple matter for their provision to the market. With the advent of new technologies, both CDs and MP3s can be reproduced at zero marginal cost by end users, and thus the good has become non-rival and non-excludable (in short, a public good). WMG will need to address this issue when determining pricing in the years to come. Strategically speaking, WMG’s objective is to maintain the excludability of their music goods, and market them as an artificially scarce good. To achieve this, WMG has considered technological, legal, and educational solutions.

One method of technological exclusion has been through the utilization of DRM software designed to impede potential copyright violations, but a lack of cooperation between the various firms involved (Sony, Microsoft, Apple, and WMG’s major competitors) has led to an ineffective and unpopular system of incompatible file formats (see Apple CEO Steve Jobs’ “Thoughts on Music” from Februaryxii). The creation of a uniform, mutually compatible DRM system may be the most effective short-term solution for dealing with MP3 sales issues. WMG’s CEO has reaffirmed WMG’s commitment to DRM technologies multiple times in the last few weeks. Bronfmann also insists that music deserves the same anti- piracy protections as software, TV, broadcasts, video games and other forms of intellectual property. Despite what music may “deserve,” however, market realities may force WMG to act.

These market forces appeared on April 2, 2007, when WMG rival EMI announced that the company would begin offering DRM-free music downloads online through iTunes. Citing market research that downloads of non-DRM tracks are more popular than their DRM counterparts by a factor of ten, EMI plans to release music that not only offers unrestricted personal copies, but also improved quality, as file size previously reserved for DRM software has been appropriated to improving the audio bitrate, a proxy for audio quality. Most importantly, the elimination of DRM from EMI’s music downloads will eliminate compatibility issues between music players, making EMI’s music files more desirable for consumers concerned with playing their music on multiple players

22 of different brands. This radical step will force a response on the parts of EMI’s competitors, including WMG. For more discussion of WMG’s options regarding DRM technology, refer to the Recommendations section below.

WMG is relatively well positioned in the digital music market today, and was the only major music publishing firm with a higher digital album share above physical album share in 2006. WMG’s digital sales doubled in 2006.

Legal options to control piracy are also available. Traditionally, music publishing companies have limited themselves to lawsuits against providers of illegal software that enables or benefits users engaged in music piracy. In 2005 WMG received $19 million as part of an out-of-court settlement with Kazaa, Inc. (“Kazaa”) and will likely continue to pursue legal avenues against other providers of file-sharing programs such as LimeWire, BitTorrent, and also apply pressure to colleges and universities that do not tightly regulate internal file-sharing. As of writing, WMG is also involved in litigation regarding activities and pricing of digital music downloads, but these do not seem to pose a large operating risk.

More recently, WMG, along with its competitors and the RIAA, has begun suing individual users of peer-to-peer (P2P) networks who violate music copyright issues. The difficulties of suing individual users, as well as the lower value of settlements imply that the marginal benefit of these lawsuits may be less than the cost of legal fees associated with them. Even suing the program providers has proved difficult, as the companies are registered off-shore and use servers based in countries with particularly lax digital property laws such as the Netherlands.

Lastly, WMG has used marketing and educational campaigns to deter would-be music pirates by stressing the impact on future artists and the serious legal consequences of piracy. Though WMG reports success in deterring piracy based on poll data taken between 2005 and 2006, it is unclear whether this is a result of an actual reduction in piracy or merely a lower reporting rate due to increased awareness of those same legal ramifications.

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Lastly, it is not clear whether or not WMG will be able to maintain current prices while dealing with an increasingly consolidated distribution network in both physical and digital goods. Buyer power on the part of Wal-Mart will continue to limit the ability of WMG to sell popular artists’ releases for a premium, and Apple’s restrictive $.99 cent track restriction on iTunes has caused the RIAA to protest publishing companies’ inability to use differential pricing for popular artists, albums and songs. This limits the firms’ ability to capture the greater consumer surplus associated with newer releases.

