Bronfman: No Consumer Fallout Yet; iTunes Still Dominates

The meltdown on Wall Street has yet to hit music buyers on Main Street – or the internet – according to recent comments by Warner Music Group chief executive and chairman Edgar Bronfman, Jr.

“We haven’t seen yet any consumer reaction to the credit markets, impacting our fundamental business,” Bronfman said Thursday, speaking at the Goldman Sachs Communacopia Conference in New York.

But Warner Music Group, like most other business in the United States and abroad, are likely to weather the after-effects.  “Everybody is going to get hurt in this market when there’s no confidence,” Bronfman said.  “Some obviously have been and will continue to be hurt disproportionately, having nothing to do with their business fundamentals.”  Against that backdrop, shares of WMG landed at $7.35 at the closing bell Thursday, after finishing last week at $8.77.

But other factors, including the quickly-dropping CD, are happening outside of broader market woes.  During the interview, Bronfman acknowledged broader shrinkage in the number of brick-n-mortar retail outlets, but downplayed talks of shrinking shelf space at big box retailers.  “We’ve certainly seen retail shrinkage on a store-by-store basis,” Bronfman said.  “We actually have not seen the kind of shelf space reductions [at big box retailers] that people have been talking about,” the label chief continued.

But when will the physical downturn hit bottom, and give way to digital growth?  “The lines will cross earlier in the US than they cross in Europe, because of the penetration that Apple had here first,” Bronfman relayed.  “In the last quarter, we reported 32 percent of our US recorded music revenue was digital, and it’s moving very smartly, very quickly.  It’s just hard to know the breakthrough factor, when that will happen.”

The broader hope for Bronfman and other label heads is that digital will eventually compensate for physical declines, and even spur a bigger business.  But flattening paid download and ringtone revenues are creating concern.  “The digital business still remains fundamentally an iTunes and ringtone business,” Bronfman described, while pointing to possible growth ahead from contenders like AmazonMP3, MySpace Music, and Nokia’s Comes With Music.  “Those are players that are currently really not in the digital business,” the executive continued.  “The base today is large but very narrow.”

Meanwhile, a shift towards selective DRM-free licensing has produced little market effect.  Specifically, labels Warner Music Group, Universal Music Group, and Sony Music Entertainment have denied DRM-free licensing to Apple, a strategy designed to tilt the playing field a bit.  “DRM on the download business hasn’t really moved the needle frankly, growth trends haven’t changed DRM or DRM-free,” Bronfman relayed, while characterizing broader volumes as “still quite robust.”

Bronfman pointed to Apple as a “very good partner,” though majors are undoubtedly uncomfortable with the dominance that iTunes exerts over paid downloads.  Independently, Warner artist Kid Rock has refused to license the iTunes Store, based on a desire to only sell packaged album downloads.  Apple requires the availability of a-la-carte singles, though Rock recently managed to sell two million copies of Rock N’ Roll Jesus, despite the exclusion of iTunes.

Buoyed by that sales story, Warner division Atlantic then yanked content from Estelle from the iTunes Store.  The British artist was just climbing the charts based on the hit single, “American Boy,” though the iTunes teardown seriously disrupted chart and sales growth.  “It was unusual to see this kind of growth with the [Kid Rock] album not on iTunes, so we wanted to understand what that phenomenon could be,” Bronfman said.  “I don’t think we know the answer to that.”

Story by publisher Paul Resnikoff.