Warner’s response to 50% of its market disappearing

The last few years have seen a tumultuous transformation of the music industry. Sales of CDs have halved since their peak level in 2000 as music goes digital. And it gets worse, much worse. For every legal track downloaded another 20 are illegally downloaded. Think about that. You're missing out on 95% of the available market. Scary.

One company who seems to doing a pretty good job of coping with theses challenge is Warner Music, according to the FT. Revenues are steady since 2004. Their share price is up from $2 in February to $7 in late May (although still down sharply from the 2005 IPO price of $17). And their 21% share of the US market is its highest level for a decade.

Picture 2 Here is what we can learn from the Warner story.

1. Re-define your market

The clue that explains the plight of many record companies is in the name. "Record labels". This antiquated definition still refers to the good old days when people bought music on bits of plastic instead of bytes of data. Warner have re-defined their view of things to now compete in the "music market". Warner are doing "360 music management" for their artists. The actual digital music is only part of this. It also includes tours, merchandise and music licensing. They are not the first to do this. Concert company Live Nation is going the other way, by also releasing music (they poached Maddonna from Warner last year).

Other markets use a similar business model, where what seems to be the core business is actually a means to an end. You can buy a decent printer for only £50. The shock comes when you have to pay £30 a pop for the ink cartridges. That's where the money is. Same story with video game consoles/games and Gillette razors/blades.

2. Keep the cannibals in the family
Warner realized quicker than other companies that you're betting off having the cannibals inside the family. In other words, if the market is moving from CDs to digital, you may as well get more than your fair share of the new business. Warner's Atlantic label was the first in the US to get more than half its revenue from online and mobile sources.

3. Focus, focus, focus

In the same way consumer good companies like Kellogg's and Pepsi are focusing their product portfolio, Warner are focusing their artist portfolio. As CEO Edgar Bronfman commented: "We've gained market share because we focused the A&R (artist and repertoire) budget on the artists we believed in."

4. Freedom from the corporate structure
Five years ago Warner was a low priority part of the sprawling corporate empire Time Warner. A $2.6billion buyout freed itself from the corporate structure, enabling management to be more radical and move faster.

5. Cut costs
According to the FT "deep cost cuts began within hours of the buyout's completion" and these have improved margins.

Doomsayers have predicted that record labels will die, as in our digital world artists can connect directly with consumers. And they may well be right. Record labels will probably die. However, by re-defining its market and business model, Warner should have a brighter future. The new music world, with expensive mega tours, complex merchandising deals and multi-channel content distribution means that Warner still has an important role to play.

A great example of how to pro-actively respond to dramatic market changes.