BMG revamp pays off in record year

Bertelsmann Music Group posted record revenue of $4.4 billion for the fiscal year 1996-97, which included record profits in both its international and domestic operations.

The figures, which come after two years of restructuring, firmly establish BMG’s operation as a rising musical force after years as an also-ran and a place creative types avoided. And the success comes despite two years of relatively flat sales in the music industry.

The numbers — reflecting the July 1, 1996, to June 30, 1997, period — also illustrate a turnaround in BMG’s domestic operations under the aegis of prexy and CEO Strauss Zelnick, a former Fox studio exec who was viewed with suspicion by others in the music industry when he took the post at the beginning of 1995.

BMG’s international arm led the earnings charge by posting $2.4 billion in revenue, while the domestic side clocked in with a $1.7 billion tally.

Though the company does not break out profits, BMG execs said the domestic arm’s profits doubled, while international boasted a 24% increase. (The tallies include CD manufacturing, but exclude BMG’s interest in Europe’s largest broadcaster CLT-Ufa.)

Music business profits typically run 18% to 20% of gross revenue.

In the past the conglom mostly relied on its Clive Davis-led Arista Records banner to carry the creative torch, while BMG’s stodgy reputation put the company near the bottom of most dealmakers’ list.

Arista reported record earnings of $400 million for the fiscal year, thanks to a handful of potent releases from such artists as Toni Braxton, Whitney Houston and Notorious B.I.G. The Arista earnings include the Nashville arm and are included in BMG’s overall tally.

Doing the deals

But BMG, parent company of venerable record label RCA (whose biggest act is still Elvis Presley), has quietly become an industry success story and, as a result, one of the first stops for dealmakers.

“Under Strauss, BMG has become the first choice for many artists rather than the last resort as it had been for years,” said a rival music conglom CEO. “He’s done a remarkable job in a short period.”

In the past year, BMG landed the distribution rights to the sought-after V2 Records, the return of Virgin Records founder Richard Branson to the record wars, and Regency Enterprises’ Restless Records.

It also purchased half of CMC Intl., a growing label trading on releases of classic rock acts that has been a solid contributor to the bottom line.

But the revitalization of RCA Records has attracted the attention of industry observers by scoring some successes such as Verve Pipe and Robyn.

RCA’s rise also validates Zelnick’s appointment of Bob Jamieson — a Canadian label chief — to helm the label two years ago.

A large industry footprint has also been established by Windham Hill Records and chief its Steve Vining (another Zelnick hire), which has helped give BMG a lock on the New Age/adult contemporary marketplace .

During the first six months of 1996, BMG’s distribution arm led the domestic music industry in sales of singles and nabbed a whopping 29.7% market share in the format, according to SoundScan.

In addition to being the leading distributor of R&B discs, BMG also ranked second with an 18.8% market share in current product (singles and albums combined).

BMG currently boasts an overall 14.4% domestic market share to accompany the resurgence in its catalog and record club operations.

Effective strategy

“It starts with the music and if you get that right, everything else will follow,” Zelnick told Daily Variety. “While that is much easier said than done, the (results suggest) we are effectively concentrating on the music and that we are doing whatever it takes to get the music heard.”

The financial picture at BMG Intl. mostly mirrored the domestic side even though sales during the fiscal year were only slightly higher than the previous year.Profits jumped 24% and reflected an uptick in successful local releases, record profits in BMG’s U.K. and Ireland divisions, and a significant performance delivered by the Latin American region. The latter growth was indicative of an increase in its stronghold in the region through the bowing of 10 new outposts.

International coin up

International profits also rose despite the loss during the fiscal year of product from Universal Music Intl., which BMG distributed overseas via a licensing agreement. Universal is currently establishing its own network of companies abroad.

“All our companies have done a terrific job building their local repertoire, which helped (BMG Intl.) outpace the growth of the market,” Rudi Gassner, prexy and CEO of BMG Intl., told Daily Variety. “This has really paid off.”

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