BMG Finds Gold Tighter Mix

Five years after selling most of its music holdings to its former partner, Bertelsmann Music Group is singing a different tune.

In 2008, when Bertelsmann Music Group sold most of its holdings — which included labels RCA, Arista and Zomba — to former joint venture partner Sony for $1.5 billion, and almost immediately announced its intention to recommit itself to the music biz as a solo act, some observers questioned the plan.

But now, with a renewed focus on rights management, music licensing and a hands-on accounting approach to selling singles rather than albums in a digital-dominated market, BMG 2.0 stands as an example of adaptability in the music business — and a new-look strategy formed by two savvy execs who began their careers as musicians.

“The day we cashed the check from Sony, we held a press conference and announced (the new) BMG,” says the division’s CEO, Hartwig Masuch, who, with Bertelsmann CEO Thomas Rabe, has aggressively retooled the music arm of diversified German media giant Bertelsmann SE & Co., whose holdings include publisher Random House, broadcaster RTL and Fremantle, producer of “American Idol” and “The X Factor.”

From 2004-08, BMG’s joint venture with Sony was the second-largest music company in the world. Since October 2008, the retooled music group has grown via an aggressive campaign of acquisition, fueled by an infusion of capital from a joint venture with giant private equity firm Kohlberg Kravis Roberts.

The company has purchased such independent music publishing houses as Chrysalis, Bug, Cherry Lane and Evergreen, and last year plucked the Virgin Music catalog in Universal Music Group’s regulator-mandated divestments tied to its buy of EMI’s labels. Controlling more than 1 million copyrights, BMG is ranked as the fourth-largest music publisher internationally.

More recently, the company has been on the prowl for master recordings, and has bought the catalogs of Sanctuary and Mute in UMG’s sell-off of those assets. In partnership with Sony, it also was a player in UMG’s auction of Parlophone Records, which it would have split with its former confederate, but its bid lost out to Warner Music Group, which in February agreed to pay $765 million for the label.

On Friday, Bertelsmann and KKR jointly announced that the German company would buy out the New York investment firm’s interest in the joint venture. The companies said terms of the transaction would remain confidential. The deal is expected to close by mid-year.

The construction of the new BMG followed a rethinking of the firm’s music strategy, which began the day in 2006 when Rabe, then chief financial officer at Bertelsmann, informed Masuch that the company was selling BMG’s publishing arm to Universal Music Group.

“He showed up at a meeting we had at (the publishing division) and said, ‘Guys, nothing personal, but we’re selling you,’ ” Masuch recalls. “I hadn’t met him before he came to that meeting.”

The two men share a familiarity with the biz at the performance level. Masuch recorded three albums with the rock band the Ramblers, and opened for the Runaways and Dr. Feelgood in Germany before starting a career in music publishing that culminated in his role as managing director of BMG Music Publishing. Rabe served as bassist in the punk group White Lies prior to attaining a law degree and serving as a financial exec.

After the publishing sale, Masuch, at the behest of Rabe (who was promoted to CEO at Bertelsmann in October 2011), remained on board at BMG as a consultant, and took a role in the sale of BMG’s interest in Sony BMG Music Entertainment to its joint venture partner.

Masuch recalls the decision to sell its stake to Sony: “Having a deep understanding of the music industry, (Rabe) said, ‘We won’t be able to go on like we are, to make enough money to justify the capital we have invested in the music industry,’ ” Masuch says. “ ‘We have the wrong mentality about the business.’ He said, ‘We’ll sell it.’ It was pretty radical.”

The move led to inhouse discussions about the potential shape of a music company in a world where digital sales were rapidly eroding the market for physical product. While the new paradigm could present problems to large companies entrenched in an old model, the Bertelsmann execs saw opportunities in an operation that could embrace a reconfigured business focused on managing rights, licensing masters and collecting public performance fees (a major revenue stream in Europe). They paid particular attention to the service-driven style of pubbery Kobalt Music, which now handles such top stars as Paul McCartney and Foo Fighters’ Dave Grohl.

