Warner Music Group Corporation

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Warner Music Group Corporation

75 Rockefeller Plaza
New York, New York 10019
U.S.A.
Telephone: (212) 275-2000
Fax: (212) 757-3985
Web site: http://www.wmg.com

Public Company
Incorporated: 1929 as Music Publishers Holding Company
Employees: 4,000
Sales: $3.5 billion (2006)
Stock Exchanges: New York
Ticker Symbol: WMG
NAIC: 713990 All Other Amusement and Recreation Industries; 512290 Other Sound Recording Industries

Warner Music Group Corporation (WMG) is the third largest recorded music company in the United States and the fourth largest in the world, with over half of company revenues stemming from operations outside of the United States. The company markets, sells, and licenses recorded music and has 29 of the top 100 U.S. best-selling albums of all time in its recorded music catalog. Warner's music publishing operations holds the rights to over one million songs written and composed by more than 65,000 artists. Some of the company's record labels include Asylum, Atlantic, Bad Boy, Cordless, East West, Elektra, Lava, Maverick, Nonesuch, Reprise, Rhino, Roadrunner, Rykodisc, Sire, Warner Bros., and Word. An investor group purchased Warner Music Group from Time Warner in 2004. One year later, WMG became the first stand-alone music company to be publicly traded in the United States.

EARLY HISTORY IN MOTION PICTURES

The Warner brothers—Jack, Albert (Abe), Harry, and Sam—were sons of Polish immigrants who arrived in the United States in the late 19th century. Their father, Benjamin Warner, made a living in the United States as an itinerant merchant. The family eventually settled in Youngstown, Ohio, where Sam Warner got a job operating a movie projector at a nickelodeon. When the nickelodeon went out of business. Sam persuaded his father to buy the projector, and the family started a traveling show. The brothers soon rented space in New Castle, Pennsylvania and opened a theater, with chairs borrowed from a funeral parlor.

The Warners' success in the theater business soon led them into producing and distributing motion pictures. With an ever-expanding base of operations, the men decided to establish a permanent headquarters in New York City. However, they were unable to make as many films as they wanted because of a lack of space and the poor weather there, so they decided to move the company's production facilities to Los Angeles. Harry was president and Abe was treasurer, while Jack and Sam assumed responsibility for running the studio in Burbank, California and making films. By 1917, the Warners were producing a string of slapstick comedies.

Warner Brothers also earned a reputation for making films that confronted social and political problems. Two of its earliest releases were Open Your Eyes, a semidocumentary on syphilis made in 1919, and another called Why Girls Leave Home. Other movies were made in the same vein, and each of them increased the reputation of the Warner Brothers as moviemakers.

When Warner Brothers released The Jazz Singer in 1927, it made movie history. Though the film was not the very first to use dialogue, it has gone down in history as the first "talkie," since it was the first talking film to reach a wide audience. Sam Warner had conceived the Vitaphone sound system used in the film, but he did not live to see the fruits of his labor; he died of a stroke 24 hours before The Jazz Singer premiered. Talkies were soon the rage across the country.

With Sam gone, Jack assumed complete control of the studio's production facilities and put Warner Brothers at the forefront of the movie industry during Hollywood's golden age in the 1930s and 1940s. The company was one of the five big film studios of the time (along with MGM, 20th Century Fox, Paramount, and RKO) turning out some 50 movies a year for distribution in its own theaters. In 1929, Jack created Music Publishers Holding Company in order to acquire music copyrights for use in films.

SUCCESS AS A FILM STUDIO

By 1930, the company owned nearly a fourth of all the movie theaters in the United States. During the 1930s, revenues from films began to skyrocket as Warner Brothers introduced Rin-Tin-Tin and Bugs Bunny, along with film biographies of prominent figures like Louis Pasteur and Florence Nightingale. Errol Flynn, too, became a household name during this time as a star in Warner movies like Adventures of Robin Hood and Captain Blood.

Warner Brothers became known as the quintessential "factory" studio from the mid-1930s through the late 1940s. Remakes were an important part of the assembly line approach to the production and distribution of movies. Plots, characters, and incidents were used again and again, sometimes transposed successfully from one genre to another—and sometimes not.

Despite this factory approach, many film historians maintain that Warner Brothers was the preeminent film studio in Hollywood during the 1940s. The company was showing some of the best movies ever made in its expanding chain of theaters. Such Humphrey Bogart classics as Casablanca, The Maltese Falcon, The Big Sleep, and The Treasure of the Sierra Madre were all Warner releases of the period. The company also maintained a prestigious stable of movie stars and directors, including Bette Davis, Edward G. Robinson, Olivia de Havilland, Claude Rains, John Barrymore, Lauren Bacall, James Cagney, Doris Day, Al Jolson, Frank Capra, John Huston, and Ernst Lubitsch.

