October 16, 2003

Record Company Woes [7:41 am]

I taped a lecture for a University of Cambridge class on the economics of distribution networks that included a discussion of industry restructuring and consolidation in the face of a changing technological climate for record companies. Here’s an example from today’s NYTimes: Universal Music to Cut Jobs as Industry Slump Lingers [pdf]

The Universal Music Group, the largest music company in the world and home to acts like U2, Eminem and Mariah Carey, is expected to announce a restructuring Thursday that will eliminate 11 percent of its work force.

In the next several months, 800 jobs will be cut across all of Universal Music’s divisions, according to company executives. Combined with the 550 jobs trimmed earlier this year, Universal Music’s work force will shrink to 10,850 people. Executives said the cuts would eventually save the company $200 million a year.

[...] Universal Music is not the first of the five major labels to refocus its business. Earlier this year, Sony Music Entertainment said it was laying off 1,000 people after several quarters of losses, and it hired a new chief executive from outside the music business. (The new chief, Andrew Lack, was a top executive at NBC.) Last year the London-based EMI Group cut 1,800 people, 20 percent of its staff. And the Warner Music Group has also restructured its business, while its parent company, Time Warner, weighs a sale or merger with either EMI or the BMG unit of Bertelsmann. The sale of a controlling interest to EMI for about $1 billion in cash appears to be the most likely outcome.

Although many analysts and industry executives say they believe that further global consolidation is necessary, those financial benefits can go only so far. In September, Vivendi Universal said its music group had an operating loss of $48 million for the first half of the year, attributing the results to the decline in the dollar and increased file sharing.

[...] “The moment for the outrageous deal has gone the way of the dinosaur,” said Doug Morris, chief executive of Universal Music.

For an industry that has built a business model around finding/creating a single home run to carry the bulk of its money-losing product (remember, a CD breaks even only after 500,000 units sold), it’s about time!

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