May 18, 2006

2006 Year-to-date, digital tracks (including digital singles and digital albums converted to tracks at a 10:1 ratio) are up 98% over the same 18 week period in 2005. However, the weekly trend lines are significantly different year-over-year. In 2005 (see Exhibit A), digital track figures increased significantly throughout the first 18 weeks of the year, with tracks continuing to improve throughout the rest of the year (see Exhibit B which goes thru calendar Q3).

Exhibit A

Exhibit B

In 2006, despite the aggregate year-to-date strength in digital tracks, weekly performance continues to decline, with every week during the second quarter below the year-to-date average.

• During calendar Q2/Q3 2005, there was concern that digital track growth was flattening out, albeit Q4 2005 showed a dramatic acceleration that continued through Q1 ’06.
• Fresh trends show that digital tracks will actually be down sequentially in Q2 ’06 (over the past 9 quarters since digital began, growth has never been less than 8% sequentially).

While new revenue streams that are not included in the digital track figure (OTA downloads, streaming music videos, ringtones, etc..) are offsetting the track slowdown, with physical sales down 5.4% year-to-date, the music industry needs as much growth as possible in digital tracks to achieve a flat-to-up 2006 (currently up 2.0%).
While seasonality is certainly part of the reason behind the current slowdown, we believe the weak 2006 trendline increases the likelihood that EMI will make another attempt to acquire WMG.

Source: Nielsen Soundscan