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Warner Music’s second-quarter results will take centre stage on Friday as executives from EMI try to determine whether to increase their $4.2bn bid for the rival music group that was rejected this week.

Of particular interest is expected to be Warner’s performance in digital music. The company has touted its burgeoning success at selling music online, and people familiar with its deliberations say this has brightened its backers’ optimism about the industry’s future and made them less eager to accept an EMI offer.

The results should also invigorate debate about whether the music industry is in the midst of a sustainable recovery after a six-year slump in which its sales fell by up to 30 per cent.

“We’re bullish,” said Michael Savner, an entertainment industry analyst at Bank of America. “Our view is that the transition to digital music is one that’s going to play out successfully.”

Mr Savner was also encouraged by the industry’s progress in fighting piracy and a slowdown in the decline of CD sales.

But music executives were more cautious. “It’s not clear at all yet [when] the industry is going to return to growth,” one said. Another said: “You could look at it either way.”

A Warner and EMI deal, which has been discussed on and off for the past five years, has long been considered an inevitability by many in the music industry. The combined company would have greater bulk to compete with industry leaders Universal Music and Sony BMG.

However, Warner said on Wednesday its board had rejected an offer of $28.50 a share after considering it for less than 24 hours. The offer represented a slim premium to Warner’s shares, which had traded the previous day at more than $27.

Privately, people familiar with Warner’s deliberations have said its management believes the company’s digital progress has made it more valuable and has even opened the possibility it could bid for EMI.

During its last quarterly results in February, Warner noted its digital sales more than doubled to $69m, accounting for 7 per cent of total revenues. This was accomplished in part by sales of “bundled” digital albums, which offered customers a variety of different features at different prices.

Edgar Bronfman, Warner’s chief executive, argued that the company had passed a milestone because the growth in digital was now offsetting the declines in physical music sales.

However, some executives at rival media companies question whether Warner’s digital performance is more of a public relations phenomenon than a bottom-line reality. Friday’s results may help to answer that question.

Copyright The Financial Times Limited 2019. All rights reserved.

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