2006 ANNUAL REPORT IND IA. ARI E A VEN GE D S EV EN FO LD B UR T BA CH AR AC H BE E GE ES SUM ND DAY THE LA DY IS A TRAMP TOO MARVELOU MERTIME HAPPY BIRTHDAY TO YOU NIGHT A S FOR WO BI RDS DA G & NCING RI IN T Listen to our story. C H H E DA BJ RK W ÖR INT K J ER AM WO ES NDE BL RL UN AND T B A OY IN’ Z N T S DA H HE OOD SW M EE ICHE T LLE FR BRAN OS CH M TY ICHA TH EL BU E BLÉ R SN YAN OW CABRE M RA AN A DREAS CA N RLSSON TRA W CY CHAPMAN H RAY CHARLES CHER ERIC CLAPTON PHIL COLLINS TH EN E CORRS COWBO I Y TROY FA BRYAN LL -MICH I AEL N COX LO DANI VE TY K M ANE I TH ST E DA Y RK TH NES E S C PA RA R IG TY DAV ’S ID OV DE ER AT O H C N T AB HE FO ST R C RE UT ET IE WH DE ER FT E YO ON U L ES IVE D BLUE ID BER DY RY HI D LL MA ID KIN’ WH O OOPEE D REAM A LITT LE DREAM OF ME IT HAD TO BE YOU YOU GO TO MY HEAD P EOP LE I ON LY W AN T T O B E W ITH YO U W HE N A MA DI N L STURBED OV LIPS THE DOORS ES FIASCO FLAMING DR. DRE THE EAGLES ENYA FAITH HILL A W LUPE OM AN I GO T A WO MA N Dear Shareholder At this point each year, it’s important to pause and eval- Recorded Music business. This year, gains in our uate our situation. At Warner Music Group, we measure Recorded Music digital revenue more than offset ourselves for progress that will yield sustained share- declines in our Recorded Music physical revenue. holder value. Therefore, we compare our standing today not simply against last month or last quarter, but also We see the prospect for growth in three primary areas: examine where we’ve come over the course of the year. And we continually challenge ourselves to build upon • Extending our global reach; our success to date. • Developing new product offerings; and This year, again, we like what we see. • Embracing new distribution channels. In a dynamic industry landscape such as ours, there are two types of companies: those who view change as In 2006, we made great progress in each of these. a threat and those who view it as an opportunity. We see opportunity in the evolution of the music industry. Accomplishments We work every day to transform Warner Music Group into a music-based content company through new business Geographical Expansion models, especially by embracing the digital business. Mobile communication is bridging—even dissolving— many of the geographical, commercial and cultural I would like to share with you some of our milestones boundaries that once separated people. Just as the this year, which are illustrative of how we intend to wireless industry is reinventing how people connect with deliver value to you in the future. one another, Warner Music Group is seeking to reinvent how consumers listen to music. Prospects in a Transitioning Music Industry Over the past year, we reached a series of agreements As the music industry works to revitalize itself and that further broadened our worldwide mobile footprint— grapples with a challenging CD retail environment, we in countries such as China, South Korea, Japan, Russia are experimenting with strategies that we believe will and South Africa. continue to offset the declines in our traditional physical FLEETW OOD MA S C GEN T MIKE JONE ESIS OR ME HEIM JE GEOR ST DANCE F SON JA GE A E THE LA L JACK ND IR NT SAV ICHAE A GE MOME V I.M. M RSHW MAGIC IVA EY H. IN G THIS LAS HENL NAR VE DON LS B GAS RRIS ORTH ARKL OU HA ’S W EY G MMYL AT IT OO GO BAN E W R WH O DOL H GRO ALK E FO LS GR AY JOS ON B S BLU ATEFUL GREEN D Y BU OVE I DEAD ILD ADY L ME U GET RE P BUT PEOPLE TERC UP EV ERYDA Y PEOP LE WHOL Shani Gonzales E LOTTA LOVE Executive Assistant, Warner/Chappell Listening to Dani California by Red Hot Chili Peppers It’s about the music. Pictured on the cover: Erin Hogan Executive Assistant, Investor Relations, Warner Music Group Singing Labios Compartidos by Maná We now reach over 1.4 billion mobile subscribers around 30, 2006, about 70% of our U.S. album bundles were the world—more than twice as many as last year. We priced above the standard $9.99 download offering. believe that our mobile reach is larger than that of any RI LO KILEY AJA NDRO SA other media company. In certain countries where the Our digital product innovation has expanded into the NZ SEA NG JOC L SEA