RECOMMENDATIONS

First and foremost, WMG must address its current competitive situation vis-à-vis its major competitors. Takeovers of rivals and smaller labels are not uncommon in this market, and WMG’s overtures to EMI are grounded in solid economics. WMG’s smaller size and heavy debt load, however, make it unclear whether it will acquire EMI or vice versa. It is clear, however, that no major mergers or acquisitions will occur until after the European Commission reaches its regulatory decision on Sony BMG in July of this year. Assuming that regulators do not attempt to unravel two years’ worth of cooperation between Sony and Bertelsmann, we recommend that WMG again attempt to acquire or set itself up for acquisition by EMI. Should performance in the second quarter exceed expectations, it may be possible for WMG to acquire EMI, though it will require the divestment of significant assets on Warner’s part. Such a merger will be beneficial to both companies, with synergies estimated at $150 million.xiii Also important is the increased bargaining power that a combined firm will have with major retailers. By not competing with each other, a combined firm should be better able to compete with Universal and Sony BMG, and will improve profit margins through stronger negotiations with iTunes and Wal-Mart as well as improved cross-marketing for each firm’s top artists.

It is important that WMG continue to maintain strong relationships with major retailers, particularly Wal-Mart and Target. Early consumer exposure is crucial to

24 protecting market share, and being squeezed out of the retail market would be fatal to Warner’s physical CD sales. Unlike Sony or Universal, Warner does not have alternative in-house avenues to promote its music such as movies and video games. Going forward financially, it is paramount that WMG continue to increase revenue growth rates while reining in cost growth. To do this, partnerships with international firms such as Motorola will also help to shield WMG from volatility in domestic markets.

Warner is the only stand-alone music publishing company publicly traded in the United States. The prestige of such specialization is short-lived, however, and WMG’s lack of diversification in different media such as movies and video games is a liability, as WMG is unable to exploit transfer pricing opportunities or use other outlets to promote its music portfolio. Although it would be premature to suggest that WMG look to acquiring alternative media companies, we recommend the company redouble its efforts to establish relationships with film companies as well as with internet and entertainment firms (Microsoft, Nintendo, iTunes alternatives). After a merger with EMI, we also recommend continued product diversification, as well as possibly establishing joint ventures with other media companies.

The key to WMG’s success in the next few years is going to be its ability to capture a larger share of the faster growing sectors of digital music goods, particularly MP3s and ringtones. There are still a number of competing business models online, from paid downloads such as iTunes offers to free download services that only require a user watch paid advertising. Universal is cooperating with Spiralfrog.com to offer one of the latter services, and ABC.com has been using such a model successfully with its television programming.

EMI’s recent decision to offer unprotected music downloads is the most pressing strategic issue for WMG. If EMI’s marketing data is correct and sales of unprotected songs will increase dramatically, it may become impossible for WMG to compete online through iTunes without following suit and abandoning DRM technologies, or at least offering two-part pricing for DRM and non-DRM

25 versions of the same songs. The previous possibility of a universal DRM for all publishing companies is no longer a viable solution for resolving compatibility issues with MP3 players. If WMG chooses not to abandon DRM, they may also suffer the marketing risk of being singled out as a music company that only offers lower quality music downloads. EMI’s new pricing strategy will go into effect in May 2007, and we recommend WMG enter into negotiations with Apple as soon as possible so that WMG will be able to follow suit if EMI’s strategy is successful.

It is unclear what the effect of the price increases (from $.99 to $1.29) will be. Some economic theorists argues that the price of an unprotected MP3 reflects the present value of all future copies that end-users will ultimately make, however this is extremely simplified. It is more probable that users are willing to pay a higher price to ensure that there will be no compatibility issues with their MP3 players. One should appreciate the irony that the best strategic response for a firm selling an artificially scarce good would be to make it even more susceptible to piracy. This unlikely result is due to the rational realization of the major music labels that DRM-protected MP3s represent a very small share of the entire MP3 market, and that correcting compatibility issues is important for ensuring network growth.

While CD sales will continue to make up the majority of WMG’s revenue, it is possible that the market is in terminal decline. While some argue that the nature of the CD has changed fundamentally to one of advertising for more profitable music and ancillary merchandise sales, it is important that WMG maintain its cash flow from CD sales for as long as possible. It will not hurt, however, to begin thinking beyond the CD as a major revenue source to how it can be used most effectively as an advertising tool.

