Warner Group Looking to Regain Lost Ground After Facing the Music

For a lesson on how corporate meddling can paralyze a creative enterprise, look no farther than Warner Music Group.

Once the dominant and most respected operation in the record business, Warner has shriveled in credibility and its share of current album sales in the U.S. music market has plunged to 12% from 23% in 1995, according to SoundScan. Profits are down too at its Warner Bros., Atlantic and Elektra labels, home to such acts as Madonna, Jewel and Metallica.

Warner has fallen from first place to fourth among the world’s five biggest recording giants in sales of current albums in the United States. Internationally, the company ranks last in most markets, behind Vivendi Universal, Sony Music Entertainment, EMI Group and Bertelsmann.

The decimation began during the mid-1990s after a lengthy corporate blood bath forced the exit of nearly a dozen top executives, including Doug Morris, Mo Ostin and Jimmy Iovine. Most of those executives went on to bolster the fortunes of competing firms.

Time Warner, the company’s parent, also made the mistake six years ago of caving in to political pressure and deciding to get out of the rap music business after a controversy over explicit lyrics. That decision not only cost the company significant market share and profit, but it also damaged its credibility in creative circles.

In 1999, Time Warner turned to the widely respected Roger Ames. The industry veteran, a native of Trinidad, arrived with an extensive artist and repertoire background from PolyGram, where he headed the biggest international music division.

As chairman, Ames masterminded a plan to merge Warner with EMI that would have instantly put the company back on the map as a global powerhouse. But Time Warner backed out of the deal after European regulators threatened to cancel the media giant’s pending merger with AOL, sending Ames back to the drawing board.

In his first extensive interview since taking over, Ames spoke candidly about the challenges ahead and addressed concerns about the struggling music division’s future inside the merged AOL Time Warner organization.

Question: Warner Music used to be the industry kingpin. How does it feel now to be looked upon as an underdog?

Answer: The way I see it, we’re like Avis. We try harder.

Q: Avis is No. 2. You’re nowhere near that position.

A: OK. We’re No. 3, or maybe No. 4, depending on how you slice the distribution market-share pie. So I guess we’re going to have to try even harder. The fact is, we are simply no longer the No. 1 distributor. But for artists and creative executives, size isn’t everything. What’s really important is the opportunity that a record company presents them. That’s how smart independent companies like Jive or Def Jam or Interscope have been able to compete with corporations twice their size.

Q: You took this job with a plan to resolve Warner’s problems by merging it with EMI. Now that Plan A has bit the dust, what is Plan B?

A: When I first took over, I thought the EMI merger would provide a quick fix to Warner’s problems. But now, what we have to do is repair the company’s artist and repertoire focus, build volume and reduce operating costs--all at the same time. And as you can imagine, it will inevitably be a much slower build, primarily because now you’re not buying market share but creating it by pumping out hits. Either way, Warner needed to restructure so I began preparing people at staff meetings, saying, ‘Hey, look around, we’re out here in the trenches now. It’s guerrilla warfare. If you’re not prepared to take it on, you better go home. Retire with no shame. Surrender. No one will judge you. Just raise the white flag and get the hell out.’ And a lot of people at Warner Bros. Records and elsewhere have done just that, and that’s OK with me. Because the ones left standing realize that we’re going to have to get down in the dirt and scrap with some pretty formidable opponents in order to come back. It’s going to be tough.

Q: Accounting rules allow AOL Time Warner to bury millions of dollars in merger losses before the year ends. You’ve already restructured your international division and trimmed about 600 posts across Warner. How many more cuts loom on the horizon?

A: We’re continuing to look at the size of the organization related to where we are in the market. We intend ultimately to consolidate all of the back-room administrative functions. We don’t have another 2,000 people to shed. We are not planning any major label consolidations or any major cutbacks.

Q: Warner was plagued in the past by executive turmoil. This year, Warner Bros. Chairman Russ Thyret quit the company after you offered the label’s top job to Interscope President Tom Whalley.

A: It was obvious to me from the get-go that Warner Bros. needed a clearer artistic direction. As great as Russ and [Warner Bros. President] Phil Quartararo are, there is a component that needs to be strengthened. What used to distinguish Warner Bros. was that it was an artist-friendly company. We need to restore that image. And in order to do that, I think we need somebody who really understands the field at a level that exceeds what is there now, so I picked Tom Whalley. Beyond that, I think Phil Quartararo has created an incredible team in the promotion department, and I certainly hope he is going to stay after Tom arrives.

Q: What about Elektra Chairwoman Sylvia Rhone? Is her job in trouble?

A: It’s true that Elektra is going through a cold spell. And when you’re cold, everybody takes shots at you. I believe in Sylvia and think she is about to bounce back. Nevertheless, she, like all of our operating executives, have certain sales and financial objectives that they must meet full stop. Elektra overall needs to get to a better place, and Sylvia and I both understand where that is.

Q: Though it has struggled the last few quarters, your Atlantic division has two albums in the top 10 this week on the nation’s pop chart.

A: Atlantic is a well-managed business. [Chairman] Val Azzoli has done a great job of nurturing a team full of stars over there: Jason Flom, Ron Shapiro, Andrea Ganis, Craig Kallman and [artist and repertoire] guy Mike Carin. The next thing we intend to do is grow the company. Does that mean the structure of Atlantic will eventually have to change? Probably.

Q: Warner was the only division of the merged parent company to post lower revenue during the first quarter. Is AOL breathing down your neck?

A: No. Of course, everybody would like to see quicker and better results. But anybody who understands this industry knows it is impossible to just turn on and off the revenue tap at will. The music business has a different life cycle, one that is not particularly helped by quarterly accounting. Would everybody like an extra 15% in a quarter? Sure. Is there pressure to achieve the numbers? Absolutely.

Q: There’s speculation that AOL might try to entice people to sign up for subscriptions by giving away music or charging a nominal fee. As head of the music division, does that make you nervous?

A: No. But there certainly is a fair amount of paranoia in the industry about it. People are out there saying that music on AOL is going to end up like water, that AOL is going to just give it away. But that’s insane. If we just give it away, how will we pay the artists? And if we don’t pay the artists, who will sign with us? But you’re right, it’s getting so ridiculous that someone suggested to me that AOL is about to offer Madonna $20 million for her next album if she would make it available only to AOL subscribers. Madonna is not going to do that. And AOL Time Warner wouldn’t allow it anywa Q: Why not?

A: Because it’s extremely shortsighted. I believe in fighting for the value of the content I deliver. I believe intellectual copyrights have to be protected and the authors have to be rewarded. That’s one of the foundations of this company and that’s not going to change just because we have a distribution system called AOL with subscriber relationships. I don’t buy into this idea that AOL Time Warner would risk killing the catalog to sell a few extra subscriptions.

Q: When you took over, Time Warner heralded you as an experienced music man who could help resurrect its crippled record sector. What’s the difference between the corporate bean counters who previously ravaged the company and a veteran record guy like you?

A: I think it’s useful to have someone running the business who understands what it means to have a hit record and what it means to be cold. I’m not sure whether giant corporations--here or elsewhere--have always given creative guys their due. I think most corporations look down their nose at record guys. The administrative guys with the fancy degrees and the fat paychecks and the big offices aren’t necessarily the ones who matter in this business. The fact is in a record company, the important people are the folks who deliver the hits. It’s as simple as that.