Making a music monolith

Seagram's $10.6 bil P'gram buy to make waves in biz

With the stroke of a pen, Seagram’s $10.6 billion purchase of Polygram shrinks the ranks of the big music congloms from six to five and creates the world’s largest music company in both revenue and market share.

But the acquisition, which had been expected to close by Memorial Day (Daily Variety, May 12), is likely to result in a massive consolidation of labels and distribution efforts, and several of Polygram’s eight full-service labels are expected to be shuttered or merged into Universal’s six.

Polygram label chiefs, who will gather in New York today to hear from president and CEO Alain Levy what lies ahead, advised their staffs of the deal on Wednesday in an effort to foster confidence. Though the future of top Polygram execs Levy and Roger Ames is unclear, few industry observers expect the duo to be in place in the long term .

A healthy purchase

Nonetheless, Universal Music Group, Seagram’s music operation, is getting a healthy Polygram. Execs at the Dutch-based conglom have spent the past three years cutting costs and shoring up areas of vulnerability.

Under the aegis of prexy/CEO Levy and worldwide music prexy Ames, the conglom has restructured its flagship classical operation, propped up its pop arm and prepared reserves for the downturn in Asia.

In addition, Mercury Records, under Danny Goldberg, is at the top of its game, and Motown is quickly rebounding after years of decline.

The acquisition gives Universal Music Group a much needed international infrastructure, as chairman/CEO Doug Morris, vice chair Mel Lewinter and prexy Zach Horowitz have been on a fast track to establish an overseas operation to fill the void created by the pending expiration of the conglom’s distribution pact with BMG. The deal was set to expire in 1999.

The trio has made impressive strides domestically, but rather than grow the international side organically, Seagram prexy/CEO Edgar Bronfman Jr. presumably decided to do things the old-fashioned way, by buying market share.

Leader in U.S., abroad

The new Universal will be the market share and revenue leader in the U.S. and abroad. UMG closed 1997 with a 12% domestic market share, compared with Polygram’s 13%; the combined company would check in at around 25%, easily toppling titan WEA, which has held the title for many years. Internationally, UMG’s 6% market share pales next to Polygram’s 17%. The resulting 23% share of the new company again topples Warner Music Group’s WEA.

In 1997, 84% of Polygram’s $5.49 billion in earnings came from music, with 75% of those revenues derived from international sales.

Several beneficial alliances would likely be created in the new UMG.

UMG’s burgeoning jazz outpost, GRP Records, would mesh well with Polygram’s venerable Verve Records, creating perhaps the most respected jazz label on the planet.

Polygram’s three classical labels, Deutsche Grammophon, Philips and Decca, are world leaders and would instantly make UMG a player in a genre in which they currently have no presence.

Distrib overlap

The merger will result in the elimination of numerous redundancies across both companies, starting with music distribution. Polygram’s international structure could be kept mostly in place, resulting in Universal saving hundreds of millions of dollars in overhead and distribution fees.

A trimming of the rosters of record labels is also likely, and many up-and-coming artists are expected to be homeless as the labels define their priority artists.