To promote Warner’s music portfolio, we also recommend that Warner work with Apple to sell iPods with selected artists’ music pre-downloaded. A similar strategy was followed by popular band with the release of the iPod U2 Special Edition. The advantage of this strategy is that early exposure to a limited set of WMG’s artists with a user’s purchase of an iPod will increase the chances that users will

26 pay for downloads through iTunes. Additionally, WMG could provide a few tracks of select artists for free, and offer iPod users discounted prices for full album downloads through iTunes. Like cooperating with big box retailers, it would be wise for WMG to ally itself with successful online music providers.

The strategic benefits of continued litigation are unclear. A cursory cost-benefit analysis of the current strategy of ‘shotgun’ lawsuits against heavy users of pirated music on college networks and at home shows that the legal fees and negative publicity being generated by the lawsuits far outweighs the actual benefits. Given the continuing minute probability that music pirates will actually be caught, the perceived risk is so low that these lawsuits do not provide an adequate deterrent effect.

Despite the ineffectiveness of lawsuits against individual users, we do recommend that WMG, either unilaterally or through the RIAA, attempt to work with larger communities such as universities and offices to better regulate their internet traffic. As it stands, most universities do not monitor file-sharing on campus intranets, where most piracy occurs. An interesting precedent is being set by Napster, which has signed exclusive deals with a number of universities to provide free service to students, paid for by the university. This may be a cost-effective way of weaning students and other high-risk groups from illegal file-sharing. We recommend that WMG abandon or seek swift resolution of outstanding individual lawsuits, while concentrating efforts on major user networks where a greater impact can be had at equal or lesser cost.

Other attempts to internalize the cost of music piracy have been less successful. The RIAA has attempted to recover the cost of illegal downloads by requiring buyers of audio hardware such as MP3 players and CD burners to pay a royalty fee. However, this tactic seems unlikely to be successful in major markets, and has met with regulatory disapproval in Europe.

WMG should also investigate alternative models of music sharing. Innovative digital distribution may allow Warner to capture a larger digital market share

27 than its competitors, regardless of their current market capitalization. To save the music industry, companies must find a successful business model that allows companies to maintain profitability while encouraging more consumers to eschew piracy for legal downloads. Some other formats, such as ad-supported music videos on artist websites or revenue-sharing plans with user-generated media content providers such as YouTube or MySpace may also be profitable ventures.

Lastly, international expansion is becoming an increasingly pressing issue. Although Warner’s international labels have been performing relatively well, there are a number of factors that will affect the extent to which the company should expand internationally. In developed markets such as Europe and Japan, the maturity of the 3G cell-phone market makes competition fierce. We recommend that Warner ally itself with industry leaders in relatively advanced markets to promote its portfolio, but we do not recommend any major unilateral investment. In the most promising developing countries such as China and India, profitability is contingent on the strength of intellectual property rights protection. We recommend that major expansion into developing countries be taken on a case-by-case basis, after ensuring that stability and enforceability of digital property rights has been established. The importance of capturing market share in developing economies cannot be underemphasized for ensuring long- term growth.

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Appendix A

WARNER MUSIC GROUP COMPARABLES (SEC data is unavailable for Universal, Sony BMG and EMI) Comparables based on SIC Industry 7929 Company Warner Viacom Discovery Walt Disney Direct TV Comcast Time Industry Music Group Warner

Ticker WMG VIA DISC DIS DTV CMCSA TWX Gen. Entertainment

Market Cap 2,510 27,760 5,810 71,020 29,510 86,940 80,520 94,600 (millions)

