Talks With EMI on Warner Signify That AOL Could Bow Out of the Music Business

By Jeff Leeds

Sept. 30, 2003 12 AM PT

Times Staff Writer

Almost 40 years ago, the fledgling record label started by Hollywood film mogul Jack Warner tuned in to the future of music: the emerging rock revolution of the mid-1960s.

After hearing the single “You Really Got Me,” rookie label chief Mo Ostin personally signed the Kinks, tapping Britain’s exploding music scene. Favorable buzz then prompted Ostin’s Warner Bros./Reprise Records to take a flier on a little-known guitarist named Jimi Hendrix. Before long, the record labels that formed Warner Music Group were on a countercultural ride to the top.

But for top executives of modern-day AOL Time Warner Inc., the new direction in music may be toward the exits.

For months, AOL Time Warner was locked in exclusive talks with German media conglomerate Bertelsmann about merging their recorded music businesses. In recent days, however, those discussions began to sputter as the two sides couldn’t agree on what their assets were worth. So now, AOL Time Warner is considering a new dance partner: Britain’s EMI Group.

Unlike the prospective Bertelsmann deal, which would leave AOL Time Warner with a 50% stake in a major record company and a central role in the entity’s day-to-day operations, a transaction with EMI would mean that AOL effectively would be bowing out of music management. Under the terms being considered, AOL Time Warner would be left with only a 25% piece of a combined EMI-Warner and little if any operating control.

The possibility that the label’s parent company may no longer be part of the music scene after 36 years is the latest -- and in some ways most dramatic -- sign of turmoil in an industry that has been plagued by piracy and a three-year sales slump. AOL Time Warner executives have indicated that they don’t know when the industry may touch bottom -- and they aren’t taking any chances.

“It’s legitimate for the management to ask themselves whether the amount of energy it’s going to take to fix the music business is really worth it,” said Tom Wolzien, a media analyst with Sanford C. Bernstein & Co. That’s especially true, he added, when the parent corporation also has big problems at its online unit, is saddled with more than $20 billion in debt and generates only about 1% of its total cash flow from its recorded music division.

Yet for many of those who remember Warner Music’s headier days, the idea of its owner bailing out on the record business marks a sad turn of history. Some suggest it also could be a strategic error.

“Selling the music company right now is undoubtedly a huge mistake that they will regret for decades,” said Fred Davis, an entertainment attorney whose clients work for various major labels. “To divest a content area because of overriding corporate considerations is a policy that is contrary to what made Time Warner a great company” with a hand in film, television, books and music.

Bob Krasnow, the former chairman of Warner’s Elektra label, agrees that AOL Time Warner should display more faith that the music industry will turn around soon.

Dropping music “is the cowardly way out,” said Krasnow, who nurtured such talent as Metallica, the Cure and Tracy Chapman before resigning in 1994 in a power struggle with Time Warner brass. “This is the way out for people who don’t get it.... I’ve watched in my career the death of the radio business, the death of the TV business. I’ve seen the death of the book business. They all died and came back stronger than ever.”

Warner Music itself is showing signs of mounting a comeback.

In the last six months, the company has leaped from fourth place to second among the five major record labels in sales of new releases in the United States. On the strength of hits from such diverse acts as Linkin Park, Sean Paul and Jason Mraz, Warner Music has captured an estimated 17.8% share of new sales, surging past Sony Corp.’s Sony Music Entertainment and Bertelsmann’s BMG, according to Nielsen SoundScan data.

This surge, though, has apparently done little to convince AOL Time Warner higher-ups, including corporate entertainment chief Jeff Bewkes, that the music division is worth hanging on to.

If anything, some say the uptick makes this the perfect time to unload the operation. “If you’re going to sell it,” said Wolzien, the analyst, “you’re better off doing it when it’s up.”

Representatives for AOL Time Warner declined to comment on the music division while talks with Bertelsmann and EMI are underway.

Though many Warner Music alumni are distressed at the notion of seeing their old company let go, some are resigned to such a move. AOL Time Warner’s willingness to abandon music, they figure, simply reflects the cold corporate culture now prevalent in a business once full of maverick entrepreneurs.

“Look at Disney,” said Ed Rosenblatt, the former chief of Geffen Records, a Vivendi Universal label that once was affiliated with Warner. “The Angels won the World Series, and six months later they sold them. Some tool-and-die company wants to get rid of their ball bearings business. That’s all it is.”

Added Jerry Wexler, the legendary record producer who once ran Warner’s Atlantic Records with co-founder and current co-chairman Ahmet Ertegun, “There’s nothing sacrosanct about corporate continuity.... Everything is for sale. It depends on the price.”

Should Warner Music be jettisoned, it would spell the end of an era for a label that has seen not only its share of hits but also its share of chaos.

The company’s family of labels had enjoyed close ties with their corporate overseers under the long reign of late Time Warner Chairman Steve Ross. But those relations began fraying soon after his death in 1992, and a parade of top label executives -- including Ostin and Krasnow -- either quit or were shown the door amid infighting over succession and cost cutting.

In the mid-1990s, Time Warner assigned HBO division chief Michael Fuchs -- then considered a strong candidate to become chief executive of the parent company -- to stabilize the music business. But the problems continued as Fuchs dismissed the division’s top U.S. management and unloaded its interest in controversial rap powerhouse Interscope Records before himself being ousted.

Many label executives pushed out during this period went on to bolster the fortunes of competitors. The exodus, which shattered morale and the company’s credibility in artist circles, resulted in a rapid erosion of profit and market share. That paved the way for onetime laggard MCA Inc., predecessor to today’s Universal Music, to take shape as the industry’s leader.

In 1999, Time Warner turned to Roger Ames, a respected industry veteran who had headed Polygram’s international music division. He bet big on the music business by forming an alliance with EMI under which Warner would be the controlling partner. Regulators scotched that deal, citing antitrust concerns.

Now, the regulatory landscape has changed, making it more likely (though far from certain) that an EMI-Warner marriage will come to pass.

“I can understand that people who aren’t comfortable with this business might feel comfortable if they didn’t have to deal with it anymore,” Jac Holzman, founder of Elektra Records, said of AOL Time Warner’s exit strategy. But rather than ditch the music company, he would opt for a different path.

“I’m a music guy,” Holzman said. “I would roll up my sleeves and try to make the group work.”