Warner Music Faces Sharp Decline Amid Slowing Streaming Growth

Warner Music Group Corp. experienced its steepest stock drop in 18 months following the release of underwhelming fourth-quarter results, with the company reporting stalled growth in streaming revenues.

The record label posted a net income of $48 million for the quarter ending September 30, marking a significant 69% decline from the same period last year. Although revenue rose 2.8% to $1.63 billion—exceeding analysts' forecast of $1.59 billion—recorded music streaming revenue grew by just 2.1%, a sharp deceleration compared to the 9.6% growth recorded a year earlier and below market expectations.

The company's stock fell as much as 11% to $29.96 in New York trading before recovering some losses, closing down 5.9% by mid-afternoon.

Industry-Wide Concerns Over Streaming Growth

Warner Music and its primary competitor, Universal Music Group (UMG), are both grappling with investor concerns over a slowdown in streaming growth. UMG faced a similar situation in July when its Q2 results revealed weaker subscription revenue, which the company attributed to slower subscriber growth on certain platforms and Meta Platforms Inc.'s decision to halt licensing premium music videos for Facebook. Additionally, Apple Inc. and Amazon.com Inc. have reported limited growth in new subscribers.

Though the music industry has been aware of the end of the streaming boom, the recent financial data has heightened concerns on Wall Street.

Challenges with BMG Distribution Deal

Warner Music’s financial outlook is also impacted by the conclusion of its music distribution deal with BMG, which will affect results in the coming fiscal year. BMG, part of Germany’s Bertelsmann, announced in September that it would manage its digital distribution in-house, ending an eight-year partnership with Warner Music.

Bryan Castellani, CFO of Warner Music Group, addressed the issue in an analyst call, stating that the BMG distribution roll-off, combined with last year’s digital license renewal and the lapping of Spotify price increases, would impact first-quarter streaming growth. Castellani noted that the roll-off, initially planned for the end of fiscal 2024, will now extend into fiscal 2025, resulting in a $16 million revenue impact in Q1.

Recorded Music Revenue and Headwinds

Despite challenges, Warner Music reported a 3.6% increase in recorded music revenue, reaching $1.34 billion in Q4. However, the termination of the BMG agreement contributed to a $25 million reduction in revenue compared to the prior year. Additionally, a renewal with a digital partner led to a $4 million unfavorable impact on recorded music streaming revenue.

As the music industry faces changing dynamics in the streaming landscape, Warner Music Group and its peers must adapt to maintain growth. The combined challenges of slowing subscription growth, changing distribution agreements, and shifting market dynamics will require strategic adjustments to sustain momentum in the evolving music ecosystem.