P/E 279.83 18.04 N/A 16.8 21.47 34.97 13.54 26.69

Earnings Per Share 0.06 2.22 -0.16 2.06 1.12 0.8 1.55 NA

Net Income/Sales 0.27% 13.89% -6.69% 12.35% 9.62% 10.15% 14.82% 6.74

Price to Book 46.33 3.45 1.27 2.17 4.36 2.08 1.34 4.08

Current Ratio 0.741 0.912 2.604 1.05 1.371 0.699 0.849 NA

Cash Per Share 2.256 1.02 0.552 1.19 2.171 0.953 0.404 NA

Debt to Equity 41.2 1.067 N/A 0.381 0.548 0.704 0.58 0.86

ROA 3.17% 8.99% 1% 7.57% 9.20% 2.63% 3.93% NA

ROE 9.68% 21% -1.01% 15.01% 19.43% 5.49% 8.15% 14.51 data taken from Yahoo Finance, April 12, 2007

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Appendix B – Discounted Cash Flow (DCF) Analysis

0 4 4 3 . . 9 2 2 0 1 1 3 2 l a n i m r e T 5 1 6 0 4 5 4 5 9 3 0 4 1 5 9 4 10 4 6 9 6 0 5 5 0 6 6 0 8 1 8 6 6 6 2 ...... 5 0 8 4 9 9 7 9 2 8 2 4 1 9 2 7 3 1 0 0 4 . . 2015 . 8 5 9 2 9 0 6 0 2 2 9 0 8 8 3 . 3 2 1 - 9 1 1 1 2 1 1 1 1 1 2 6 7 4 4 0 , 3 8 8 5 3 3 , , - - 1 1 2 9 5 9 4 2 3 5 2 2 6 4 4 2 1 4 2 2 7 7 1 6 7 1 6 5 0 5 3 0 6 7 6 6 2 ...... 4 2 0 4 9 5 5 8 1 5 8 3 3 0 7 5 6 0 8 0 6 . . 2014 . 6 1 9 9 9 2 9 9 8 1 9 5 3 2 . 6 2 3 - 1 1 1 1 1 1 1 7 5 3 5 4 1 , , 8 7 5 2 3 3 , , - - 1 1 2 9 8 5 7 1 3 7 9 4 8 5 0 0 4 0 4 2 8 9 9 2 9 2 3 3 6 9 0 8 3 6 6 4 2 ...... 2 4 4 4 9 6 1 1 4 1 4 1 9 9 7 2 3 3 0 0 0 . . 2013 . 6 1 1 9 9 9 9 9 9 5 7 1 1 2 2 . 2 2 0 - - - 1 1 1 1 1 1 1 5 4 9 7 4 3 , , 7 6 5 1 3 3 , , - - 1 1 9 9 7 5 1 5 5 2 8 5 4 4 3 4 3 0 1 8 5 7 2 1 1 4 1 4 8 6 5 0 6 6 7 0 2 ...... 8 5 8 4 6 4 5 1 8 8 0 8 0 5 7 9 6 3 0 0 . . 2012 3 8 1 1 5 0 8 8 9 8 9 7 2 1 5 2 . . 2 2 - - - 1 1 1 1 1 1 1 1 1 3 3 0 5 9 4 , , - - 5 7 5 5 3 3 , , - - 1 1 9 5 9 6 5 4 4 0 5 0 4 5 5 9 5 9 9 7 5 3 2 4 4 6 4 6 2 8 9 0 8 6 7 5 2 ...... 4 9 4 9 4 2 7 4 4 4 6 4 6 2 9 6 7 6 0 0 . . 2011

