I've been a follower of Richard Greenfield and his Pali Capital blog for some time -- predominantly because I appreciate his clear-eyed, cutting analysis of media stocks. This past few weeks, however, in his write-ups on Warner Music Group, I think he got it a bit wrong. He lauded the company's recent moves to improve its cash position, and re-negotiate the maturity date of its longterm notes. Just what every shareholder in a company saddled with $1+ billion in debt wants to hear, right?
Unfortunately I think the focus on pure balance sheet clean-up is shortsighted, as just one week earlier the company announced it would discontinue investing in digital music start-ups (WMG's positions in Imeem and Lala were both written down last year). One can argue all day long as to whether those were the right horses to bet on, but ultimately a company -- an industry -- that fails to invest in revolutionary innovation will die. Were WMG's $15-20MM positions in these start-ups that much of a drag on its $400+MM EBITDA?
Why are we talking about 3M and GE decades after their birth? Because the imperative of change, the Darwinian directive to disrupt, was and is baked into their DNA. Everyone points to the major labels' investment in MySpace Music as a "giant step" toward Music 2.0. The truth, of course, is that for everything MySpace Music is, and promises to be (and I'm a big believer in their branded content model), the division itself is really the outgrowth of a lawsuit settlement. Kinda like Imeem, come to think of it. The point is that with "this whole digital thing" now entering its second decade, you'd think the labels would be taking what little cash they have left and going on a shopping spree at the VC fire sales currently in progress.
Speaking of revolutionary innovation, I've been reading about recommendation engines and learning machines for a while now. Sounds like talk at the MusicTech Summit centered around these thrilling new platforms which are positioned, ultimately, to blow the lid off the music industry. These web crawlers will basically scour the ocean of behavioral data on-line -- who visits what website, subscribes to which Tweats, shares which tracks with whom and where and when (and infers why?), then cross references it with purchase data on downloads, tickets, and merchandise -- and will map musical similarities and affinities. It will allow New Artist A to bypass commercial radio, American Idol and the entire major label machine, and simply post new music on-line and let the recommendation engines point an audience toward him/her based on what music is similar, and why (and where -- geo-targeting will be an important component for club-level artists).
How does all this get monetized? If New Artist A posts a track and the RE's bring an audience of 700,000, of which maybe 70,000 are interested enough to download that track (better recommendation efficacy will drive higher conversion), what would an advertiser would pay for that super-contextualized and highly-engaged audience?
Lastly, music. Yeah, most of us got into this game for the music, remember? I still actually pay for downloads (although it's been a minute since I purchased a shiny disc... sigh...). My faves so far this year are Lady GaGa -- does that make me a 15-year-old girl? -- Duncan Sheik, Green Day, a new collection of hip-hop and soul classics remixed by Rae & Christian, called Raiding the Vaults, and the improbably named Miike Snow, actually a trio of Swedish and New York-based producers best known for collaborating on Britney Spears' hit, "Toxic".
Straight outta Williamsburg, baby!