WMG Closes Gap

Warner Music Group Corp., whose artists include Katy Perry and Madonna, reported narrower losses in the third quarter on Thursday as growth in Europe helped offset a slowdown in global music sales.

Online sales continued to rise as the No. 3 music company in the United States sought to shift its revenue mix away from the declining CD market and into higher-margin downloads and into deals with artists that capture new revenue streams.

Net losses narrowed to $9 million, or 6 cents per share, in the three months ending in June, from $17 million, or 12 cents a share, in the same period last year. That beat analyst expectations of a loss of 18 cents per share.

Shares fell 4 cents to $8.40 in afternoon trading.

“Over the course of this upcoming year we plan to work towards optimizing, evolving and transforming our business,” said Edgar Bronfman Jr., the chairman and chief executive who owns a 6.5 percent stake in the company.

Revenue rose 5.5 percent to $848 million from $804 million, but sales were down 1.1 percent when factoring out the benefit of a weak dollar.

Analysts polled by Thomson Financial, on average, expected a loss of 18 cents on sales of $769 million.

The New York-based company announced its earnings the same week Sony Corp. announced it was buying the 50 percent stake of Bertelsmann AG in their joint music venture, Sony BMG, the No. 2 operator, for $900 million.

Bronfman disputed several analyst opinions that suggested the price Sony paid implied Warner Music shares were overvalued.

“Even if the multiples were as low as have been proffered in the analyst community … that would still, we think, argue for an improved valuation of our own business,” he said on a conference call.

The company said its share of the U.S. market grew nearly a percentage point from the previous year to 21.5 percent, its sixth quarter of gains, helped by the release of music from Madonna, Disturbed and Frank Sinatra.

Digital revenue grew 39 percent to $166 million, accounting for 20 percent of its total revenue, but the company acknowledged rising online sales had yet to overcome the decline in CD sales.

Domestic revenue declined 6.5 percent. International revenue grew 17.2 percent, or 3.6 percent eliminating benefits from exchange rates.

Goldman Sachs analyst Ingrid Chung said the results beat expectations but kept her “sell” recommendation on the shares, partly because overall U.S. music sales, including digital downloads, fell 4.8 percent in the quarter.

“We still expect general industry fundamentals will continue to be anemic,” she said in a research note.

Looking ahead, Bronfman expressed hope for better digital revenue in a music service offered by Nokia Corp. on its cell phones, which has garnered the participation of major record labels Warner, Sony BMG and Universal Music Group.

But he fired a shot across the bow at the video game industry, complaining that the benefits from hit games such as “Guitar Hero” and “Rock Band” had unfairly skewed toward game makers such as Activision Blizzard Inc. and away from artists and the music industry.

“There is what I would call a very paltry licensing fee per song,” Bronfman said.

“I think the industry as a whole needs to take a very different look at this business and participate more fully and in a much more partnership way,” he said. “And if that does not become the case, as far as Warner Music is concerned, we will not license to those games.”

Warner Music Group Corp. is the third largest music company in the United States, trailing Universal Music Group, a unit of Vivendi SA, which is No. 1 with 31 percent.

Sony BMG has a roughly 25 percent share of the market and EMI Group PLC is in fourth with about 9 percent, according to Nielsen SoundScan, which tracks sales of albums, singles and digital downloads.