Confidence Behind the Music

By deciding to hang on to the world’s biggest record company, Vivendi Universal sounded a note of confidence in an industry that has heard nothing but doomsaying as album sales plunge and mega stars fall.

Taking Universal Music Group off the auction block doesn’t prevent the French conglomerate from bailing out of the music business down the line. But it reflects a growing sentiment among some Wall Street players and music executives that the value of record labels could be headed higher.

“There are some signs that the industry is bottoming out,” said Dennis Leibowitz, a New York money manager and investor in InterActive Corp., which owns a stake in a Vivendi Universal subsidiary. The company’s music unit is home to such diverse artists as Eminem, U2, Bon Jovi and No Doubt.

The sunnier outlook arises from recent industry-backed efforts to combat online music piracy. Leibowitz and other analysts point to the explosive early sales at Apple Computer Inc.’s new online music store and the recording industry’s recent move to sue individual users of free online file-swapping networks.

The labels have expressed hope that such developments would reverse a slump that has dragged sales down an estimated 25% in the last three years and sharply cut music company valuations.

Not everyone, however, is predicting a turnaround.

“I see very little evidence that there will be a recovery in a year,” said Michael Nathanson, an analyst at Sanford C. Bernstein & Co. who tracks Vivendi and British music giant EMI Group. “It’s very 1999 to sit here with a couple weeks of Apple data points and proclaim the business has turned a corner.”

He described as “bold” Vivendi’s move to hold out for an industry comeback and a potentially higher payday.

Universal Music declined to comment.

Sources said Vivendi executives, who took the unit off the table at a board meeting Tuesday, believed that the bidders competing for the company’s U.S. entertainment operations hadn’t offered a fair price for Universal Music Group, which is valued by Wall Street at about $5 billion. Vivendi also feared that including the record label in the auction would slow down the sale of its film and cable operations to bidders unfamiliar with the music industry, including Liberty Media Corp. Chairman John Malone and Metro-Goldwyn-Mayer Inc., sources said.

Some insiders worry that separating music from the other entertainment assets would deprive the label of marketing clout to recruit and retain artists through alliances with Universal’s film studio and theme parks.

It also leaves open the question of long-term management. Although senior executives at the label expressed relief at remaining under French executives they’ve come to know, they don’t believe Paris-based Vivendi is interested in a long-term presence in the record industry, even though the music division continues to generate hundreds of millions of dollars in cash.

“I’m sure this will be seen as the best of a variety of bad alternatives,” said one Universal executive, who requested anonymity. “I’m not sure what’s good and what’s bad anymore.”

For critics who believe Vivendi will have to endure years of financial pain before the record industry rebounds, there is ample evidence.

Executives say the industry’s basic economics -- sky-high promotion costs and few hit acts -- are not quickly changing. Some privately contend that anti-theft efforts, though laudable, will not stop determined pirates.

Indeed, the sales drought has prompted two other music giants, AOL Time Warner Inc.’s Warner Music Group and Bertelsmann’s BMG, to pursue a potential merger of their recorded-music operations.

Either way, Universal still carries some heavy baggage. Island Def Jam, a New York-based division of the music giant, was hit with a $132-million verdict in May after a jury found that it had defrauded a smaller competitor. A Def Jam-distributed rap label, Murder Inc., is the subject of a federal money-laundering probe.

Universal also has suffered on the charts, though it remains the industry leader by a wide margin. Industry data show that rivals Warner or BMG, or both, have outperformed the Vivendi unit in U.S. sales of new releases for four of the last five weeks.

Universal’s Interscope label boasts the bestselling album of the year, rapper 50 Cent’s “Get Rich or Die Tryin,’ ” but the company’s other three divisions have been running cold.

Some insiders said Vivendi’s move to stick with music provides needed stability for executives as they seek to respond to the industry’s woes.

“All I want is the next two or three years to do all this with peace of mind,” said another Universal executive. “The industry leader needs to be stable.”