BREAK'S IT DOWN!
In the most massive restructuring in the history of the
music industry, Seagram Co. has developed plans to
slash $300 million in costs annually from the
PolyGram and Universal music groups by
integrating dozens of business operations in 44 markets
around the world. The unprecedented move will result in the shuttering
of well-known labels, the closing of plants and warehouses as
well as the loss of thousands of jobs. Some of the nation's best
known record labels--including Motown, Geffen, A&M and Mercury--are
expected to undergo significant downsizing as Seagram attempts
to transform itself into the largest and leanest music conglomerate
in the world. Seagram plans to consolidate its U.S. music division
into four large groups and install an aggressive new management
team made up of some of the industry;s youngest and most successful
entrepreneurs, including Interscope Records Jimmy Iovine and Def
Jam Records' Lyor Cohen, sources say. Internationally, the combined
company is expected to rely heavily on the strengths of PolyGram,
which has been the industry leader for a decade. The U.S. organization
is expected to become a hybrid of both the PolyGram and Universal
music groups. The reorganization--which will follow the December
completion of Seagram's $10.4-billion purchase of PolyGram --is
expected to begin in January and will take at least until next
summer to implement. Rival music industry executives predict that
the combined entity--to be called Universal Music Group--will
emerge as a formidable competitor, accounting for at least 25%
of all music sold around the world. Analysts suggest that the
massive restructuring will provide Universal with unparalleled
economies of scale guaranteed to boost operating margins and position
the conglomerate for strong revenue growth during the next three
years."After Universal completes the consolidation, it should
be able to out perform anybody in its peer group," said Michael
B. Nathanson, an analyst with Sanford C. Bernstein & Co. "Because
of its size, it will definitely have the most attractive cost
structure of any of its competitors. Guys like Sony or [Time]
Warner can't possibly
cut costs that deep. Universal will benefit by keeping PolyGram's
highly profitable international operation intact and emerge with
a leaner, more efficient U.S. operation that should give them
the highest margins in the business." The reorganization
is certain to cause management discord and morale problems in
the months ahead as Seagram attempts to merge the different cultures
and operations of the two companies. Several competing record
chiefs said they hope to use tha window to raid the company for
executives and artist The merger radically alters the architecture
of the business itself by shrinking the number of global competitors
from six to five: Universal, Sony, Bertelsmann, Time Warner and
EMI. It is unclear how many jobs will be eliminated in the restructuring,
but sources estimate that nearly 20% of the 15,500 workers employed
by PolyGram and Universal could be let go. It's not yet clear
where the layoffs will occur, but both A&M and Geffen, which
are based in Los Angeles, are sure to be affected. The timing
of the reorganization is significant in part because it comes
as rising talent costs, consolidation of retailers and economic
turmoil in Asia and other world markets have combined to erode
music profits. With global demand for music flat and new forms
of piracy on the rise, some analysts say it will be difficult
for Seagram to sustain long-term growth. Seagram has said it is
counting on exploiting changes spurred by the Internet and digital
technologies to bolster sales in the future. The restructuring
plan follows months of intense integration meetings between top
brass at Seagram, Universal and PolyGram. A blueprint for the
U.S. consolidation was drafted by Universal executives Doug Morris,
Zach Horowitz and Bruce Hack and submitted two weeks ago to Seagram
chief Edgar Bronfman Jr. A Universal Music spokesman said Monday
that no final decisions have been made, but he declined to comment
further. Details about the consolidation plan and management structure
are not expected to be announced until late December, but sources
say the U.S. division will be divided into four large companies--two
on the East Coast and two on the West Coast. Morris, an industry
veteran with a track record for discovering and grooming successful
managers, has already lined up an ambitious executive team to
run the proposed units, although no contracts have been signed.
In Los Angeles, Interscope Group and MCA Group will dominate the
landscape. Universal plans to purchase the remaining half of Interscope,
home to such diverse acts as Nine Inch Nails, No Doubt, Kirk Franklin
and the Wallflowers. Universal, which bought a half-stake in the
successful Westwood label three years ago for $200 million, has
already paid Interscope co-founders Iovine and Ted Field about
$85 million and will write a $40-million check for the balance
before the end of the year. Universal will downsize the struggling
Geffen and A&M labels and fold them under the umbrella of
an expanded Interscope Music Group, which will be run by Iovine,
45, and Field, 46, and the company's 46-year-old president, Tom
Whalley. Geffen and A&M, home to such acts as Beck and Sheryl
Crow, will maintain their own talent scouts and marketing divisions
and continue to release music under their own logos but will operate
with reduced staffs and artist rosters. It is unclear whether
Geffen Chairman Ed Rosenblatt and A&M Chairman Al Cafaro will
have any role in the new structure. MCA Records Group will survive
the restructuring unscathed and continue to be run by Jay Boberg,
a 40-year-old entrepreneur who came to Universal after selling
a label he ran that discovered such acts as R.E.M. MCA Nashville,
the top country music label in the business, will continue to
be run by Bruce Hinton and Tony Brown. In New York, upstart Universal
Records will emerge as a powerhouse with Def Jam and a downsized
Motown folded into its new infrastructure. The company will continue
to be run by Chairman Mel Lewinter with assistance from Jean Riggins,
the 43-year-old president of black music. Kedar Massenburg, the