“We spent some time (asking), what is the backbone in the digital world?” Masuch says.

One of the answers was to sweat the small stuff.

With the digital business shifting emphasis from the sale of high-priced CDs to 99¢ downloads and from albums to single tracks, BMG saw an analogy between the new world of music sales and the music publishing business.

“It’s a penny business,” Masuch says. “You can’t measure everything by gold and platinum records. (That) world is done. We have to monetize very small income streams. If everything is in violent fragmentation, you have to be able to survive as an artist on small transactions.”

Masuch sees the digital world as transferring power to content creators, with the high cost of production, marketing and distribution slashed in favor of digital distribution. And once acts connect with their potential market, they don’t long for bygone ways of doing business.

“They never come back to the old world and say, ‘Glad I can be in your arms, take care of me,’ ” he says.

While BMG has acquired thousands of so-called “evergreen” copyrights in its publishing purchases, Masuch notes that the value of most copyrights erodes over time, and the company can see continued success only by developing new writers. He points to songwriter-producer Busbee, who has worked with Lady Antebellum, Katy Perry, Christina Aguilera and Blake Shelton, as an example of the young talent signed to the firm.

“We work with talent that was emerging three or four years ago and now (has) big worldwide hits,” Masuch says. “You have a great portfolio, you get relevance in the licensing market and you protect your investors with a stable catalog. But if you want to add value to the whole discussion, you have to work with young writers and you have to develop artists. That is the mantra of this industry.”

BMG has moved beyond its commitment to publishing with deals that involve artists’ song and master rights. In addition to repping acts’ publishing, the company will fund the artists’ recordings, in what Masuch describes as “a very strict and rational investment plan,” and will secure distribution for the work. Boyz II Men, Anastacia and Bryan Ferry are among the performers who have sealed such pacts.

Masuch points to the new album by former Roxy Music lead vocalist Ferry — “The Jazz Age,” an album of hot-jazz arrangements of the musician’s repertoire, issued in the U.S. on Feb. 12 — as an ideal example of the type of project BMG sees as worthy of sponsorship — one that helps artists access their market, without the company overexposing itself financially.

Masuch sees Ferry as an iconic talent who wants a bigger output level. “Very quietly in Europe, we’ve sold around 70,000 digital bundles and albums of ‘The Jazz Age,’ ” he notes. “(There’s) nothing wrong with an artist selling 20,000 or 30,000 units of a record. Nobody has proved that only artists or records where $500,000 (is) invested have the right to be properly marketed.”

In the immediate future, observers also can expect to see BMG continue its burgeoning acquisition of master recordings. In addition to its Sanctuary and Mute holdings, the company retains the catalogs of 200 artists secured in its parting of the ways with Sony. Masuch sees BMG’s profile in master rights as mirroring the importance of its profile in publishing rights.

“The more you are able to license masters and publishing from one source, the easier business is,” he says. “Absolutely our priority this year is to move forward on that business. There are several ways to go. You can buy aggregates, like Parlophone, or you can look at individual artists.”

Ultimately, though he spent more than two decades in the old-school record biz, Masuch is in no way nostalgic or sentimental about the way things used to operate.

“We don’t want to be in the traditional label business,” he says. “I think the model we’ve refined or proposed is a very attractive alternative.”

EXEC HIGHLIGHTS

Thomas Rabe

❯ Bertelsmann CEO since Jan. 1, 2012
❯ RTL Group chief financial officer, 2000-06
❯ Securities company Cedel Intl. chief financial officer, 1996-2000
❯ Doctorate in economics, U. of Cologne
❯ Former bass player, White Lies

Hartwig Masuch

BMG Rights Management CEO since 2008
❯ BMG Music Publishing, managing director/senior vice president, 1991-2007
❯ Warner Music Publishing, g.m./VP of creative affairs, 1987
❯ Freelance music producer
❯ One-time member of the rock band the Ramblers

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