The production of A Streetcar Named Desire in 1950 was a harbinger of the coming bad times for Warner. Neither Elia Kazan, the director, nor the stars, Vivien Leigh and Marlon Brando, were on standing contract with the company. Even worse, the photography director, the art director, the costume designer, and the composer were not Warner employees either. All were hired from outside the studio for that one film. As the assembly line, in which films were designed as vehicles for stars and executed by full-time employees, gave way in the 1950s to films crafted one by one, Warner's business began to suffer.

The company was affected not only by the rise of independent productions, but also by the advent of television and new postwar recreational patterns. Movie attendance dropped as the number of TVs in the United States rose dramatically. In addition, in 1949 a government antitrust action forced Warner Brothers, like all the other big film companies, to give up its theater chain. As a result, Warner suffered a severe financial and artistic decline throughout the 1950s.

COMPANY PERSPECTIVES

We intend to increase revenues and cash flow through the following business strategies: attract, develop and retain established and emerging recording artists and songwriters; maximize the value of our music assets; focus on continued management of our cost structure; capitalize on digital distribution and emerging technologies; develop and optimize our physical distribution channel strategies; and contain digital piracy.

Harry Warner died in July 1958 at the age of 76; his death seemed to symbolize the final passing of Warner Brothers' greatness. From then on, Jack ruled the company. He launched the company's foray into music in 1958 with the creation of Warner Bros. Records. However, the company continued its downhill slide. In the early 1960s, Jack produced Whatever Happened to Baby Jane? starring Joan Crawford and Bette Davis, both former Warner stars, in what Michael Freedland described in The Warner Brothers as "a magnum opus of bitchiness." Later, in 1966, Jack seemed to recapture some of the Warner Brothers' knack for hit movies with Elizabeth Taylor and Richard Burton in Who's Afraid of Virginia Woolf?

A SALE TO SEVEN ARTS IN 1966

In 1966, Jack decided it was time for him to leave the company. He sold all his shares in the company to Seven Arts Productions, Ltd., for $32 million. The new management asked him to stay on as an independent producer, and he was given the honorary title of vicechairman of the board. However, Seven Arts was not very interested in producing new movies; it was more interested in the money that lay in selling the television rights to Warner's movie library. Frustrated by his lack of control and saddened by the death of his brother Abe in 1967, Jack Warner left the company's Burbank studios in 1969. He died in 1978.

By 1969, Seven Arts movie production had virtually come to a standstill. The single bright spot for the company during this time was the purchase of Atlantic Records for $17 million in stock. Atlantic's creator and president, Ahmet Ertegun, was responsible for encouraging the proliferation of rhythm and blues in the mid-1950s with his recording of LaVern Baker and Clyde McPhatter. These artists, in turn, influenced the development of rock and roll. Warner had also purchased Frank Sinatra's Reprise Records in 1963.

STEVEN ROSS BUYS WARNER IN 1969

In 1969, Warner Brothers-Seven Arts was bought by Steven Ross. Ross had spent the late 1950s and 1960s assembling a conglomerate that included a funeral business, a parking lot operation, a car-rental agency, and a building-maintenance company. When he purchased National Cleaning Contractors, Ross decided to name his firm Kinney National Services, and Kinney became the parent company of Warner Brothers. However, by 1971 Ross had sold most of its holdings; that year he changed the company's name to Warner Communications.

Under Ross's direction, Warner's fortunes were revived. Woodstock was the company's first big hit in years, and was quickly followed by a popular John Wayne movie, Chisum. These films provided Ross with the money he needed to produce two of the box-office smashes of the 1970s: All the President's Men and The Exorcist. Ross then initiated a diversification program of acquisitions in the entertainment industry, including a toy company, a cable-television business, record companies, a paperback book publisher, and a magazine-distribution system. The company finished the 1970s with the two most successful movies of 1979, Superman and Every Which Way but Loose. By 1980, Warner's revenues had reached $2 billion.

The good times, however, did not last long. Warner had purchased Atari, the video-game and computer firm, in 1976 for the bargain price of $28 million. By 1980 Atari's revenues reached $900 million and provided Warner with a large percentage of its earnings. However, the video game market plummeted unexpectedly three years later. The resulting decline in Warner's stock price prompted a takeover attempt by an Australian media tycoon Rupert Murdoch.

