How Warner Music and Its Musicians Are Combating Declining Album Sales

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Smile for Me: Lyor Cohen, in his Manhattan town house, is turning WMG's frown upside down. | Photograph by Nino Munoz

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Keeping It on the Download

On a chilly night in Manhattan, Julie Greenwald is steamed. "I hate free! Why should people get music for free?" says the 40-year-old spitfire COO of Atlantic Records, one of two major labels of Warner Music Group, and the first big label with more U.S. music revenue from digital downloads than physical discs. She's in the VIP room backstage at the Nokia Theatre, where Atlantic rock act Shinedown headlines a sold-out show. "Music isn't free!" she says. She ticks off the costs: songwriters, producers, sound engineers, radio promotions, Internet promotions, people working to place songs in movies and on TV, people to run artists' Web sites ...

Then Shinedown lead singer Brent Smith walks in, and Greenwald smiles. "They can't pirate this!" she says as she hugs the ponytailed and neck-tattooed Smith.

"If they can figure out how to pirate this, we're screwed," says Smith.

It is hardly news that record companies are screwed, or, if you prefer, under serious pressure. Greenwald's boss, Lyor Cohen, 50, says that when he was considering leaving Universal Music Group to run WMG's North American recording business in early 2004, his mother called him from Israel and warned, "Son, aren't you reading the newspapers? The music business is in trouble. Maybe you should rethink this." Cohen's mother, Ziva Naumann, insists she was even more emphatic: "I said he should quit."

Instead, Cohen -- who started as Run-DMC's road manager and rose through the rap world to head Island Def Jam, one of the largest labels at the world's largest music company, Universal -- rethought the traditional role of a record label. And today, WMG is on the verge of cracking the media world's most pressing business riddle: how to successfully replace analog dollars with what Goldman Sachs analyst Ingrid Chung calls a "river of nickels." Cohen's trick has been a clever twist on what the music biz calls a "360 deal," a full-service contract with artists that includes touring, merchandise, Web services, and more. Ironically, it is precisely this sort of deal that cost WMG its biggest single star, Madonna, who bolted in 2007 for a $120 million 360 deal with the concert-promotion and ticketing firm Live Nation. Cohen and his boss, chairman Edgar Bronfman Jr., had already decided to focus their 360 investments on up-and-coming bands like Shinedown, so they parted ways with the Material Girl.

WMG's digital sales were up 11% last quarter, with digital music making up 30% of its revenues worldwide and 47% in the United States. (Sources say that at Atlantic, digital music approaches 60%.) Overall revenue is steady at more than $3 billion annually and margins are up. In comparison, Universal Music's revenue last quarter dropped 13% and digital music sales dipped 2%. While WMG posted its fifth straight quarterly loss and analysts expect it to post a loss this year, those metrics are somewhat misleading. The deficit comes from a goodwill write-off. Cohen is pumping out cash: Operating profit in the first three months of 2010 was $87 million, up 9%. WMG has enough cash on hand that industry watchers expect it to bid for EMI, a competitor whose own ballyhooed reinvention is seen as a fiasco. "Warner Music is mapping to the reality that consumers with a broadband connection and a search bar can get whatever they want," says Mike McGuire, a Gartner entertainment analyst.

"Lyor provides the emotional gravitas every creative enterprise needs," says Bronfman, who was laughed at for putting a rap mogul in charge. "Lyor's proved me right."

"I believe music is like oxygen," Cohen told his skeptical mom when he took the WMG job. "I'm going to rely on how critical it is for society, that it will find its way." Of course, people don't pay for oxygen. For a while it seemed they didn't want to pay for music either. Cohen seems to have found a way around that -- for now.