When Edgar Bronfman, Jr., ankles the executive suite at Warner Music Group on Jan. 31, he will leave behind a company much different than the one he came to in 2004, when he spearheaded the purchase of WMG from Time Warner.
Music industry observers will be closely following the post-Bronfman fortunes of WMG, whose new owner and chief executive are confronting a contracting business that may soon comprise three major companies rather than four.
Bronfman will remain on the WMG board, but his exit as chairman — a role he took in an exchange of jobs last August with current CEO Stephen F. Cooper — was announced in early December. He had taken the dual role of chairman and CEO of WMG after he led a consortium of private equity firms in the acquisition of the company.
Momentous events shook WMG last year. In July, the $3.3 billion sale of the company to Access Industries, a diversified company operated by former WMG board member and petrochemical billionaire Len Blavatnik, was finalized. Soon thereafter, Cooper, a close associate of Blavatnik, joined the board as chairman; Bronfman retained the CEO title.
The purchase of WMG paid off handsomely for Bronfman and his equity partners, who controlled 56% of the company’s stock. Blavatnik’s Access Industries paid out $700 million more than the 2004 purchase price of $2.6 billion.
In August, as an auction of EMI Music’s assets by Citigroup heated up, Bronfman swapped jobs with Cooper to focus on “growth opportunities.” It was universally assumed that Bronfman, whose interest in EMI dated back to his tenure at Universal Music Group in the late ’90s, was moving to splice WMG and the British major.
But then the unthinkable happened: In November, WMG backed away from the auction after bidding a reported $1.5 billion for EMI’s label holdings. EMI was split up among the successful bidders, with industry leader Universal taking the label side for $1.9 billion and No. 2 Sony Music Entertainment purchasing its publishing business for $2.2 billion. Regulatory approval is pending.
In a December earnings call, Cooper’s first with analysts, the new CEO said in a prepared statement: “As disciplined investors, we were not willing to pay a price for EMI that would not have provided an adequate return on our investment. Access has indicated that acquiring WMG has always been viewed as a stand-alone independent transaction, and was never made on the basis that there would be a subsequent acquisition of EMI.”
“Edgar Bronfman did a very admirable job with Warner Music, from the company he got to the company he was forced to sell,” says Bishop Cheen, a Wells Fargo Securities analyst who follows WMG closely, says. … “Bronfman didn’t control Warner Music — the equity sponsors controlled it. They wanted out. They already made all their money.”
The privatization of WMG and its status as a distant third among the three major music firms if the sale of EMI is completed raises questions about the company’s future amid a still uncertain music biz climate.
Veteran music journalist Fred Goodman, whose 2010 book “Fortune’s Fool” took a sympathetic in-depth look at Seagram distilling heir Bronfman’s adventures in the music business, raises rhetorical questions of his own.
Goodman says, “Is it a transition? How long is Blavatnik there? What will they do? Are just going to manage it down and sell it, and then somebody can manage it from a different asset side? Only the future can say. But you’re certainly not looking at a team that’s going to approach this company the way Bronfman did.”
One longtime staffer calls WMG a company in transition. “We used to be one of the biggest cogs in the business — we used to be the biggest cog. And now we’re not.” The source adds: “It’s one thing to be in transition when business is great. … Everything has been exacerbated by business conditions.”
On its balance sheet, WMG has seen a recent decline in its operating income before depreciation and amortization — OIBDA, a key metric that WMG uses in parsing corporate performance. Flat at $475 million in 2008, OIBDA has seen successive drops since, with $290 million reported in the 2011 fiscal year ended Sept. 30.
WMG has recorded deepening net losses, from $21 million in the 2007 fiscal year to $143 million in 2010. Figures for the last fiscal year showed a slim improvement, as WMG notched $138 million in losses. Over the last five fiscal years, the firm’s net losses totaled $458 million. Revenues have declined the last three years, from $3.17 billion in fiscal 2009 to $2.86 billion in 2011.
While WMG has long maintained that its losses have been less than those witnessed by competing major music companies, its market share has also shown recent signs of erosion.
In the past three years, WMG — which has consistently placed third among the four music companies behind Universal and Sony — has witnessed drops in domestic total album market share, according to figures from Nielsen SoundScan. After claiming almost 21.4% in 2008, it took 20.5% in 2009, 20% in 2010 and 19.1% in 2011.
Speaking to analysts in December, CEO Cooper was sanguine about the company’s market position. “Share is a metric, and while it’s an important metric, it’s only one metric,” he said.
Last year, the biggest of WMG’s No. 1 albums — the only one to hold the top slot for more than one week – — was Michael Buble’s seasonal hit “Christmas,” which sold 2.45 million copies in 10 weeks. Domestically, it was the second-biggest seller of 2011, behind Adele’s blockbuster “21,” and it should add luster to the company’s next quarterly report.