Ross appealed to Herbert J. Siegel, chairman of Chris-Craft Industries, for assistance in warding off Murdoch's attempt. In 1983 Siegel agreed to buy a 19 percent share in Warner, and soon increased it to 29 percent. However, when Siegel became a member of the board of directors as his holdings increased, he and Ross began to disagree about the timing of asset sales and about what Siegel regarded as excessive overhead. Nevertheless, Atari was sold in the summer of 1984 for $240 million and the publishing division, which produced DC Comics and Mad Magazine, reached $16 million in operating profits by the end of 1984. But the company was still hurting from the Atari episode: in 1983 and 1984 Warner lost over a billion dollars after taxes and debt piled up to $841 million.

KEY DATES

1927:: Warner Brothers release The Jazz Singer.
1929:: Jack Warner establishes Music Publishers Holding Company.
1958:: Warner Bros. Records is created.
1963:: Warner buys Reprise Records.
1966:: Warner is sold to Seven Arts Productions Ltd.
1969:: Atlantic Records is acquired; Steven Ross buys the company.
1971:: The company's name is changed to Warner Communications.
1990:: Time Inc. acquires Warner Communications.
2004:: Warner Music is purchased by an investor group.
2005:: The company goes public as Warner Music Group Corporation.

RESTRUCTURING LEADS TO SUCCESS

For the next two years, Warner underwent an extensive restructuring program. By 1986, the result was clear— company revenues had climbed to $2.8 billion. The turnaround was sparked by box office successes such as The Color Purple and Pale Rider, the company's five-year licensing pact with Time Inc.'s Home Box Office (HBO; which gave HBO exclusive rights to all new Warner films and some library titles), recorded-music operations (with releases from Madonna, Paul Simon, Van Halen, Genesis, and other artists), and its cable-TV business, America's sixth largest.

However, the Ross-Siegel feud had become a familiar story to shareholders and media analysts. By the late 1980s the two communicated primarily through their attorneys. A particularly heated disagreement came in February, 1987 when the Warner board of directors gave Steven Ross a ten-year contract with a potential salary-and-bonus package of about $14 million a year. A furious Herb Siegel argued that no CEO was worth that kind of money; Ross's flamboyant style angered the cost-conscious Siegel as well. Rumors that Ross planned to take the company private to rid himself of Siegel, which had begun to circulate soon after the Ross-Siegel rift had first occurred, became more widespread. While the company continued its glorious comeback, however, the soured alliance remained intact.

In contrast to Ross's flashiness, Warner Communications maintained some of the most conservative business practices in the media industry. Chief financial officer Bert Wasserman maintained tight control over Warner's books. Unlike other large entertainment companies, Warner set aside reserves on its motion pictures prior to release. The company did not predict syndication on its television programs, but tried to recoup the entire cost of production through network licensing fees; if a program did achieve syndication, the resulting revenues transferred quickly to the bottom line. Wasserman's conservative practices gave Warner a degree of breathing room to execute its high-risk operations.

In February 1986 the company bought the other half of Warner Amex Cable from American Express for $393 million. Within two years, largely as a result of deregulation in the cable industry, the subsidiary was valued at between $2.5 billion and $3 billion; it had been an incredible buy. Box office hits such as Goonies, The Color Purple, National Lampoon's European Vacation, and two of the Police Academy movies gave the motion picture unit a solid performance. The expansion of ancillary markets like syndication and cable also provided strong earnings.

The Warner Records unit became the biggest label in the United States in the mid-1980s with stars like Prince, Madonna, Genesis, and Van Halen bringing in huge sums. Although CBS Records was still number one in total sales worldwide, Warner had the "hottest" stars—a crucial factor in the image-conscious music business. Strong music sales continued throughout the later 1980s and in 1989 Warner's record group became the world's largest.

In 1988 Warner began negotiations that culminated in its January 1989 purchase of Lorimar Telepictures for $600 million in stock. Itself the result of a 1986 merger, Lorimar Telepictures was one of Hollywood's most successful producers of television programming. Lorimar had produced such hits as The Waltons, Eight Is Enough, and Dallas, and its spinoffs Falcon Crest and Knots Landing. Telepictures was responsible for the immensely popular People's Court, and a number of animated programs, including Thundercats. After the 1986 merger of Lorimar and Telepictures, the new Lorimar Telepictures had gone on a buying spree, purchasing a diverse group of enterprises including ad agencies, publishing businesses, and TV stations. In 1986, the company bought the 44-acre lot of the legendary MGM Studios in Culver City, California, from Ted Turner for $118 million and renamed the studio Lorimar Studios.

While the company's television production unit was at the top of the industry, Lorimar's film production and distribution unit was not as successful—it had yet to score a hit by 1989. Warner's acquisition gave Lorimar Telepictures much needed liquidity. The deal was typical of the mergers sweeping Hollywood in the late 1980s as entertainment companies looked for strength in increased size.

