Companies That Management Can’t Fix: Warner Music

September 11, 2007 by Douglas A. McIntyre

Now that results for the first half of the year are out, 24/7 Wall St. is revisiting its features on companies that management cannot fix. These firms have lost the ability to be turned around no matter who runs them. They become candidates for sale or liquidation, but the odds that they can do much with their current share prices is very low.

Warner Music Group (WMG) shares have fallen from a 52-week high of $27.24 to $10.92. As a large music publisher, its business model has been ruined by the digital download business.

The Wall Street Journal describes the secular decline of the WMG’s industry: "Piracy of songs over the Internet and the shift in buyers’ preferences from physical sales to new forms of digital music are a continued challenge for the music industry. Though Nielsen SoundScan data show first-half digital tracks sales surged 48.5% from a year ago, compared with a 19.3% drop in CD sales, the overall slide in sales of CDs has far eclipsed the growth in sales of digital downloads, which were supposed to have been the industry’s salvation."

According to The Associated Press, the trend away from the CD is accelerating: "A total of 229.8 million albums were sold in the U.S. between Jan. 1 and July 1, according to Nielsen SoundScan figures released Wednesday. That’s a 15 percent decrease over the same period last year. Meanwhile digital tracks sales increased 49 percent to 417.3 million this year."

WMG now operates in a world controlled by Apple (AAPL) iTunes and piracy. Apple has little incentive to offer digital downloads at high prices. It is in the business of making profits on iPhones and IPods. Pricing is an issue for content owners. NBC recently pulled out of iTunes over pricing issues, but WMG does not have a deep-pocket parent like NBC does in GE (GE).

It is sunset at Warner Music and the question now is what management will do to the company. It can only cut costs so much.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.