THAT’S NOT ENTERTAINMENT, FORBES SAYS OF WMG

On the eve of the Warner Music Group IPO, Forbes.com has weighed in, and the picture painted by the respected business publication’s analysis isn’t pretty.

In a May 6 report titled “Hitting a Sour Note,” Scott Reeves breaks down the nuts and bolts of the IPO, the company and the industry in general, making the following points:

1) The 32.6 million shares being offered is way too much, putting a lid on the first day of trading.

2) Many of the original investors are expected to take the IPO money and run, prompting Reeves to ask, “If the smart money wants out, do you want in?”

3) The related facts that the original investors are cashing out and the net proceeds of the IPO will be used to pay down debt isn’t likely to cause Wall Street to do handsprings.

4) The IPO includes 5.43 million shares whose sale will benefit WMG not a penny because they belong to current shareholders.

5) WMG’s sales are down 9% YTD from 2004, and the company reported a pro forma loss of $863 million on revenue of $3.4 billion in the year ending 9/30/04.

6) The music industry as a whole is being squeezed by profound changes in the way people acquire music, and the WMG filing acknowledges that "no significant new legitimate audio format" is on the horizon that might revitalize the business as transpired in the mid-’80s, when the introduction of the CD pulled the record biz out of an earlier prolonged slump. “Internet technology is changing the music industry and may destroy it as we know it,” Reeves writes in the lead. “Now is not the time to snap up shares in Warner Music Group's planned IPO.”

7) The music industry must continue to cut costs in order to survive—resulting in ever-smaller staffs being spread ever thinner and thus be less capable of mounting effective efforts.

8) Reeves sees WMG as exemplifying the old entertainment industry, giving the example of DreamWorks Animation SKG, which withstood a difficult IPO to become a profitable operation, as an example the new shape of showbiz.

Considering these facts and figures, Reeves, advises prospective investors to “Enjoy the music, but skip Warner Music Group's IPO.”