Universal Aims to Translate Latin Music Into Profits

Maybe Universal Music Group’s rise to the top in Latin music was a matter of destiny.

Eight years ago, Zach Horowitz, now president of Universal Music Group, was among a pack of record executives begging hot rock en espanol producer Gustavo Santaolalla to cut a deal.

Horowitz’s company was then known as MCA Inc. And Santaolalla, never one to ignore an omen, happened to pick up a rental car with the license plate MCA733. So he decided to go with Horowitz.

As luck would have it, Santaolalla’s Surco label yielded a smash hit from singer Juanes last year, making it a centerpiece in the two-front strategy that suddenly has put Universal on top of the Latin music world.

Beyond the long-cultivated Surco joint venture, Universal has been aggressively assembling an unmatched Latin empire.

Dead last in Latin music 18 months ago, the company has become No. 1 thanks to distribution deals with hot labels such as Univision Records, Disa Records and, as of last week, Latin powerhouse Fonovisa Records -- all of which are now controlled by Los Angeles-based television giant Univision Communications Inc.

Universal also has shaken up its own once-lackluster Latin division. With the latest alliances, Universal commands a market-leading 30% of U.S. Latin sales.

That the world’s largest record company would display such zeal in pursuing what major distributors once considered a backwater genre is a clear measure of the growing power of Latin consumers. As Latinos have surged to about 12% of the U.S. population, numbering more than 31 million as of the 2000 census, they have created a pocket of relative strength in an increasingly shaky music industry.

Domestic album sales dropped 11% last year, but the comparatively strong Latino market remained flat. Record executives estimate that Latin record sales of roughly $600 million accounted for 5% of the industry’s $12 billion U.S. total in 2002, and that share is continuing to expand.

“Look at the demographics of this country,” Horowitz said. “Any major label not in the Latin business is going to miss a major opportunity. It was irking me that in this genre, which resonates with a significant portion of the country, we were not in it the way we should’ve been.”

Whether Universal will cash in on its top-dog position is the subject of much speculation in music industry circles.

Executives estimate that Universal’s new round of distribution pacts will generate more than $18 million a year in fees, before its own costs, plus millions more in manufacturing income. But critics say the company has paid too much for distribution rights to make the deals profitable in the end. Universal also has failed to turn Latin artists into cross-over stars, while competitors have scored with such acts as Sony Music’s Ricky Martin.

Horowitz claims not to be worried -- and suggests it’s his rivals that are having trouble making money on Latin music.

“I don’t believe this was a deal for bragging rights. We’re going to make millions and millions of dollars off the distribution of Fonovisa alone,” the Universal president said last week in an interview. “When I look at some of our competitors, even when they have hits, they’re spending so much to market them that I don’t know what their profit margin is.”

Horowitz contends that because of its new distribution pacts, Universal’s sales force now carries more clout when pitching albums from the parent company’s own label, Universal Music Latino.

At Universal, the company replaced the Latin unit’s managers 18 months ago with respected veterans Jesus Lopez and John Echevarria. More recently, it also hired a controversial executive, Jesus Gilberto Moreno, who was convicted several years ago of illegally bribing a radio programmer to play his label’s music.

The success of Juanes, whose album has sold more than 800,000 copies worldwide, may be a sign that operations are falling into line. Universal Music Latino also has scored with pop singer Paulina Rubio, whose first Spanish-language album for the label has sold about 1.2 million copies worldwide.

About the time Lopez and Echevarria arrived, Universal’s Latin division got another boost from a crucial court battle. It beat out Sony Music in a bidding war for RMM, a tropical music label that had been thrown into bankruptcy proceedings by a songwriting-credit dispute.

Sony executives declined to comment for this report.

Universal paid more than $10 million for RMM, which owns older recordings by such acts as Marc Anthony and Tito Puente. It also distributes tropical label Lideres Records, whose TV-driven compilations have given Universal an additional 2% of the Latin market.

New Doors Open

But Universal’s biggest coup was getting two of Latin music’s most independent-minded entrepreneurs -- Disa Records head Patricia Chavez and Univision Music Group chief Jose Behar -- to trust the company with their distribution rights.

Chavez is vice president of Monterrey, Mexico-based Disa, a 32-year-old label founded by her father, a former cockfighter. The label has become a dominant force in so-called regional Mexican music, which includes banda, mariachi and norteno.

Universal executives Gus Lopez and Marco Bissi learned in late 2000 that the label’s distribution deal with Britain’s EMI Group was expiring. But Chavez already was close to signing a new accord with Sony.

Lopez and Bissi flew to Monterrey to pitch her, promising to give Disa’s albums a prominent role in Universal’s sales system. Before they could close a deal, however, Univision stepped in with an offer to buy 50% stake in Disa for $75 million.

After coming to terms with Univision, Chavez turned around and signed with Universal -- but only after Universal upped its offer and promised to get her music into Universal films, as well as pumped through the speakers at Universal’s City Walk.

“It was important to us that they were willing to listen to all kinds of opinions that we had,” Chavez said. “I thought they could walk the road to success.”

Behar was the key to both the Univision Records deal and Universal’s later alliance with Fonovisa -- but the two didn’t come as a package.

A former talent scout who helped transform the late Selena into a success while running EMI’s U.S. Latin division, Behar became one of the most powerful executives in music after resurfacing as the head of Univision Communications’ start-up record arm. His 18-month-old Univision Music Group is still chasing a profit, having posted operating losses of $11.9 million for the nine months ended Sept. 30 because of acquisition-related charges. But it quickly has established itself as a force on the charts.

It broke through with singer Pilar Montenegro and -- in a deal expected to be announced this week -- snagged superstar Pepe Aguilar. Aguilar, who has been embroiled in a bitter contract dispute with the independent Musart/Balboa label, is expected to release his first album on Univision in March.

Making a Deal

Even before Univision Music was formed, Universal was courting Behar. The entrepreneur reasoned that the conglomerate would make a good partner precisely because it was weak in Latin music: He was virtually guaranteed prominent display in its marketing of the genre. So he signed.

Yet Behar was coy when Univision last year bought Fonovisa Records, the biggest Latin independent label, in a $240-million stock deal and was asked to bring it to Universal as well.

Fonovisa, home to star Marco Antonio Solis and others, accounted for a hefty 10% of the U.S. Latin market and had its own distribution operation. For more than 10 months Behar flirted with a deal that Universal hoped would vault it past Sony Music to leadership in the domestic Latin market.

Universal, whose roster includes megastars such as Eminem and Shania Twain, finally convinced Behar that it had the clout to put Latin music in big chains such as Toys R Us and Wal-Mart Stores. Lured largely by the potential of such mainstream outlets, Univision in December signed a four-year agreement that gives Universal an estimated 10% distribution fee on Fonovisa albums and extends its deal with Univision Records.

The deal channels all of Fonovisa’s international sales through Universal and provides Univision Music Group with a worldwide marketing force underwritten by the music behemoth.

“What we do is discover artists and make great records,” Behar said. “We don’t want to have a warehouse with 600 people packing and shipping.”

For fellow player Santaolalla, by now a Universal mainstay, the new arrivals promise a future that Latin artists and producers only dreamed of a decade ago. “There’s been a Latinization of the world in music and in language and in food,” he said. “What’s coming out of Latin America has a place worldwide.”