Going the Way of the Vinyl Record

For those of you that didn't know, the record industry has found itself - as the Rolling Stones song goes - "Stuck between a rock and a hard place".

As big box retailers including Walmart (NYSE: WMT) and Best Buy (NYSE: BBY) begin reducing the size of CD displays in their stores in favor of more profitable products such as video games and Blue-Ray DVDs, many label executives are in panic mode. Add into the equation the fact that consumers are increasingly relying on both legal and illegal music downloads to purchase their favorite tunes and that situation becomes even worse.

CD Sales Plummeting

As of October 6th, Nielson SoundScan - an information system that tracks sales of music and music video products throughout the United States and Canada - announced that CD sales were down 18.5% for the year. In order to combat declining CD sales and maximize retail floor space profitability, many leading retailers have begun introducing online music download solutions and plan to further reduce the size of their CD displays once these solutions gain a better following.

According to an article on page 23 of Rolling Stone's 40th anniversary edition, digital downloads account for only about 10% of music sales, a percentage that is declining. Due to this fact, industry executives including Jim Capparo, former chairman of Island Def Jam, fear that less floor space in the stores of leading retailers could potentially lead to the market's overall decline.

Warner Music Group Feeling the Pinch, But Showing Resilience:

One company in the public sector that has been negatively impacted to some extent by this trend is Warner Music Group (NYSE:WMG). The company produces artists ranging from Frank Sinatra to the Red Hot Chili Peppers. WMG reported a fourth quarter loss of $17 million or 12 cents per share after losing $14 million or 10 cents per share during the corresponding quarter of 2006. Shares have also plummeted over the past 6-12 months, further exhibiting the trend's negative impact.

Labels Must Change with the Times; or be Left Behind

Company's in the public sector such as WMG, as well as those in the private world including Sony BMG Music Entertainment and Universal Music Group must either develop optimal online capabilities or give way to popular music download services.

And Warner, despite lagging sales, seems more than optimistic regarding their chances for survival in a new era of music. Commenting recently that "Our business is poised to rebound because the demand for music is as strong as it has ever been and our determination to meet that demand has never been greater," Warner CEO Edgar Bronfman is quite confident that his company's efforts to diversify revenue streams through increased focus on online music, mobile downloads, and international markets with pay off in the long run.

Only time will tell, but for now, we are bearish on the record industry as a whole but neutral on Warner Music Group Corp. (NYSE: WMG). With Pali Research recently downgrading their rating of the company from "Neutral" to "Sell", Citigroup issued a "Buy" Rating on August 7, and has held solid with the opinion since. As the company strives to cash in on the "new wave" of media and sells songs online in high traffic regions including the popular social networking site myspace.com, only time will tell if Warner Music Group can succeed in a new day of music.