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Tue, 10 Nov 1998 07:00:15 EST
Seagram Plans Major Revamp
Seagram's Reorganization
n 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.
The combination of the PolyGram and Universal music groups into the largest
music company in the world will involve a massive reorganization.
See the graphic for more details.
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 successfulentrepreneurs, 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
outperform 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 that window to raid the company for executives and
artists.
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 labelthat 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.
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