By Paul Sloan
March 19, 2008

By Paul Sloan

Michael Nash, a longtime digital music executive, takes over Warner Music’s

digital division in June, reporting directly to CEO Edgar Bronfman Jr. Since Bronfman and a group of private equity investors bought Warner Music from Time Warner

in 2004 for $2.6 billion, the company has made headway adapting to the digital marketplace. Digital sales accounted for 14% of the company’s total revenues of $989 million in the most recent quarter. But like the other labels, Warner has been hit hard by the sharp falloff of CD sales. For the past year Warner’s stock has been on a near-steady decline, currently hovering around a $5 a share. I sat down with Nash last week to ask him how a big record label survives and thrives in the Facebook era.

Let’s start with Amazon. Warner signed on to sell music through Amazon’s online store at the beginning of the year. It was a big step because Amazon is selling music without digital rights management – meaning, songs can be played on any device and copied endless number of times. Does Amazon become a serious competitor to Apple iTunes, and if so, when?

We hope that Amazon becomes a formidable competitor. They’re getting traction in the market place. The competition is great from the standpoint of what the consumer gets. And it’s obviously really good for the content companies to have multiple partners operating at scale and successfully selling your content. But Apple has done a sensational job, and you’re going to see Apple control the majority of the digital download marketplace, certainly for the rest of this year.

How come when I hear a new song on the radio, then go to buy it online, it’s not always there?

You’re right. It’s crazy to allow this situation to perpetuate where you can hear a song, and if you’re a digital music consumer, you go to your computer and the only place you can find that music is on [file-swapping service] LimeWire. We need to work on release timing so as soon as we start marketing a new project we’ve got the single available. When you’re really building interest in that artist, it’s important that you can pre-order the album, get the single along with a premium package that you can sell on the release date.

The conventional wisdom is that the music industry – and certainly the traditional model of the big labels controlling and selling all the content via CDs – is dying. You’ve been at this a long time and clearly are passionate about the industry’s prospects. Why are you so optimistic?

Music culture has never been more vibrant and fans have never been more passionate about artists they care about. All of those are very hopeful signs, but clearly the industry needs to change and we believe completely in our ability to transform the company to make those necessary changes. In a way, we agree [that the traditional music business is dying]. We’re not trying to do business the way we’ve done business.

That old model is increasingly less relevant to digital consumer. So we have to figure it out. That might mean creating a 360-relationship with our artists, creating a broader array of content, and looking for ways to create new content with our artists so we can program social networks and online communities that lets fans connect with artists in new ways. We have to go where our consumers are.

Right. And your consumers are certainly on Facebook and MySpace. So how do you tap into that community and make money there?

It is a key priority for us to unlock the value of music in the context of social media and online community. The experience in online community has to be more than somebody clicks on a stream of music and pays per play. We need to really think about and create new business models to capitalize on the fact that music has incredible emotional equity and drives a ton of value in the context of social media and online community. And we need to create new types of business models, new forms of collaboration to be able to take advantage of that.

Isn’t your deal with iMeem an example of that? iMeem is a social network for music fans, and it has tons of music available to hear for free, and Warner shares in the ad revenue and gets paid when a user clicks through to iTunes and makes a purchase.

We have a very close partnership with iMeem, and it’s a business model that let’s us monetize on all the experience that’s happening in that environment. We meet with them frequently and think about how we create special programming. That’s an example of the way we need to change our thinking. The online community, the social media audience, they want something new on very frequent basis. They’re consuming in different ways.

Can an ad-based model be good enough to replace the money you make, or used to make, from sales?

The online advertising market here is still a new marketplace. More intelligent execution needs to be applied to integration of advertising with online community. One example is that you’re going to see very significant focus on creation of special programming. As this matures, there will be a lot of money available to the content companies. But advertising itself is not going to replace the revenue from consumers. We do believe, however, that if you promote music discovery through an ad-sponsored platform, there’s a great opportunity to make a conversion to a sale. You have to have a really good integration, so a consumer can act on that impulse.

The mobile market was supposed to be a huge boon for the labels, yet it’s hasn’t yet turned out that way. What’s going on?

We’ve been very frustrated at what’s happened in the mobile space. We feel like it’s clear that consumers want products that are made for the platform, that there is consumer demand for innovation. Verizon Wireless

has done a good job in various ways in the U.S. market and there’s been a lot of innovation in the Japanese and Korean market, but by and large the carriers here have not done a great job in driving the mobile business, and they’ve allowed the ringtone to become a pretty stale format. A master tone [a snippet of the actual recording] has been in the marketplace for seven or eight years. It’s no surprise that sales are kind of flat. There’s been absolutely no innovation. I feel like there’s a great opportunity and consumers are crying out for innovation but it hasn’t really been delivered there yet.

That said, I think the fundamentals in mobile are going to make it happen. You’re going to have billions of microcomputers that are connected at broadband speeds that are a media entertainment portal and that are significant part of an individual’s cultural life. That’s going to be the best platform the music industry has ever had to sell into. Over time, the fundamentals will be so attractive that people will figure out how to monetize that opportunity. The carriers just cannot afford to fail to deliver on that.

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