Warner Group Looking to Regain Lost Ground After Facing the Music

AOL Time Warner answered the prayers of Wall Street analysts last week when it posted strong profit in its first quarterly earnings report. But the company’s music executives have been saying their own prayer: Please, let this be as bad as it gets.

Although it generated $881 million in sales this quarter, AOL Time Warner’s music division was the only part of the newly combined company to report a revenue decline from the same period last year, and executives at its three record labels say they are determined to make up for the loss of image and money.

They will have to do it while completing a massive reorganization that will result in the firing or retirement of an estimated 615 people. The labels are also expected to trim a number of money-losing acts to cut costs. The music division, composed of the Warner Bros., Elektra and Atlantic labels, has fallen from first to fourth among the five major record conglomerates in current U.S. album sales and was the only one in recent years to have avoided such a purge.

The ouster nine weeks ago of 30-year veteran Russ Thyret, chairman of the flagship Warner Bros. label, burned perhaps the last bridge to the label’s heyday under legendary Chairman Mo Ostin, who resigned in 1995 after a corporate power struggle. Since Ostin’s exit, the label once revered as the “artist-friendly” home of Jimi Hendrix, R.E.M. and Madonna is on its back after disappointing showings recently from acts such as Green Day, Paul Simon, Mark Knopfler and Bette Midler. Warner Bros.’ U.S. market share has dropped from 8.95% of new releases in 1995 to 4.74% this week, according to SoundScan.

Ostin, who now heads 6-year-old DreamWorks Records, just led the label to perhaps its best-ever performance, landing nine records this week in Billboard magazine’s top 200.

But Warner Bros., which is being run by promotion-trained President Phil Quartararo, still captures a larger share than its two sister labels, thanks in part to successes by country singer Faith Hill and new rock band Linkin Park, signed by a Quartararo hire, Jeff Blue. It also may benefit from buying out its joint venture with Giant Records, which delivered rock act Disturbed. Sources say Warner Bros. continues to lose millions through its alliance with Madonna’s Maverick Recording Co., however.

The pressure also is rising at Elektra Entertainment, where label executives are counting on hits this year from rock band Staind, rapper Missy “Misdemeanor” Elliott and the upcoming “Tomb Raider” film soundtrack to thaw a lengthy cold streak. Although such hits could deliver Elektra the market share it has been lacking, the label will have to split profits from each Staind sale with Flip Records, to which the band is signed, sources said.

After breaking through the glass ceiling in 1994 to become the first--and still only--black woman to run a pop label, Chairwoman Sylvia Rhone generated record sales and built Elektra’s market share to 3.11%. But it has plunged to an abysmal 1.29% this week as the label has failed in recent attempts to break through with a new rap act and last year was unable to deliver a single album that reached the million-sold mark.

Even powerhouse Atlantic Records, which delivered most of the music division’s biggest new stars since the turbulence began in the mid-1990s, has been losing its edge.

Atlantic is coming off two straight down quarters with less-than-hoped-for sales by Rod Stewart and Lil’ Kim. On Thursday, the label closed its sluggish Nashville division, laying off its 13 employees and folding its operations into Warner Bros.’ office there.

Atlantic’s share of current U.S. album sales has fallen to 2.93% from 8.1% in 1995, according to SoundScan. The decision that year by Warner Chairman Gerald Levin to unload Atlantic’s interest in controversial Interscope Records amid a heated debate over rap lyrics cost it 2% of its market share and the hottest label in the business.

Under Chairman Val Azzoli, the label continued its success on the charts with hits from Jewel, Stone Temple Pilots and others. Atlantic talent scout Jason Flom has proved himself among the best in the business, bringing in successful acts, including albums by Kid Rock, Matchbox Twenty and new act Uncle Kracker.

Indeed, sources said the label’s top executives--including talent whiz Craig Kallman, promotion ace Andrea Ganis and administrative chief Ron Shapiro--are restless and have been the subject of attempted raids from competitors. Azzoli and much of the senior staff were installed by Warner’s former U.S. music chief, Doug Morris.

Morris, who was fired by Time Warner in 1995 in a management shake-up, is now chairman of Vivendi Universal’s Universal Music Group, the industry’s No. 1-ranked company.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Sour Notes

s Since ascending to the top of the music world and capturing 23% of the U.S. market in 1995, Warner Music Group has fallen from first to fourth place among the five conglomerates that dominate the $40-billion global record business. Sales of current releases in the U.S.:

*Universal acquired PolyGram in 1998.

Source: SoundScan