Time Warner Tunes in New Delivery Channel

Migrating the music industry to the Web will be a far more brutal move than most record companies will admit, says Time Warner President Richard Parsons.

Already, sources say turf wars have erupted between AOL and Time Warner as they attempt to integrate their drastically different cultures.

In an exclusive interview, Parsons talks frankly about Internet economics, the status of Time Warner’s proposed mergers with AOL and EMI Group as well as rumors regarding his own status.

Question: How will you make the transition from people buying CDs in stores to fans downloading music?

Answer: It’s a reality that the retail trade must recognize. Technology has enabled a new alternative channel to exist. And if that’s where our customers want to go, we

better be there to give them what they want. This isn’t something that is being driven by the record companies. It’s being driven by customer choice, and it exists virtually across the board right now in all industries moving onto the Web. Music. Books. Cosmetics.

We’re spending a lot of time with our retailers trying to figure out how to position them to have a presence in both arenas. But [the change] is not something you can avoid.

Q: This isn’t just a retail problem. Time Warner could stop manufacturing and distributing CD albums. I hear executives in these divisions are slowing down the move toward online transactions.

A: When new technologies come on board they obsolete certain kinds of jobs. Automotive factories, for the most part, no longer have people in them. It’s all robots now.

For us, part of the challenge is to try to train people to do different things. Another part of my job is to manage these transitions in a way that doesn’t cause disruptions in the company.

Inevitably, these changes are going to cause some cannibalization. We used to be heavily invested in the black vinyl business. Then along came tapes. Then along came CDs. But those transitions were made. This transition will be made as well. I don’t mean to sound heartless here to the guys who manufacture, pack and ship, but hey, the CD business is not going to go away over night.

Q: How long will it take?

A: In terms of having a substantial number of people consuming music through some kind of digital device, broadband is here. And it’s growing. When nearly every American can get it, that’s another few years down the road.

Q: Your competitors are complaining to the government about Time Warner’s proposed mergers with AOL and EMI. Are you willing to dump EMI as a concession to keep the AOL deal intact?

A: There is simply no truth to that. The EMI transaction is as important to us as the AOL deal. We believe that there is no legitimate reason why we can’t do both and we certainly intend to pursue both.

Q: Under the newly proposed management structure, will AOL executive Bob Pittman be in charge of online music?

A: Yes. Bob got the subscription-based businesses generating revenue and e-commerce activity. I was given the content businesses, where we create content that has to be sold over a multitude of distributive channels. Warner Music will not only provide music to an AOL-based online service, but anybody else who has one as well. Same with books and movies and television. Bob’s job will be working with our AOL colleagues to create the premiere space online for streaming and downloading.

Q: Will he establish pricing for online delivery?

A: He will establish pricing for what it costs consumers. Then he will negotiate with the music companies for what he pays for the music.

Q: Do you have any concern that he might set prices below what CDs cost in stores?

A: I think the way that it will work is there will be a negotiation. There will be a lot of experimentation going on in the upcoming years to determine what consumers want, what the price points are and where they want them.

Q: How do you and Bob Pittman get along?

A: Listen, I think things are going better than you might expect. The definition of roles that [Time Warner Chairman] Jerry [Levin] and [AOL Chief] Steve [Case] came up with is very comfortable to me and to Bob. We’ve both got our hands full. There is really an absence of conflict between us.

Q: So rumors circulating about tension between you and Pittman are untrue?

A: I have not heard any such rumors. But to the extent that any such rumors exist, there is no truth to them.

Q: Right now, most folks online don’t pay for music. Is there any fear at Time Warner that while you’re tinkering around with the Internet that you might lose a generation of online fans who will never buy music.

A: It’s not a fear. It’s a reality. An increasing number of young people don’t buy albums, so we are not only losing that immediate revenue. They are also growing up with a notion that music is free and ought to be free. We have been late and slow to react. And our reaction has not been what it needs to be. A year or two ago, most people in the industry didn’t appreciate how serious a problem this was.

Q: The court is about to decide whether Napster is infringing copyrights or not.

A: I think this is a very profound moment historically. This isn’t just about a bunch of kids stealing music. It’s about an assault on everything that constitutes the cultural expression of our society. If we fail to protect and preserve our intellectual property system, the culture will atrophy. And corporations won’t be the only ones hurt. Artists will have no incentive to create. Worst-case scenario: The country will end up in a sort of cultural Dark Ages.

Q: It would also spell the end for corporations like Time Warner that profit from buying up the rights to intellectual property.

A: True. But I just can’t see that happening. In the end, if there is really no way to protect intellectual property in the digital world, then what you will end up with is anarchy. It’ll be every man for himself. Everything will just shut down. I can’t imagine the government will let it come to that.