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Major labels are now placing chips on emerging startups, part of an ongoing diversification strategy. Universal Music Group has the most dry powder, according to executives familiar with the terrain, though Warner Music Group is also spending serious cash.
Warner is now investing $20 million in San Francisco-based Lala.com, and playing a key role in its strategic development. The stake, first tipped to Digital Music News by mp3.com founder Michael Robertson, is actually well-documented in regulatory filings.
In paperwork dating back to January of this year, the major disclosed its interests. "The Company purchased a minority interest in la la media, inc. for $20 million," Warner revealed within a proxy statement. The major further detailed an arrangement that trades additional equity for CD-based advertising inserts. The filing also noted that Bain Capital controls a 20 percent stake in the startup.
Lala is playing with funding levels of approximately $40 million, though the model is largely experimental. The company first approached the market with an online, CD-swapping service, and then transitioned into a virtual jukebox and limited ecommerce model. Now, the company is preparing a service that charges 10-cents for unlimited streaming access to a specific song, a transaction that does not include download access.
The model has drawn some criticism, and serious competitive and consumer issues emerge. The price point is certainly relaxed, though it remains questionable whether consumers will gravitate towards a streaming-only, limited-use song that can easily be obtained in MP3 format for free.
Meanwhile, a number of competing services offer free, on-demand streams on a similar catalog, including Imeem, Last.fm, and even Napster. Another issue surrounds the shelf-life of music-related startups and propositions, and a potentially low-trust consumer climate.
Those are serious concerns, though the topsy-turvy terrain of digital music has crowned some unlikely champions. But will Warner ultimately realize a gain on its substantial investment?
Wall Street has reason to exercise caution. Goldman Sachs analyst Ingrid Chung recently raised her price target on the company, though the broader mood remains bearish. WMG has consistently traded sub-$10 since November of last year, down from valuations approaching $30 in mid-2006.
A worsening recording industry forecast is driving those numbers downward, though other factors are also in play. The top executives at Warner Music Group command serious, multi-million dollar annual compensation packages, despite staffing reductions and mediocre financial results.
And chief executive and chairman Edgar Bronfman, Jr., criticized for depleting a massive family fortune, has picked some losers before. That includes Bulldog Entertainment Group, also an unannounced, under-the-radar acquisition. The promoter of tony Hamptons performances, acquired for $16 million, ultimately crashed with losses estimated at $30 million.
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