The company’s longest-running hit in recent memory was by a developing act: pop artist and producer Bruno Mars’ “Doo Wops and Hooligans.” That 2010 release has sold more than 1.4 million copies, and it remains in the top quarter of the chart after 68 weeks in release.
Mars is the marquee example of an A&R philosophy that developed on Bronfman’s watch: the 360 deal. Since 2005, WMG has signed new acts to either 360 pacts (which take a piece of touring revenues and at least two other non-traditional rights in exchange for the major’s biz acumen and marketing clout) or multi-rights deals (which extend beyond the sale and licensing of an act’s music). Today, 70% of WMG’s active global roster is signed to such contracts.
However, as far as the future of 360 signings is concerned, Goodman notes, “Bruno Mars is really the only useful exhibit. (A potential signing might say), ‘OK, who have you built lately? Who have you made into a household name, and why should I give these things up to you?’?”
Analyst Cheen notes that the 360 strategy “is really in its infancy. It’s a great concept on paper.” But he adds, “It’s no more valid for Warner Bros. to say, ‘We’re experts and we’ll help you with touring and ticketing and merchandising’ than it for Live Nation to say, ‘We are experts in recordings and distributions, and we’re going to take on that business.’?”
Cooper appears to be committed to a 360 strategy: He noted to analysts that digital and 360 revenue accounted for a combined 46% of recorded music revenue, and that the practice would be part of a “more disciplined approach” to developing diversified revenue streams.
Philosophically speaking, it remains to be seen what Cooper will bring to the table at the helm of WMG. The exec declined to be interviewed for this story.
Historically, Bronfman’s successor is a specialist in the turnaround of severely distressed operations. The headline of a 2006 Forbes profile referred to him as “The Man Who Mops Up.”
During the last decade, he distinguished himself by shepherding companies through monumental bankruptcy proceedings. In 2002, he was installed as interim CEO at scandal-ridden energy broker Enron. He took the same role at Krispy Kreme Doughnuts (2005), Hawaii Telcom (2008) and MGM (2009).
Cooper is a member of the supervisory board at Access’ LyondellBasell Industries, which itself filed for Chapter 11 bankruptcy protection in the U.S. in 2009.
Cheen notes that Blavatnik has “brought in all these accounting-type suits — ‘Let’s see what you can do with it.’ The core of any music management company, any music distribution company, is still people who are steeped in that skill set. They have ears for something. They have a nose for something. They understand how to get the most out of an artist. … The rest of this is all financial gamesmanship. So we shall see.”
Goodman refers to Bronfman as a “juggler.”
“He could get those bankers and those equity guys in one hand, and he knew how to talk to them. And he knew how to talk to (former Warner Bros. Records chairman-CEO) Tom Whalley and to (WMG chairman-CEO of recorded music) Lyor Cohen. He understood what it was they needed and what they did, on both sides of the equation. Steve Cooper’s really just about the financial side.”
Given Cooper’s career as an asset manager, his skills could come into play if the EMI sale is approved by the Federal Trade Commission.
Rumors have been circulating through the music industry that WMG is already contemplating a move to shift its distribution to Sony Music Entertainment, which would spell the end of its own distribution unit WEA. In recent years, with physical sales waning and major music accounts shuttering, WEA and WMG’s indie distribution arm Alternative Distribution Alliance have been merged, shedding many jobs.
Acknowledging the rumors, one longtime distribution exec says, “Quite honestly, that would be a smart move. Let Sony do all the dirty work. If they’re not making money at it, they should shut it down.”
If the FTC forces Universal and Sony to sell off some assets as a proviso for completing the EMI sale, WMG could be a beneficiary. And a WMG source points out that if the FTC blocks the EMI sale, “I would imagine (WMG) might be able to get it cheaper.”
But Cooper has already gone on record saying that growth is not about “running wild and spreading cash like a buffet lunch.”
The EMI sale, which would seriously tilt the international music playing field in favor of buyers UMG and Sony Music, is being challenged both abroad and at home.
Earlier this month, British trade org the Assn. of Independent Music urged its members to send a draft letter opposing the deal to members of Parliament. The letter noted that if the sale is consummated, “Warner Music will effectively be relegated in size to a position where it can offer no real global competition.”
In a statement issued Jan. 26, Helen Smith, executive chair of the European independent music companies org IMPALA, said, “Neither the USA nor Europe wants to see the music sector become a two-horse race, devoid of competition from any other companies.”
WMG is hardly accepting the sale as a given. A company spokesman acknowledged WMG has retained the services of Washington lobbying firm Brownstein Hyatt Farber Shreck. Brownstein Hyatt advocated against AT&T’s proposed acquisition of T-Mobile, which was ultimately dropped in December.
Regarding the future of the music business and his own plans, Bronfman told the Deal magazine in a January interview, “For now, I’ll view that future from the perch of a director of Warner Music Group.”