2 1 1 1 4 8 8 8 8 8 8 7 4 3 2 2 s . 6 2 . - - - 1 1 1 1 1 1 1 1 1 2 2 e 2 1 4 5 - , , - r e 7 5 5 2 3 3 c , , a - i r h 1 1 S P 5 5 4 5 5 8 7 0 5 4 1 5 3 3 4 9 3 4 8 4 3 3 6 8 8 8 3 8 8 8 6 9 1 0 8 6 7 2 2 ...... 0 7 4 7 2 2 0 0 0 0 0 9 0 0 8 8 7 2 3 2 0 0 . . 2010 8 1 1 1 7 8 8 8 8 4 8 8 6 4 3 1 3 3 . 4 2 . - - - 1 1 1 1 1 1 1 1 1 1 1 1 8 4 4 7 - , , - 6 4 5 9 3 3 , , - 1 1 5 6 4 5 2 5 1 6 8 1 3 3 2 3 2 6 0 3 2 8 7 8 8 9 8 9 0 5 7 5 6 6 8 ...... 2 2 0 2 8 0 0 6 0 0 4 0 4 8 4 4 1 1 0 0 9 4 2009 7 . . 1 1 5 . 5 4 8 8 7 8 7 9 5 4 7 4 . 5 2 - 1 1 6 1 1 1 1 1 1 1 0 0 6 , , - - 7 4 4 6 3 3 3 5 1 , , 1 - 1 1 6 3 5 6 5 8 8 1 5 5 1 0 5 1 8 5 5 2 3 2 8 3 3 2 4 3 2 7 8 5 6 6 8 0 0 ...... 5 0 4 6 8 0 4 7 0 0 7 1 0 7 6 8 1 1 0 0 8 . . 2008 2 . 1 . 6 0 4 9 9 7 3 9 7 5 4 7 4 0 3 7 1 3 1 1 1 1 1 1 1 1 1 0 0 1 2 4 , , - - - 1 3 6 1 3 3 , , 3 - 1 1 0 0 0 2 2 5 1 5 5 0 6 6 8 0 0 0 0 6 5 5 5 9 4 0 9 1 9 6 4 5 6 6 9 0 5 ...... 5 5 0 0 5 1 1 1 6 1 6 6 5 7 2 0 9 3 0 0 . . 2007 0 9 1 1 1 1 . 9 3 4 9 7 3 2 2 9 0 . 8 9 - - - - 1 2 2 2 1 1 1 1 1 1 1 7 4 0 - , , V 6 3 2 7 3 3 P , , - 4 1 1 N = 1 5 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4 % % 8 6 0 0 0 0 0 0 0 0 0 2 0 0 5 6 9 ...... 0 0 6 4 5 5 9 4 6 7 5 4 8 1 6 3 8 0 0 1 5 2006 . . 0 0 5 3 3 3 9 2 4 5 3 2 4 3 1 3 1 0 0 5 4 0 0 4 4 2 2 4 2 1 1 2 2 5 2 8 . . 0 0 , , , - - . . 0 9 3 3 1 9 9 0 9 9 9 3 7 , , 4 4 1 1 s n s o r i t e a b l l a u m s e c l u e s s r R a n e N

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n n t D Terminal Growth Rate c c N E B D e n T C e I p a a s p p p p v a e A a h a e e a h o e B r h W Year R C D E 1-t EBIT (1-t) D C C Free Cash Flow - Nominal PV Factor F C = c C - + C - - = X = + - - = X =

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WAAC Calculations WAAC 5.10% Total Debt 2,256.00 Total Equity 58.00 Total Value 2,314.00 % Debt 97.49% % Equity 2.51% Corporate Tax Rate 35.00% kd 7.50% ke 13.78% ke Calculations 13.78% Risk Free Rate 5.00% Risk Premium 7.50% Beta 1.17

i 2006 10-K. All statistics, unless otherwise cited, are drawn from this report. ii “Sales of Music, Long in Decline, Plunge Sharply.” Wall Street Journal Online, March 21, 2007. 4http://online.wsj.com/article_email/article_print/SB117444575607043728- lMyQjAxMDE3NzI0MTQyNDE1Wj.html iii Pali Research Report, March 2007. iv Boldrin, Michele and David Levine. “The Case against Intellectual Property.” AER 2002, pp. 209-212. v BigChampagne, LLC. vi 10-K, p.28 vii “WMG profit plunges 74% in first quarter.” Associated Press. February 9, 2007. viii Value Line, February 16, 2007. ix http://www.iht.com/articles/2007/02/22/business/sonybmg.php x http://www.wmg.com/news/article/?id=8a0af81210c2b40b0110df66b1ed2939 xi Aisha Phoenix, “Warner Music Approaches Rival EMI on an Acquisition.” 20 February, 2007. http://www.bloomberg.com/apps/news?pid=20601087&sid=at0xjRZlJEkM&ref er=worldwide xii http://www.apple.com/hotnews/thoughtsonmusic/ xiii Pali Research Report, March 2007.

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