Effects of The Warner Music Sale

Charles Darwin once said, it’s not the strongest of the species that survive, or the most intelligent. It is the one most adaptable to change. It goes without saying that the music industry was not quick enough to adapt to the digitization of music, and has paid dearly by revenues being halved over the last decade. And now even burgeoning digital sales have flattened, and in some sectors, tapered off, as Amazon’s cloud service, iTunes subscription service, and Google getting into the music game virtually guarantee that the music industry will have to deal with even less revenue moving forward.

With such a bleak picture, bankruptcies and consolidations in the music industry are inevitable. When Citibank seized British label EMI in February after defaulting on a loan, my theory was the dominoes would start falling, similar to how the bankruptcy of Lehman Brothers was the first domino in the financial crisis of 2008. In February I asked If Nashville Could Be The Next Detroit? to the jeering of some folks who thought I was being sensational. I think the answer to the question I posed was “not likely”, primarily because of the diversity of the Nashville economy. But over the weekend local newspaper The Tennessean took a somber look at the new sale of Warner Music to Russian tycoon Len Blavatnik and the effects it might have on local jobs, including the possibility of elements of Warner’s Nashville music holdings consolidating with elements of EMI, resulting in even larger job loses.

From The Tennessean:

In one possible scenario, Warner’s new owner could try to buy No. 4 EMI in order to reap the benefit of slashing staff at a combined company, and then shed certain music labels or get rid of one of the publishing divisions to satisfy antitrust regulators. The prospect of another Warner deal would sharpen the prospect of deep staff cuts and further consolidation, said Loren Mulraine, chairman of the Department of Recording Industry at Middle Tennessee State University.

“Consolidation usually happens in a big sale like this, and that’s something that will likely be felt here,” Mulraine said. “It may not happen dramatically, however, unless they also purchase EMI. If they did that, there would be so much overlap that you can rest assured there’d be a lot of jobs cut.”

Warner Music and EMI have been attempting to merge since 2006, trying three different deals that all failed, putting it on Bloomberg’s Biggest Failed Mergers list. Ironically the more positions the two companies cut, the more likely regulators would allow a deal to go through.

Something interesting about the Warner Music sale is that CEO Edgar Bronfman Jr. will stay on board. As I’ve said for years, as much as digitization has been a strain on the music industry, it has also masked other problems such as lack of innovation and talent development, and bloated infrastructure and executive pay. Just two weeks ago deadline.com released a list of 16 media moguls with “Out-Of-Whack Executive Pay.” Out of the 16 named, 3 have “Warner” in the company title, one being Warner Music. Vice Chairman Lyor Cohen is the main culprit as the highest paid executive. But Edgar Bronfman is brought up as well, making out with $5 million dollars even as he presided over rigorously-declining sales and stock prices.

The music business stinks and Warner Music hasn’t found a way to fix it. The stock declined 2.9% last year and the company recently announced that it hired Goldman Sachs to study “strategic alternatives” — which is the way corporations put themselves on eBay. But you wouldn’t necessarily know that anything’s wrong from the 30% raise that the company gave Vice Chairman Lyor Cohen. He made $6.5 million ($3 million salary, and $3.5 million bonus). That’s 3.9 times higher than the average pay for the four other top executives. Cohen’s pay plus the $5 million that went to CEO Edgar Bronfman Jr. accounted for 71% of the pie for Warner Music’s top five.

Is it a coincidence that one of the first top American labels to be sold is also the one with the most lopsided executive pay, or is it the cause?

Also it was recently announced that Warner Music was being sued by DM Records for allegedly selling digital downloads to copyrighted material illegally, something the music industry regularly accuses the public of doing, calling it the primary reason for the decline of the music business.

The systemic problem that has plagued the Nashville music business from the beginning is that most of the big decision makers in music are based out of New York or Los Angeles. For example, when The Tennessean for the above-mentioned article asked Warner Music how many people it employed in Nashville, they referred all questions to their New York office, which declined comment. Country artists have always looked to rock artists with envy of their creative freedom. More control must be levied against Nashville artists and local Nashville management to keep decisions aligned with financial expectations of executives in other cities, many of whom receive compensation that as a percentage is misaligned with comparable businesses or performance.

In the next 18 months, we may see more change and realignment in the music industry than any other time in its existence, if not an outright collapse. The question is how this will effect the creative freedom and talent development of artists, and the music we all love. Nashville’s major labels must shed their modes of the old economy, or they will be shed for them in the form of bankruptcies, liquidations, and takeovers, at the expense of many jobs. Meanwhile independent labels continue to expand their market share of music sales, with fleeter, more intuitive and updated business models.