G DRO YU N PAU G DILEMMA WORK G YOUN physical music business is rife with piracy, the mobile mobile landscape. For example, with KDDI, we offered L JO R WHITE FLA IT MISS YO IL YOUN HN SH E A RIVE U BURN MS NE ANKS CRY M AMER ILLIA music business provides the promise of deriving eco- the first mobile bundles in Japan. We also announced a SHIN LOVE ICAN OHN W EDOW Y IN IDIO HITE J nomic value from our content. partnership with Skype, becoming the first Recorded N FR CRAZ T TH RRY W ANK S E RE EN BA INAT ASO NHAG Music company to offer online personalization through BAD RA PA N ESTER T IT UL SI EILL W U GO MON S URT W SA We have a deep commitment to customized, innovative a Voice Over IP ringtone service. YO IMPLE WALL K VE A ATED PLAN S N PAUL HOR PLIC LAYER T MORRISO SE ( partnerships that best complement the technology, cul- COM HE SMITHS USED VAN RIDE APH STAIND ROB TH CLE KRACKER THE A CO TOGR OMAS T.I. TIMBALAND TWISTA UN WBO ture, taste and conditions of each territory. We were the first music company to make SMS tones LE PHO Y) W EN AWHI E BEL commercially available beginning in Germany. These IT’S BE ONG T OGETH ER PR New Digital Product Creation tones are very short versions of mastertones and video- OMISCU OUS CRAZ tones that are used as message signals for incoming Y Only three years ago, the Recorded Music business SMS messages. was just about selling CDs. Due to the advent of digital distribution we’ve been able to turn each album release Distribution Channel Expansion into a myriad of consumer offerings. Not only is the CD version of an album available in digital form but also Beyond creating new forms of content, we are finding “unbundled” on a track-by-track basis and in the form new channels to distribute it—and video entertainment of ringtones and video downloads. We can also sell has been a primary focus. We have a video strategy an album in digital form at a premium price point designed to: “bundled” with additional assets such as bonus tracks, “making-of” videos, artist interviews and concert ticket- • Develop unique video assets for album releases; ing opportunities. • Establish strategic relationships with both video dis- Innovative products such as album bundles enhance tributors and “enablers”; and our margin profile and drive incremental demand for music. We are leading the industry in total number of • Build new business models to optimize the monetiza- album bundles. For the 12 months ended September tion of video in the digital space. JUVENILE KID RO CK K.D. LANG LARRY T HE CABLE LICA GUY LED A HORSE W ETAL ZEPPEL ITH NO CER M IN LIL’ NAME M Y MER FLIP LI OONDA OHNN L’ KIM NCE P AAR J LIL’ SCR EACEFU C SOL APPY L L EASY M IN KIN P F EELI Y ARK HT NG LA ONE CKNIG YLA S E OF M RIAN M TAYING E LOV NTY B ALIVE R TH OX TWE W FO ATCHB S NO TADON M PING U NÁ MAS STOP ADONNA MA N’T NO M ORS AI LOSED DO BEHIND C David Molinary Shipping Manager, WEA NYC Enjoying Come to Me by Diddy We discover and nurture the careers of the world’s most creative recording artists and songwriters. 1 We’re leading the digital revolution by marketing, promoting and distributing music content in the most innovative ways. GEORGE MICHA EL LUIS M IGUEL N NICKELBACK NOTORIOUS MISSY Y NILSSO B.I.G. PAN ELLI S HARR IC! AT TH OTT M ICHOL E DISCO OBY PARK TIM N LAUR ALA IN THE OLLS A PAUS CREEP NIS M URDAY EYE RK D INI CO MACARENA ICE ORI SAT OF T EW YO LE PO SUNNY C N R SSET IT IS? HE TIG N N RTER AME HOM MIE TE TIME ER EWMA DANIE E AMA DA H AT SLOW DY N L POW ZED TH M. W W JAS HAN RAN TER IS KISS .E. KNO ON MR D RDER BELIEV R ALLY AZ MU NE W O E SMO Y RE SE MUS ANCE TH E RS OTH L BOD IQ SOUL L ROM E W ABL PEPPE IVIN’ L ANY CHILD EMICA IND ELIEV CHILI A VIDA OES MY CH BEN UNB HOT LOCA LY D EA EME ES RED SOFT TH M ES TH RAMON G ME Y W A JON EAD THE KILLIN INGS DIAN KY RADIOH THEME EN LD IN PRETTY RIC STAR WARS DLES WOR S LO RE THE VE M WE A ORNI JUMP NG TRA BEAT IT IN WHAT YOU NEED Tahirah McLean Coordinator, Art Department, Atlantic Records Watching the video of Crazy by Gnarls Barkley The deal we reached with YouTube this year is emblem- • Our focus on profitable growth through financial disci- atic of what we are trying to achieve.