2008 Annual Report
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Warner Music Group Annual Report 2008 NYSE: WMG www.wmg.com A Message from Chairman & CEO Edgar Bronfman, Jr. Dear Fellow Shareholders: Fiscal 2008 marked a year of strong progress at Warner Music Group and I am very proud of what we have accomplished. At a time of great upheaval both in the broader economy and in the recorded music industry, we implemented an innovative and disciplined management approach that sustained revenue and OIBDA – no small achievement in this challenging environment. More importantly, WMG continued to build the foundation for future growth through a strategy that we believe will not only help us navigate through these difficult times, but will also help us reap the long-term rewards of the recorded music industry’s evolution. Clearly, the industry’s transition is far from over and many challenges lie ahead. Our confidence in our future prospects is based on our track record of developing new music business solutions, maintaining our digital leadership position, managing costs, gaining share and delivering strong returns on our A&R investments. Looking back on fiscal 2008, we made meaningful progress in several of those key areas. Managing Our Balance Sheet and Cash Flow Early in fiscal 2008, we moved to a more conservative balance sheet strategy, which enabled us to preserve financial flexibility and satisfy balance sheet requirements even as economic conditions worsened. The strategy included several components: building cash on our balance sheet and improving our cash flow, remaining vigilant about managing costs, reducing M&A spending and eliminating the quarterly dividend. As a result, our year-end cash balance grew to $411 million in fiscal 2008 from $333 million in fiscal 2007. Continuing Our A&R Success Strong returns on our A&R investments over the past several years support our plan to sustain substantial A&R investment going forward. Continued focus on our core capabilities – finding and developing artists with long-term career potential – helped us gain 2.2 percentage points of U.S. SoundScan track-equivalent album share in fiscal 2008. We were the only music major to increase such share over the course of our fiscal year, ending up at an impressive 21%. WMG gained unit album share in all of the top five music genres, according to U.S. SoundScan for calendar 2008. A total of 40 Warner Music Group albums debuted in the top 10 on the Billboard Top 200 Albums chart in 2008, including #1 debuts of new releases from Danity Kane, DAY26, Madonna, Death Cab For Cutie, Disturbed, Slipknot, Metallica, T.I. and the Twilight soundtrack. Kid Rock’s Rock ‘n’ Roll Jesus, Metallica’s Death Magnetic and T.I.’s Paper Trail were among the top 10 albums in the U.S. in calendar 2008 based on unit sales. We are also proud that in calendar 2008, Atlantic Records was the number one label in the U.S. based on SoundScan total album share. Enhancing Our Music Publishing Business Warner/Chappell Music, which boasts one of the world’s most valuable libraries of musical compositions, delivered a solid performance in fiscal 2008. Warner/Chappell enjoys a diversified revenue stream from its more than one million copyrights and more than 65,000 songwriters and composers. This business is characterized by strong OIBDA-to-free cash flow conversion, favorable working capital dynamics and low capital requirements. As we have noted in the past, we have a global multi-pronged plan to drive long-term growth at Warner/Chappell. This plan includes continuing to invest in talented songwriters to support the development of our music-publishing catalog, building new opportunities to exploit the value of our existing catalog, expanding our leadership position in digital music by playing a key role in industry initiatives and broadening our international reach. Warner/Chappell has had great success this year in concluding agreements with collection societies to further its innovative Pan-European Digital Licensing initiative (“PEDL”). First announced in June 2006, PEDL is designed to facilitate pan-European licensing of musical compositions for digital music services throughout Europe. As a testament to our continued investment in A&R, for calendar 2008, Warner/Chappell songwriters were writers on two of the top five U.S. albums, including the top seller Lil Wayne’s Tha Carter III and Kid Rock’s Rock N Roll Jesus. Warner/Chappell’s songwriters were also represented in three of the top ten U.S. digital songs – Lil Wayne’s “Lollipop”, Katy Perry’s “I Kissed a Girl” and T.I.’s “Whatever You Like.” Highlighting the overall success of our Music Publishing business, Warner/Chappell was named “Publisher of the Year” for the sixth year in a row at SESAC’s 12th Annual Music Awards. Sustaining Our Digital Leadership In the critical digital segment, which represents the future of the recorded music industry, WMG