Warner Music to Slash Jobs, Costs in Restructuring

In a giant reorganization of the record industry’s onetime leader, AOL Time Warner Inc. is planning to make significant cuts at Warner Music Group this week by integrating U.S. business operations and shedding hundreds of employees.

The moves are an effort to transform Warner Music into a leaner conglomerate. Once the world’s dominant music company, it has fallen from first to fourth place among the five biggest recording giants in U.S. sales of current albums.

Warner Music is set to close three of 15 U.S. sales offices and eliminate an estimated 615 jobs, including 500 positions belonging to people who have accepted early retirement packages. On Tuesday, the company is expected to unveil the names of employees slated to lose their jobs at WEA Inc., Warner’s manufacturing and sales arm, with the record labels following later this week.

AOL Time Warner said in January it would eliminate 600 positions from the global music division. But the details had not been decided until Friday. The entire reorganization, scheduled to be completed as early as July, is expected to produce annual savings of at least $20 million.

A Warner Music spokeswoman declined to comment.

Though the move means the exit of dozens of veteran promotion, marketing and publicity executives, it’s a far more limited restructuring than the 1999 shakeout following Seagram Co.’s $10.4-billion purchase of PolyGram.

Yet it is significant because Warner was the biggest of the five major record conglomerates to have escaped such belt-tightening in recent years. Executives inside and outside the company say privately the cuts are overdue. Not only has Warner suffered bloated management ranks, but also the industry today is dominated by a handful of retail chains that can be served without a far-flung sales force.

The restructuring marks Warner’s second attempt to reclaim its place at the top of the $40-billion global record business, following the collapse in October of its planned merger with British music giant EMI Group. The merger, the brainchild of Warner Music Group Chairman Roger Ames, who was hired in late 1999, fell apart amid antitrust objections from European regulators.

Analysts suggest the restructuring will provide Warner with economies of scale that may offset increased costs as the company invests in local repertoire internationally.

“In this case, the money that can come out is not as easy as when you merge, and you have matching businesses and you can eliminate one,” said Tom Wolzien, an analyst at Sanford C. Bernstein & Co. “The cuts have to be precise, and that makes them more difficult.

“It’s clearly, for the first time, adult supervision for the music business,” he said. “There’s a lot of neglect that has to be reversed. These are things that could have been done, should have been done, over the last five years.” But the music division, he said, “has been burned repeatedly.”

Ames’ predecessors, Bob Daly and Terry Semel, were criticized for inexperience in music and for not paying enough attention to the record division, though their three-year tenure restored order to the company following several years of turmoil that gutted the management team and destroyed morale.

Once the most respected operation in the business, Warner has seen its share of current-album sales in the U.S. music market plummet to 12.6%, from 20.9% in 1996, according to SoundScan. Internationally, Warner ranks fourth behind Universal, Sony and EMI.

Warner Music sources who asked not to be identified suggest Ames, who left PolyGram during the Seagram merger, may reorganize Warner in the image of his former employer, dividing the world into five equal regions instead of elevating the U.S. division over its international arm.

Though Ames has put off for now a full-scale reshaping of the global structure, he is planning to centralize the marketing of acts internationally so that Warner’s overseas offices prioritize the same American and British records, the sources said.

In the U.S., Ames is centralizing Warner operations to form a backbone for its three record labels, Atlantic, Elektra and Warner Bros. Each label will transfer employees to a common “shared services” unit, which will include accounting, human resources, production and information technology systems.

At the labels, it’s the back office that is bearing the brunt of the firings. And, contrary to industry rumors, Ames is not consolidating the labels or changing the leadership at Atlantic, run by Val Azzoli, or Elektra, run by Sylvia Rhone.

Ames has hired Interscope President Tom Whalley to take the reins at Warner Bros., but Whalley isn’t expected to arrive until January, when his current contract expires. Warner Bros. is led currently by President Phil Quartararo.

Burbank-based Warner Bros. is firing 40 people, with an additional 46 departing with early retirement packages, the sources said. Warner Bros. also is transferring the remaining dozen employees of its Reprise Records division to its own payroll, the sources said, raising questions about the future of Reprise President Howie Klein, who has more than two years remaining on his contract.

With the transfer of an additional 45 people to the new corporate-level back office, Warner Bros. will shrink from 475 people to about 340, numbers comparable to those of large competitors such as Sony’s Columbia Records, which led the industry in overall U.S. market share last year.

Atlantic and Elektra each have undergone massive downsizing since 1995, and the restructuring won’t affect them as much. Atlantic, home to such acts as Kid Rock and the Corrs, is slated to terminate 25 workers, with 17 more taking retirement, sources said. At Elektra, which releases music by such acts as Metallica and Staind, about 20 employees will be let go, with 15 retiring. The two labels also will reassign dozens of workers to the new centralized back office.

Warner Bros. also is expected to close a deal to purchase the 50% stake in Giant Records it doesn’t own for an estimated $15 million. The deal, which could still unravel, is expected to be completed as soon as Friday.