November 13, 2007 by David Piccolo
Warner Music Group Corp. announced a larger than expected third-quarter
loss and attributed the larger loss to more consumers purchasing digital
music instead of CDs. While digital revenue increased seven percent from
the previous quarter, revenue from recorded music fell four percent. This
example provides an opportunity to examine the current business model
employed by recording companies in the near and long-term and whether they
would be better served with a different model.
The current business model for recording companies is to acquire copyright
from artists – generally the sole right to make any sound recording. As
the rights-holder, the recording company then releases a CD by the
artist(s). In theory, the CD would sell its greatest volume in the first
week and then a declining number in subsequent weeks. While this model
may have led to profits in the past, it may no longer be the case.
According to Warner Music’s management, sales for new release CDs are
declining. As well, the decline in sales in subsequent weeks is
expanding. Thus, the recording companies are seeing declines in sales on
both fronts. The increase in substitutes to purchasing a CD is the likely
cause for the current unprofitability of this business model.