THE TIME WARNER DEAL IN 1990

Although the Lorimar acquisition was big, it paled in comparison to Warner's next move. In March, 1989, Warner proposed a merger with the publishing and cable TV giant Time Inc. to create the world's largest media conglomerate, sending shock waves through the industry. The two companies planned at first to merge by swapping stock. In June, 1989 Paramount Communications Inc. (formerly Gulf + Western) threw a wrench into these plans when it bid $10.7 billion ($175 per share) for Time. Time rejected the bid and agreed to purchase Warner for $14 billion ($70 per share). Paramount sweetened its bid to $200 per share and took Time to court to keep it from buying Warner. But in July 1989 a Delaware court put an end to Paramount's ambitions when it approved Time's purchase of Warner.

The new Time Warner was a colossal entity. Once integrated, the new company was the nation's numbertwo cable TV operator in addition to controlling the largest pay service, HBO; the company's publishing group included magazines as diverse as Mad and Time, in addition to several major book publishing concerns; and Warner Brothers Pictures and the Warner Music group, were both leaders in their fields.

When the dust settled on Time Warner deal, Warner Music was left with a giant parent company and a host of problems. Changes in management and faltering sales plagued the company throughout the 1990s. Warner Music's market share tumbled as the company scrambled to sign new artists. In fact, its U.S. album market share fell from 20.9 percent in 1996 to 13.7 percent by 2000. To bolster Warner Music's business, Time Warner announced plans to merge the music business with the EMI Group. The deal was called off, however, after Time Warner announced its plans to merge with America Online Inc. The mega-deal that created AOL Time Warner was completed 2001.

Meanwhile, Warner Music continued to look for ways to bolster sales and profits. As sales of CDs continue to drop, the company needed to take advantage of new digital music offerings that appeared to be the wave of the future. During 2001, the company teamed up with EMI, BMG Entertainment, and Real-Networks to create an online music venture under the name MusicNet. It also acquired Word Entertainment, a Christian music label, in 2002. It soon became evident however, that many of the synergies that were expected to result from the multibillion dollar union of AOL Time Warner—including those related to Warner Music—had failed to reach fruition. Time Warner eventually removed the AOL portion of its name in 2003 and put Warner Music up for sale.

BRONFMAN BUYS WARNER MUSIC GROUP AND TAKES IT PUBLIC

Seagram Co. Ltd.'s former chairman Edgar Bronfman, Jr., and a team of private equity investors including Thomas H. Lee Partners made a play for Warner Music Group (WMG) in 2004. By this time, the company had lost nearly $8 billion over the previous three years and was struggling to keep pace with the changing marketplace. Bronfman, however, eyed WMG as a potential success. "The delivery of music digitally to computers or across wireless platforms represents and great opportunity for the industry and for consumers," he explained in a May 2004 Billboard article. Bronfman was able to sell his vision for WMG to several investors and the $2.6 billion leveraged buyout was completed February 2004.

After the buyout, Bronfman immediately set plans in motion to cut costs and revamp WMG's operations. Over 1,600 jobs were cut and 375 artists were let go. As the company prepared to go public as Warner Music Group Corporation, several artists—including Linkin Park and Kid Rock—began to complain about Bronfman's actions, claiming that while Bronfman and his team of investors were lining their pockets, funds necessary to promote artists' records were being cut. Nevertheless, the initial public offering went on as planned and raised over $554 million in May 2005. The company eventually mended fences with Linkin Park.

Lyor Cohen was tapped to lead WMG's U.S. recorded music operations in 2005. Under his leadership, the company entered into a joint venture with Sean "P. Diddy" Combs' Bad Boy Records label. WMG also worked to shore up revenues and profits in its retail business as well as capture new digital business via individual song tracks, ringtones, and video downloads. On the international front, the company expanded its mobile music offerings in China, South Korea, Japan, Russia, and South Africa.

Meanwhile, WMG continued to eye a possible merger with EMI Group. The two companies first tried to strike a deal in 2000 but plans were thwarted when Time Warner dropped its bid in favor of the AOL deal. Since that time, WMG had tried to gain access to EMI's two major labels, Capitol Records and Parlophone, which produced and distributed music by artists such as Coldplay, Norah Jones, and the Beatles. An offer was made in 2006 but private equity group Terra Firma Capital Partners Ltd. launched a higher bid in the spring 2007. While the future of a possible EMI and WMG union remained up in the air, improvements in revenues and profits led management to believe that the Warner Music Group was on track for success in the years to come.

Updated, Christina Stansell Weaver

PRINCIPAL SUBSIDIARIES

Warner Bros. Records Inc.; Warner/Chappell Music Inc.; Wea Corporation; Word Entertainment; Warner Music International; Rykodisc; Rhino Entertainment; Independent Label Group; The Atlantic Records Group.