How's Universal Music boosting digital revenue?

A flood of red ink continues to threaten to swamp most of the major recording companies. The exception appears to be Universal Music Group, the largest of the majors.

Last week, UMG said that revenue grew by 3.5 percent in the first nine months of 2008 on a constant currency basis to $3.97 billion. Compare this with some of UMG's rivals. Warner Music Group reported a $9 million net loss for the third quarter. At EMI, in the first year with new owner Terra Firma guiding the label, it has lost more than $1 billion.

So what's UMG's secret? The Vivendi-owned company saw big growth in music publishing and merchandising. CD sales, the workhorse of the industry, continue to ail, but digital music sales are starting to make up losses. At UMG, digital sales were up 33 percent and according to Vivendi, this "more than offset lower physical sales."

Warner also saw big gains in digital, reporting a 39 percent increase in sales from the third quarter the prior year.

According to my sources, some of UMG's digital success can be traced to CEO Doug Morris' negotiating skills. Morris, a former songwriter, is the king of "per-play minimum" deals said one source. Per-play minimums describe licensing deals that require companies to pay UMG every time one of the label's songs is played.

Morris was also one of the label chiefs who insist on taking an ownership stake from some services, such as MySpace Music.

Critics of these deals, such as Mp3tunes.com founder Michael Robertson, argue there is no way music services can make money paying the pay-per-play minimums. UMG has always said that it won't allow a repeat of what happened with Apple, which sold songs cheaply while reaping huge profits on iPod sales.

"If a music service is going to use music to draw lots of traffic and make lots of money, UMG is going to take its share," said the source.