Getting Warner Music More Upbeat

Amid the recent dreariness of the record business, Warner Music Group has had a uniquely bright year: In the first half of 2006, Warner Music was the only major music company to increase its U.S. market share. That’s a significant accomplishment for a company that, when it went public last year, the stock debut was criticized by at least one high-profile analyst as a dud.

At least some of the credit for the recent success belongs to Lyor Cohen, 46, chairman and chief executive of Warner Music’s U.S. operations.

The 6-foot-5-inch executive started in the record industry as a club promoter and road manager for the rap group Run-DMC. In joining Warner Music, Cohen left a high-profile position heading Island Def Jam Music Group, a division of Universal Music Group that remains a leader in urban and hip-hop music.

Cohen’s jump to Warner Music surprised many. Although Warner Music once sold more albums in the U.S. than any other company, it stumbled badly in the 1990s.

Expectations fell further when the company was purchased in 2003 for $2.6 billion by an investor group led by Seagram Co. scion Edgar Bronfman Jr. Bronfman immediately launched a restructuring that cost the jobs of almost 2,000 employees, cut the artist roster and loaded the company with more than $2 billion in debt. The company’s stock debuted in 2005 at a disappointing $17 a share.

But Warner Music’s sales of worldwide recorded music in its most recent quarter rose 15% from a year earlier to $678 million. Powered by hits from bands including Green Day, the Red Hot Chili Peppers, and new discoveries James Blunt and Gnarls Barkley, Warner Music’s U.S. market share has grown to 19.3%, up from 16.7% in 2005, according to Nielsen SoundScan.

The company’s stock price has jumped 25% this year, with shares closing Friday at $23.70, up 9 cents from the previous day.

Bronfman and others say much of that success is due to some controversial hiring decisions, including Cohen. An American-born son of Israeli parents, Cohen early in his career developed a reputation as a tough negotiator who relentlessly promoted his acts, occasionally poached talent from other managers and sometimes broke the rules.

In 2003, for instance, a federal jury ordered Cohen to pay millions of dollars after an independent record label accused him of fraud and of stealing away rapper Ja Rule. A trial-court judge called Cohen “morally reprehensible,” but an appellate court overturned the verdict in 2005 and Cohen was largely exonerated.

Under Cohen, Warner Music has thrived, due in part to the executive’s innovative initiatives, such as an incubator program that builds relationships with independent label executives the company aspires to hire.

Cohen talked with The Times about Warner Music’s turnaround.

Question: What was the biggest challenge Warner Music’s managers confronted when they purchased the company?

Cohen: Warner’s infrastructure was way too expensive. Throughout the 1980s and early ‘90s, the success of the compact disc format allowed music companies to build enormous, expensive staffs. When the industry began to decline in the late 1990s, most companies decided that rather than cut staff, they would take shortcuts to sell more records. That’s why Britney Spears, the Backstreet Boys and ‘NSync appeared, because labels had to find huge pop hits to pay for their staffs, no matter how short-lived those hits were.

But to survive, the industry needs to develop artists who are profitable over the long term, even if they don’t start out big. We wanted to give ourselves more time for artist development, but to do that, we had to lay off a lot of people so we could afford to move more slowly. The whole industry is still bloated. Everyone needs to get in better shape.

Q: What was the biggest management change that you and Bronfman made when you took over Warner Music?

A: Warner had a history of failed mergers, and executives had postponed a lot of hard decisions in anticipation of one of those mergers succeeding.

So when we took over, we were clear and decisive about who would be fired. People had been paralyzed because they were worried about their futures. We made our decisions quickly, and removed uncertainty so people could focus on the future.

The other change we’ve made is placing A&R; [artist and repertoire, those who discover and nurture talent] executives above marketing and promotion employees. Record people want to work for an A&R-driven; music company. We’re still three to five years from becoming a really substantial company, but the only way we can get there is if A&R; is on top.

Q: You come from a musical background, having been a club promoter, a road manager and a marketer for such bands as Run-DMC, Social Distortion, the Circle Jerks and the Red Hot Chili Peppers. Today, some music companies are run by executives with more corporate than musical experience. How does your background influence the choices you’ve made at Warner?

A: My background lets me teach my executives not to fear mistakes.

Here’s an example: When Warner’s label heads were cutting their artist rosters, I told them, ‘My man, you’re gonna cut an act that’s going to be successful across the street, and it’s OK.’ I have cut many platinum acts in my career. At [Island Def Jam], I cut the Baha Men, who went on to sell millions and millions of records. But for me, the Baha Men would have represented short-term positive results that would have led me down the wrong road.

Our industry wastes money on hundreds of acts because executives are afraid to cut an artist who might be successful somewhere else. We’ve got to change that mind-set. My background lets me tell my executives: ‘You don’t have to snare all the successful bands. Just focus on making the ones you have snared successful.’

Q: Last August, you were criticized for ousting Atlantic Records co-Chairman Jason Flom, who now heads EMI Group’s Virgin Records. Why did you do it?

A: You can’t talk the talk unless you walk the walk. Here we had brought clarity to this organization by firing a large number of people because they did the same jobs, and then we had two people running Atlantic. It was talking out of both sides of our mouths. To be credible, we had to show the same discipline among the top ranks that we had shown throughout the company.

Q: What is your biggest challenge?

A: The digital revolution is baked into the very capillaries of our organization now, and we have to push experimentation every day. We have to be willing to try things that may fail, and partner with anyone we can. Right after joining Warner, I asked for special funding to start an incubator system to build relationships with young executives outside the company. There was a temporary CFO who thought that sounded too loosey-goosey and said it was dangerous to risk money on anything nonessential. But Edgar [Bronfman Jr.] supported the idea, and that’s how we found [the band] Panic! at the Disco. The band’s manager, a guy in his 20s named John Janick at the Fueled by Ramen Co., is one of the best record execs I’ve ever met. I expect him to be an integral member of our management team, but in today’s music industry, we wouldn’t have discovered him if we didn’t try this experiment.

When Edgar meets [Chief Executive] Meg Whitman from EBay, he says: ‘Use us as your chief experimental partner.’ There’s going to be a lot of dead ends and embarrassing mistakes. But, we have to take risks if this industry is going to thrive.

Q: How would you respond to critics who have questioned your methods or behavior?

A: There’s no question that I’m an outsider in the traditional record industry. I’ve been an outsider for more than 25 years. I’m an entrepreneur, and so I look at things differently. Here’s an example: I could never get my acts on Jay Leno or David Letterman’s shows. Finally, I hustled a few acts on the shows, and I realized it didn’t sell any records. So I stopped caring about those shows.

Music insiders care. They want to feed their ego by saying they know Leno or they’ve shipped millions of records, even if a whole bunch get returned. I care about moving the needle. So I encourage risk-taking. And the only way to encourage risk-taking is to take risks yourself, which means sometimes you’ll fail, or people will say you are too aggressive or controversial. But someone needs to jump in the pool first for a party to get really great. I’ve always been willing to be that guy.

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Begin text of infobox

Lyor Cohen

Current Title: Chairman and chief executive, U.S. recorded music, at Warner Music Group

Born: New York

Raised: Los Angeles

Credits: Road manager for Run-DMC. Developed the careers of LL Cool J, Public Enemy, Run-DMC, and the Beastie Boys. Before joining Warner Music, Cohen headed Island Def Jam, a division of Universal Music Group that has traditionally been the most powerful label in rap and hip-hop music.

Age: 46

Education: Bachelor of business administration in international finance and marketing at the University of Miami

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Los Angeles Times