Digital downloads widen Warner’s loss

Warner Music Group’s (WMG) third-quarter loss widened this year, to US$17 million. Warner is one of several major players in the global music industry being hit hard by the seismic repercussions the internet has held for the music business. Indeed, virtually every industry that distributes their product through traditional media has seen market changes like never before as a result of the internet’s capacity to rapidly and effectively share information around the globe. Companies like Warner that have been unable or unwilling to respond quickly have seen their profits shrink as a result.

A closer look at Warner Music Group’s third-quarter numbers reveals an even more troubling, if ironic, picture for the company. Excluding nonrecurring items, WMG’s loss for the quarter was actually $29 million. Part of the reason the company was able to report a smaller loss was because it included US$11 million in one-time gains due to a settlement related to the old Napster file-sharing software.[1]<!–[endif]–>

This brings us to the root cause of Warner Music Group’s current troubles. The company states that the decline in revenue and resulting loss was a result of, “the shift in consumption patterns from physical sales to new forms of digital music…. Declines in [Warner’s] physical Recorded Music revenue were only partially offset by increases in Music Publishing and digital Recorded Music revenue.” In other words, the company is not adding through digital online sales what it is losing through lower traditional hardcopy sales. This, combined with the ease with which people can illegally obtain digital music online, has created a challenging environment for the company.

Online file-sharing has been savaging music industry revenues for several years now, and the industry has launched many legal challenges in different jurisdictions with varying degrees of success. The seminal Canadian case in this area of intellectual property law for the music industry is BMG Canada Inc. v. John Doe. In this case, the Canadian Recording Industry Association (CRIA) was trying to compel internet service providers (ISPs) to provide subscriber information of individuals who had downloaded approximately 1000 files through various different software programs. The court ruled that the ISPs did not have to disclose the names of the individuals in question, and an appeal to the Federal Court of Appeal was dismissed.<!–[if !supportFootnotes]–>[2]<!–[endif]–>

Moreover, the ruling of the trial judge further muddied the waters with respect to what constitutes copyright infringement. The judge stated that without a positive act by the owner of the songs, there was no distribution. Legal restrictions on making digital material available for others to download are covered by the World Intellectual Property Organization Performances and Phonograms Treaty of 1996, but they have not been incorporated in Canadian copyright law.

This case was seen by the recording industry as a major setback, and the CRIA claims that, “Illegal file swapping continues unabated in Canada…in the face of outdated copyright laws that fail to properly safeguard intellectual property in the digital age.”<!–[if !supportFootnotes]–>[3]<!–[endif]–>  Indeed, file sharing does indeed appear to be pervasive in Canada. The Organisation for Economic Co-operation and Development (OECD) has found that Canada has the highest number of file-sharers per capita in the world.[4]<!–[endif]–>  Certainly not all of this file sharing is of an illegal nature, but it is certainly having a significant impact on the music industry.

We must remember that although this battle has placed industry titans against the individual consumer, in an apparent David and Goliath battle, intellectual property rules exist for a reason. Without assurances that a musical creation will be protected through the law, the monetary value of that creation is greatly reduced, perhaps to nothing. This environment will quite likely reduce the number of musicians, and the number of songs being produced. Many record labels have suggested that rampant file-sharing will ultimately result in greatly reduced investment in finding and developing new talent.

It is difficult to say what the ultimate ramifications will be for the traditional music industry. One scenario might see the strengthening of legal and regulatory regimes to broaden the reach of copyright laws, and allow for greater enforcement of existing laws. However, although this might curtail file sharing to some extent, it would be unlikely to stop it completely.

Just as file-sharers will continue to download illegally, undoubtedly an international music industry will continue to exist. Over the next few years, the industry will continue to experience an unavoidable series of adjustments, as Warner’s numbers show us, and will need to come up with innovative solutions to maintain existing revenue streams and to create new ones. But ultimately, these companies will either fail, or will reach a state of equilibrium with respect to an economical level of investment in the industry in the current industry climate.


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[1]<!–[endif]–> Warner Music Group Corp. Reports Third-Quarter Results, http://investors.wmg.com/phoenix.zhtml

[2]<!–[endif]–> BMG Canada v. John Doe, http://www.canlii.org/en/ca/fct/doc/2004/2004fc488/2004fc488.html

<!–[if !supportFootnotes]–>[3]<!–[endif]–> Canada Recording Industry Association, “Music sales in Canada fall 4 percent in 2005: downward trend resumes as international body calls on Canada to act on copyright reform and curb illegal file swapping http://www.cria.ca/news/020306a_n.php

[4]<!–[endif]–> Organisation for Economic Co-operation and Development, http://www.oecd.org/dataoecd/13/2/34995041.pdf

One Comment
  1. The widespread us of peer to peer sharing of music is indeed having some impact on traditional music sales. In a poll commissioned by the CRIA in 2005, it was found that at least 14 illegal files are downloaded for every legal one. Obviously the giant music companies are inevitably hit by this practice. However can we blame the entire decline on just P2P sharing alone? How about the decreased production in music albums and increased competition from other digital forms such as DVD’s? Major studies such as the one done in 2004 by Harvard University showed that most users of P2P sharing would not have bought music albums even if file sharing was not available. It is also known that the music industry uses the statistics of P2P sharing to boost its marketing and sales by encouraging radio and television stations to play or air those that seem to be popularly downloaded. The recording industry would have us believe that we are constantly stealing music. What about the implications of the copyright levies and taxes on blank recording devices. It’s an anticipatory compensation to the artist in the event that we steal music. The industry is now worried that the purchaser of the MP3 player would pay the tax, and then consider that a free license to steal music. The recording industry needs to better balance its need to compensate its artist, fill its coffers as well as dealing with the reality that P2P sharing is inevitable today.

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