Warner Group Faces the Music

It's all about the music.

A few months ago, I received a business card and the slogan on it was "It's all about the music." That struck a chord with me, because as a longtime investor in Apple (AAPL - commentary - Cramer's Take), and more recently as a short in Warner Music Group (WMG - commentary - Cramer's Take), I am keenly attuned to the fact that for some companies, it really is all about the music.

There are two clear trends in music, and I think there are opportunities on both sides of those trends.

The first, which I've cited before, is that traditional sales of music and the cycles that have long governed that incredibly lucrative business are done. Ever since the double-sided 78 was introduced in 1923, thereby bringing the concept of owning music content to the masses (RCA Victor introduced the 45 rpm record in 1948, which really accelerated the adoption by the masses), the selling of music has been a growth business. But that all changed when MP3 technologies enabled instant and perfect replications of that music content. That technology, combined with the ubiquity of the Internet, has forever ruined the music sales model.

The most recent and clear evidence of that business model's destruction came in WMG's report this morning. The stock is up because the company's top line didn't decrease and instead grew 2% year over year. First off, 2% doesn't even match the growth of GDP. When a company's top line is growing less than the broader economy, it's a pretty big red flag indicating secular problems.

But digging into the numbers is where we get the real beat of this fading rhythm. Sales of physical music (CDs, mostly) were just about $700 million for the quarter, down 7% year over year. I have to say that I am surprised that the decline was only in the single digits. But 7% is a meaningful decline, and it's a decline, as in secular decline. And there's nothing WMG, RIAA, Led Zeppelin or anyone else can do about that secular decline. Physical sales of music will simply never be a growth business again.

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At time of publication, the firm in which Willard is a partner was net long Apple and short Warner Music Group, although positions can change at any time and without notice.

Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney. He also produces a premium product for TheStreet.com called The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns. At time of publication, the firm in which Willard is a partner had no positions in any of the securities mentioned in this column, although positions can change at any time and without notice. None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person. Willard appreciates your feedback -- click here to send him an email.