grew revenue by 39% to $639 million (or 18% of total revenue) in fiscal 2008, and in our U.S. Recorded Music business, digital represented 28% of total revenue. In November, The New York Times reported that Atlantic Records was the first major label to achieve more than 50% of its music sales from digital products. During the calendar year, WMG had the greatest digital track- equivalent album share advantage over physical album share in the U.S. of the music majors. The new business models we’ve been implementing to broaden our consumer reach and align our interests with our digital partners are enabling us to monetize our content more efficiently. In fiscal 2008, we launched access models that bundle the purchase of a device with access to music. Several of these models are just now being rolled out, including Nokia’s “Comes With Music” and Sony Ericsson’s “Play Now Plus.” We believe that major global handset makers and other device manufacturers are in a strong position to introduce new digital music offers. Other fiscal 2008 highlights underscore our continued leadership in the digital space: • MySpace Music, a joint venture offering DRM-free digital downloads, ad-supported audio and video streaming, ringtones and other mobile products, launched its service in September 2008. This fully integrated music offering has the potential to be a powerful way to monetize our content on a platform that is considered the world’s largest social network. • In December 2007, we began offering DRM-free audio downloads on the Amazon MP3 digital music store. Extending this strategy, we announced a series of MP3 deals in fiscal 2008 with partners who have agreed to support our product management strategy, promote pricing flexibility and embrace our technology initiatives including Wal-Mart, Tesco, Napster and 7Digital. • We continue to handily outperform our competitors in the sale of premium album bundles on iTunes. These higher-margin, higher-priced premium album bundles consistently outsell the standard album version. And in a recent development in fiscal 2009, Apple announced on January 6th a new deal with us under which iTunes will immediately begin to sell our product DRM-free and will also sell our product as over-the-air (OTA) downloads for the iPhone. Additionally, tiered pricing of single- track downloads is scheduled to commence on April 1st. This is a welcome development as we have been on the forefront of advocating for variable pricing of single-track downloads. Diversifying Our Music Revenue Base We continue to transform our recorded music business within the music value chain, while broadening our revenue mix into growing areas of the music business – including sponsorship, fan club, website, merchandising, touring, ticketing and artist management. By entering into expanded partnerships in these areas, artists and their label’s interests are better aligned to nurture and grow all aspects of artists’ careers. We now have expanded rights deals with about one-third of our active global recorded music roster. Over the past several years, we have built the necessary resources through acquisitions, partnerships and new hires so we can best serve artists in these expanded activities. This includes both building in-house capabilities with broader expertise and investments in a growing number of global artist services companies, including operations in the U.S., U.K., Japan, Germany, Italy, France, Spain, China and Finland. This year proved once again that, if we remain steadfast in our strategy, we can accomplish great things for the company and its stakeholders. Over the course of fiscal 2009, we expect that our priorities will continue to evolve but they will remain centered on optimizing and transforming the business. Recognizing that we have made substantial progress but still have a significant way to go, we are confident that we are building the most progressive company in the music industry today. We believe that, as the company continues to successfully execute on its strategy, over time our share price will reflect that progress. Discovering and promoting artists – and developing artist brands – is the foundation upon which Warner Music Group was built. It remains our driving principle today. Music companies guided by that principle will have enduring value to artists and an expanding role in the music business. These are unprecedented economic times. So far, we have weathered the storm well and we believe that as a result of our accomplishments this year the company is in a stronger position to carry out its growth strategy over the longer term. As always, it is a pleasure to report to you on our progress over the past fiscal year and we look forward to a dynamic and productive fiscal 2009. Thank you for your continued support. Edgar Bronfman, Jr. Chairman and CEO, Warner Music Group Corp. January 2009 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.