Company Town : Pop Shopping : Booming Music Business Has Investors Drooling

Now that Kirk Kerkorian’s bid to take over Chrysler has fizzled, the Las Vegas billionaire might want to try rolling the dice in the record business.

And why not? If you believe the buzz circulating in the entertainment industry these days, the world is full of billionaires contemplating a future in the booming $35-billion global music market.

Rupert Murdoch, Sumner Redstone and Ronald Perelman are all bullish on pop and aggressively shopping to add a music division to their portfolios.

In addition, top music attorneys interviewed this week say they’ve been barraged with inquiries about acquisitions from major cable and telephone companies as well as from a growing list of foreign investors, all hoping to cash in on the pop market.

Yet few record executives are losing sleep over reports of predators looming on the horizon.

“Almost nobody in the music business takes a shred of this stuff seriously,” said one record chief, who reflected the views of several interviewed this week. “While Murdoch and Perelman and Redstone may be good at what they do, when it comes to music, none of them has a clue.”

MCA Music Entertainment Chairman Al Teller, whose Universal City-based firm is being acquired by Seagram Co., offered a more cautious assessment.

“Creating a successful record label is much harder than it looks. There is no scientific formula for how to achieve it,” Teller said. “But with the caliber of the individuals who are stepping up to the plate these days, you just can’t afford to discount their commitment to succeeding.”

The allure of the music business is based on a simple principle: hit records are inexpensive to produce, deliver a quick return on investment and generate a steady revenue stream into the future in the form of catalogue and music publishing sales. In the past, some successful record labels have been put together for less than the cost of the budget of one major motion picture. But who knows how to pick a hit?

Investors who intend to become a force in the music business have only three options for entry: (1) They can start their own label from scratch (2) build a company slowly by acquiring a cluster of small and mid-size labels or (3) try to purchase one of the six major corporations that have dominated the global market for decades.

Those firms already are controlled by powerful parent companies: The Warner Music Group belongs to New York media giant Time Warner. PolyGram is owned by the Dutch electronics company Philips. Sony Music is part of the Japanese electronics giant. BMG is controlled by Bertelsmann Inc., the West German media conglomerate. MCA Music was just sold by Tokyo-based Matsushita Electric Industrial Co. to Canada’s Seagram. EMI Music is part of Thorn-EMI’s British retail and rental operation.

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Analysts began viewing pop music as a serious cash cow in 1990 after David Geffen sold his 10-year-old record label for $550 million to MCA. Geffen’s sale triggered a flurry of label start-ups because it showed just how much and with what speed money could be made in the industry.

Of the dozen or so new labels that have started since 1990 at a total investment of about $300 million, few have turned a profit. Indeed, several firms have already folded and many remain struggling.

Because start-up labels have no existing catalogue to generate revenue, it is essential to discover new talent. Recent start-ups such as Interscope, La Face and Epitaph have quickly established credible reputations in the music business by transforming unknown artists such as Dr. Dre, Toni Braxton and Offspring into multimillion-selling superstars.

Anyone who underestimates the difficulty of building a label from the ground up need look no further than Disney’s struggling Hollywood Records.

“The problem with creating a label from scratch is that you must allocate enormous resources and be prepared to sustain tremendous losses for at least five years--and even then there is no guarantee that you will get a hit,” PolyGram International CEO Alain Levy said in a phone interview from London. “Still, I would never underestimate the resolve of these new players. It’s not impossible for them to succeed if they make their minds up to do it.”

Some conglomerates have avoided the start-up trap by bolstering their presence in the business through acquisitions. Levy, for example, effectively expanded PolyGram’s domestic market share this year after several mid-sized labels he recently purchased--A&M;, Motown and Def Jam--delivered hit records.

Most of the desirable mid-size labels, however, have already been gobbled up, leaving new investors unwilling to start their own labels with only one plausible way to gain a foothold in the business: to buy a major record corporation.

Many analysts believe that EMI Music, which releases records by such artists as Garth Brooks, Janet Jackson, the Beatles and the Beastie Boys, is the likeliest takeover target left among the large record companies.

EMI Music has increased in value in recent years through a series of acquisitions orchestrated by CEO James G. Fifield. The corporation--which is now comprised of Virgin, Capitol, Liberty, Angel, Blue Note and the EMI Record Group--posted global revenues of $3.5 billion last year with profits up 20% to $478 million, an EMI spokesman said.

Despite its current anemic standing in the U.S. market, the firm maintains a strong presence internationally and controls a rich recording catalogue as well as one of the biggest music publishing operations in the world. EMI generates half of its parent company’s revenues and nearly two-thirds of its operating profit, analysts say.

Thorn-EMI chief Colin Southgate has made it known that he is unwilling to spin off the firm’s music division, leaving potential suitors with no option but to purchase the entire corporation, including its lackluster retail and rental operations. Analysts say that a serious buyer would have to cough up almost $10 billion to close the deal--more than twice what competitors believe the music division is worth.

The rumor mill ran wild with speculation last month that Disney and Viacom were duking it out behind the scenes, each considering a possible purchase of EMI. Even Geffen and Edgar Bronfman Jr. were being tossed out as EMI suitors.

“Eisner, Redstone and Geffen did not get where they are by overspending,” said one executive. “I don’t believe there is anybody out there crazy enough to fork over $10 billion for EMI. The reason these big shots are interested in the music business is because they want to make money, not waste it.”

Ironically, Geffen is the only billionaire poised to enter the market. Insiders are betting on him to succeed when he launches his new DreamWorks label, the music division of the entertainment combine he formed with partners Steven Spielberg and Jeffrey Katzenberg. Indeed, insiders speculate that Geffen already has gotten the jump on Murdoch, Redstone, Perelman and Eisner by luring the revered executive team of former Warner Music chiefs Mo Ostin and Lenny Waronker to run his label.

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Money Sings

Recording industry sales are booming, particularly in the United States, where revenue growth has tripled in the last 10 years--making the industry a hot prospect for a variety of investors. Domestic music industry revenues, in billions of dollars:

1983: $3.814

1994: $12.068

THE BIG SIX

Six companies dominate the U.S. market. Market share as of May 28 and examples of leading artists represented by each company: Warner Music Group (Madonna, Prince, Dr. Dre): 22% PolyGram (Police, Sheryl Crow): 14.2% Sony (Michael Jackson, Pearl Jam, Michael Bolton): 13.1% BMG (Whitney Houston, Kenny G, Annie Lennox): 12.2% MCA (UNI) (Guns N’ Roses, Hole): 10.7% EMI (Smashing Pumpkins, Frank Sinatra): 8.8% Others: 19.1%

TAKEOVER TARGET?

EMI Music, with such artists as Garth Brooks, Janet Jackson and the Beastie Boys, is the only one of the world’s six largest record corporations seen as a potential takeover target. EMI at a glance: * Headquarters: New York * Chief Executive: Jim Fifield * Employees: 9,746 worldwide * 1994-95 Sales*: $3.5 billion * 1994-95 Earnings*: $478 million * Major labels: Virgin Classics, Blue Note, Capitol and Liberty records, EMI Latin, EMI Music Canada and EMI UK

* Fiscal year ended March 31

Note: EMI Music is owned by London-based Thorn EMI. Percentage figures have been rounded.

Source: Soundscan, Recording Industry Assn. of America, Times reports.

Researched by JENNIFER OLDHAM / Los Angeles Times