35-year-old former manager who discovered soul singers D'Angelo
and Erykah Badu, will be brought in to run Motown following the
exit of George Jackson. It is unclear what role Motown executive
Clarence Avant might play after the restructuring. Def Jam's Cohen,
39, is likely to take on a key role at Universal if Seagram can
work out a deal to purchase the remainder of Def Jam, the hot
PolyGram label that has dominated the pop charts this year with
hits by such acts as Jay-Z and DMX. Cohen and Def Jam founder
Russell Simmons, 40, are said to be asking more than $70 million
for the 40% of the label that Seagram does not already own, but
it is unclear whether Seagram will pay that much. It is also unclear
what role Simmons might fill at the organization if the sale goes
through. Island, home to U2 and Dru Hill, will be combined with
Mercury, home to Kiss and Bon Jovi, to form Seagram's other major
outpost on the East Coast. Staff and artist rosters will be cut
at both labels, and PolyGram distribution chief Jim Caparro, 46,
will take over as chairman, with John Reid, the 37-year-old chairman
of PolyGram Canada, brought in as president. Island executives
Hiriam Hicks, 35, and Johnny Barbis are expected to take on new
roles at the combined company, but Island President Davitt Sigerson
and Mercury chief Danny Goldberg are likely to leave. Luke Lewis
will continue to run Mercury's highly profitable Nashville division,
which will remain operating as a stand-alone label--although back-office
functions for the company will be combined with MCA's Nashville
operation. Under the plan, each of the four U.S. units would be
pared to about 100 recording acts and 175 employees and expected
to generate an estimated volume of at least $200 million per year
in album sales. Each company will maintain its own marketing and
promotion staff, but payments to independent promoters and industry
tip sheets will be slashed. The Interscope/Geffen/A&M unit
will end up being a somewhat larger structure and be expected
to generate more than $300 million. The combined entity's distribution
system will be run by Universal's Henry Droz and Jim Urie with
the assistance of several top PolyGram distribution executives.
In the United States, the corporation will integrate sales forces
and utilize a blend of manufacturing plants and warehouses from
both organizations. About half of all U.S. plant warehouses currently
operated by PolyGram and Universal will be shut down or sold during
the next year.
Outside of the U.S., Seagram will fold its Universal sales force
into PolyGram's sales force and turn over all manufacturing and
distribution duties to the PolyGram team in April when its current
deal with BMG expires. Universal previously had no manufacturing
or distribution system outside the U.S Universal currently does
less than 20% of its business outside the U.S., while nearly 80%
of PolyGram's revenue has been generated outside the United States
by local artists in their respective markets. Universal has decided
to shutter most of its own systems outside the U.S. and adopt
PolyGram's music publishing, auto-processing, financial and royalty
systems as the backbone of its operation around the world. Universal
will appoint PolyGram executives Jonathan Similansky and Jonathan
Manley to head the company's human resources and information technology
divisions. "There is no question that management is making
a very strong effort to integrate the Universal operations with
those of PolyGram," said Christopher Dixon, media analyst
for PaineWebber. To stabilize the combined entity's presence around
the world, Universal international() chief Jorgen Larsen has already
secured the services of most of PolyGram's key global executives,
including Norman Cheng in Asia, Kei Ishizaka in Japan, Wolf Gramatke
and Tim Renner in Germany, Pascal Negre in France, John Kennedy
in Britain, Manolo Diaz in Latin America and Theo Roos in the
Netherlands. Universal also plans to create a centralized catalog
division to sell the thousands of titles in the PolyGram and Universal
vaults. Revenue generated by this sector, headed by Bruce Resnikoff,
will be directed to the labels from which each catalog item is
culled. Rudi Gassner, chief executive of BMG Entertainment International,
predicted that Seagram's new Universal Music Group will alter
the balance of power in the global record business. "Once
Seagram overcomes the integration problems inherent in every takeover,
the new company will emerge as a formidable competitor,"
Gassner said.
Reverberations
The combination of the PolyGram and Universal music groups into
the largest
music company in the world will involve a massive reorganization,
thousands of
layoffs, the downsizing of historic labels and the casting-off
of dozens of acts.
Analysts say the result will be a large, lean firm led by a formidable
group of industry
veterans and rising young executives.
* * *
THE FOUR U.S. UNITS
Under the plan, each of the four U.S. units would be pared down
to about 100
recording acts and 175 employees and would be expected to generate
an estimated
volume of at least $200 million per year in album sales.
* * *
Who's In Charge?
Doug Morris: Chairman and CEO of Universal Music Group
Bruce Hack: Vice chairman of Universal Music Group
Zach Horowitz: President and COO of Universal Music Group
Jorgen Larsen: Chairman and CEO of Universal International
Henry Droz: President of Universal Music Distribution
***
WEST COAST
Interscope Music Group: Under Jimmy Iovine, Ted Field
and Tom Whalley; includes Interscope Records, Geffen
Records and A&M Records
MCA Records Group: Under Jay Boberg; MCA Nashville:
Bruce Hinton and Tony Brown
* * *
EAST COAST
Universal Records: Under Mel Lewinter, Jean Riggins and Lyor Cohen;
Motown: Kedar Massenburg, Clarence Avant ; Def Jam: Russell Simmons
Island/Mercury Group: Jim Caparro and John Reid with Hiriam Hicks,
Johnny
Barbis and Steve Greenberg; Mercury Nashville: Luke Lewis
* * *
INTERNATIONAL
Universal Music International: Under Jorgen Larsen, with Norman
Cheng in Asia,
Kei Ishizaka in Japan, Wolf Gramatke and Tim Renner in Germany,
Pascal Negre in
France, John Kennedy in Britain, Manolo Diaz in Latin America
and Theo Roos in
Holland
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