Daly-Semel Swan Song Comes as Warner Music Loses Its Groove

It's panic time again at Warner Music Group.

News of the unexpected exit of Bob Daly and Terry Semel, longtime co-chairs of Time Warner's Warner Bros. entertainment studio, is causing extreme anxiety inside the struggling music group, which has fallen to fourth from first place among the world's five biggest recording giants in sales of current albums in the United States.

Not since the mid-1990s, when a lengthy corporate blood bath paralyzed Time Warner's music sector, have so many record executives been caught up in trying to gain a foothold in the new hierarchy. Time Warner has yet to indicate whether Daly and Semel's successor will come from inside or outside the company and whether the studio will be restructured after their departure, splitting off music, which was added to the Warner Bros. fold in 1996.

This week, Warner executives and competitors alike privately suggested that the music group is in dire need of an overhaul and a group leader for its three labels.

Once the dominant and most respected operation in the industry, Warner's credibility has dwindled and its share of current album sales in the U.S. music market has shrunk to 15.44%, from 22.36% in 1995, according to SoundScan.

And things look even worse overseas, where Warner's international division has been foundering.

Time Warner President Richard Parsons, who flew in last week with Chairman Gerald Levin to meet with executives at the music group's Burbank headquarters, denied the company is in disarray.

"I think the reports of panic are overblown," Parsons said in an interview Monday. "Clearly there is anxiety. And my job is to try to help minimize that anxiety while we're going through this.

"That's why Jerry and I met with the music leadership. What we hear from them is that there is a great sense of optimism about the ability of the company to come together. But there is uncertainty about what happens next. The music company has been through a lot."

When Daly and Semel added the music division to their responsibilities, they had a successful track record in film and a 17-year partnership at Warner Bros. studio, which also includes television and retail store divisions.

While Daly and Semel were criticized for inexperience in music and for not paying enough attention to the record division, most observers credit the executives with restoring order to the corporation following several years of turmoil that gutted the management team and shattered morale.

Former Chairman Robert Morgado and his successor, Michael Fuchs, had alienated many of Warner's biggest stars by firing or forcing out nearly a dozen of the company's top executives, including Doug Morris, Mo Ostin, Lenny Waronker and Jimmy Iovine.

Many of those executives ended up working for companies owned or distributed by Seagram's Universal Music Group, which has taken the lead. This year, Sony and Bertelsmann Music Group also have surpassed Warner in sales of current albums in the United States.

The company's flagship label, Warner Bros. Records, provides a snapshot of the decline. So far this year, the 35-year-old company has captured only 6% of the U.S. market--barely half a percentage point more than Seagram-owned Interscope Records, a relatively young start-up that Time Warner dumped during a controversy about rap lyrics.

But the problems at Warner Bros. aren't just about market share. The corporate chaos damaged its credibility with artists too.

In a pop world long accustomed to fawning over one-hit wonders, Warner Bros. executives once had a reputation for signing, developing and working closely with visionary artists such as Jimi Hendrix, Joni Mitchell and Prince. These days, however, artists' managers complain that the executive team is so out of touch that it's difficult to even get them to return a phone call.

Managers say Warner Bros.' current promotion-trained president, Phil Quartararo, and Chairman Russ Thyret seem to concentrate less on developing artists and more on pushing radio hits such as Cher's "Believe," which has been one of the company's top priorities and biggest sellers so far this year. Another criticism is that the label has practically no presence in hip-hop music, which currently ranks as one of the top-selling genres in pop.

Even executives within the organization privately suggest that Warner Bros. needs to be restructured in the same fashion that sister labels Atlantic Records and Elektra Entertainment were in recent years. Atlantic, run by Val Azzoli, and Elektra, run by Sylvia Rhone, downsized several years ago and have been breaking new acts since 1995--although Elektra has been going through a cold streak lately.

The music industry is buzzing with rumors about who will take over the division and what changes they might make. The New York tabloids have been rife with speculation recently that Azzoli would be promoted to music czar, but sources say his elevation could spark dissent among his colleagues--primarily Rhone, who recently signed a six-year contract.

Other potential candidates include Warner Music executives Jerry Gold, Dave Mount and Les Bider--although it is unlikely that any of the current label chiefs would voluntarily report to them.

Time Warner will also most likely encounter tensions along the chain of command if they try to bring in an outsider such as former PolyGram chief Alain Levy. In fact, the lack of experienced executive talent could pose problems for Time Warner as the media giant searches for a successor to Daly and Semel.

Parsons said he could not put a date on when Time Warner would announce a successor, but he denied the company plans to use the duo's exit as an opportunity to reorganize the division.

"Restructuring the music group is not on our agenda," Parsons said. "What Jerry and I are focused on right now is an orderly selection of new leadership for the music group as Bob and Terry pull back in an orderly way.

"Jerry and I have personally talked to the music leadership and solicited their advice. We told them that we are going to respond positively to the need for thoughtful music-centric leadership at the top. And I promise you as I promised them, we intend to use all deliberate speed in making this decision."

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