Warner Music the Remix
CEO Edgar Bronfman's effort to adapt a storied label for the digital age could provide a blueprint for the salvation of the recording industry--and of the reputation of one of America's most intriguing moguls.
By Paul Sloan, Business 2.0 Magazine editor-at-large

(Business 2.0 Magazine) - The lights were dim. Scented white candles guttered and glowed, arrayed around a towering arrangement of white flowers that were themselves encircled by chairs draped in white linens. Madonna was in the house.

The house in this instance was a conference room at the New York headquarters of Warner Music Group (Research) last June, and despite the efforts to set the mood, the vibe was anything but relaxed. CEO Edgar Bronfman Jr. and a handful of top Warner executives had gathered to hear Madonna's as-yet-unreleased album, Confessions on a Dance Floor.

Bronfman was particularly edgy; Madonna's last record had bombed, and the onetime undisputed diva, now 47 years old, seemed perilously poised between one last shot at clawing back into the limelight or sliding further into faded stardom--and, more to the point for Warner, commercial oblivion. Yet as he listened, Bronfman was relieved, then thrilled. Track after track sounded like classic Madonna, the kind of music that had made her a global superstar, selling roughly 200 million albums for Warner over her career. When the CD ended, Bronfman stood up, turned to Madonna, and said, "You are our queen."

The moment was more than the beginning of one pop luminary's comeback. It may ultimately be looked back on as the moment when the recording industry, so baffled for so long by all things digital, started to get its own act together. With Confessions, Bronfman and his lieutenants put an entirely new way of selling music to the test. It involved not just traditional marketing--most notably a campaign with Motorola to promote the Rokr phone--but also a string of digital firsts.

Warner teamed up with France Telecom (Research) and other carriers to release a ringtone of the single "Hung Up" a month before the song was released. The impact was swift: In France, for instance, so many fans downloaded the 20-second tune to their phones that DJs, unable to get their hands on the CD itself, began broadcasting the ringtone on radio. The ringtone release also helped draw in a younger audience. Then, instead of releasing the entire album at once, Warner let France Telecom's Internet customers and iTunes users download the single if they preordered the album. It also sold the single along with a video and, with the official release of the album last November, offered a digital dance-mix version in which all the tracks blend together.

The upshot? All variations of Madonna's release jumped to the top of the charts--in the physical world as well as the digital. Remarkably, this happened as Confessions got less than half as much radio play as releases from other top artists, according to Warner research. Even more encouraging for Warner was that many fans paid $3 extra to download the video from iTunes along with the album. Now, just four months after its release, Confessions has sold more than 7 million CDs worldwide, generating by analysts' estimates roughly $100 million for Warner--and that doesn't include the tens of millions in additional revenues from digital downloads.

Confessions wouldn't be such a smash if Madonna hadn't once again created something that connected with a global audience. But the clever ways in which Warner has exploited digital possibilities have established the company as a leader in aggressively rethinking the music industry and have laid out the beginnings of a blueprint for how the entire business may save itself from oblivion in the iPod age.

The industry's overall sales continue to sag as consumers abandon traditional CDs for the mix-and-burn digital world, and Warner is no exception: Its first-fiscal-quarter revenues were off 4 percent. But Warner has captured an outsize portion of the growing digital pie, commanding 17 percent of the CD market in the United States but an almost 23 percent share of the sale of digital albums. EMI, with 10 percent of the U.S. digital-album market, is the only other major to have a greater digital presence than physical. Moreover, while Warner's digital revenues are still modest--$69 million in the first quarter--digital is by far the fastest-growing aspect of its business, up 30 percent from the fourth quarter.

By 2010, some analysts estimate, Warner's digital efforts should generate roughly $1.4 billion a year and make up about a third of the company's revenues. "Edgar is willing to experiment and not to be tied to old rules," says longtime friend and former colleague Barry Diller, CEO of InterActiveCorp (Research). "He took a company most people thought was going to lose its entire base and has rebuilt it brick by brick."

Warner's quest to conquer the digital world still faces any number of threats, from heavyweight rivals to quirks in consumer taste to music pirates. But, for the moment, Bronfman appears to have succeeded in infusing an encrusted organization with new entrepreneurial zeal and creativity, and his progress has the makings of an impressive corporate turnaround--and an equally impressive personal one. Bronfman has been a controversial figure in American business, and when he put together a group of investors to buy the business from Time Warner (Research) in 2003 for $2.6 billion, it was widely derided as a here-he-goes-again move.

Bronfman was still stinging from his last big gamble when, at the height of the dotcom bubble, he sold the family business, Seagram, in exchange for a large stake of what became Vivendi Universal (Research). The deal quickly soured, the Vivendi stake lost billions in value, and Bronfman's efforts to buy back some of the assets, including his prized Universal Music, failed. If he can transform Warner into a digital power, what he likes to call a "music-based content company," Bronfman, now 50, will have remade a checkered record as a strategist and manager.

The flip side, of course, is that if he fails, both Warner and Bronfman's reputation as a businessman will simply fade out.

To some degree, Bronfman's digital bet on Warner music looked no less risky than selling to Vivendi. Under Time Warner, the parent of Business 2.0, the company suffered years of declining sales, repeated layoffs, and constant management upheaval. Ultimately, under pressure to pay down debt and regroup after its costly merger with America Online, Time Warner gave up on the money-losing music business entirely.

Bronfman swooped in and cleaned house, cutting more than 1,000 jobs. The digital team that Bronfman inherited had laid some important groundwork; it was, for instance, responsible for persuading other music labels to work with Apple's iTunes digital store. But, overall, the business was a bureaucratic mess. Infighting was rampant, communication between divisions rare, and key people--whether the digital strategy group, those in the publishing business, or artist and repertoire (A&R) people working with the musicians themselves--operated almost as independent agents.

The approach wasn't a problem when the role of a music company was to sign acts, make albums, and promote them. But in the post-Napster world, a company composed of lone wolves wouldn't stand a chance. Bronfman wanted everyone to embrace digital and all its possibilities, and he restructured the company to embed digital in everything Warner did. "The silo approach served the company well in an era of growth and static channels," Bronfman says. "It was a disaster for the digital age."

Bronfman began with some basic changes, even in office arrangements. He set up the company so that the heads of all the divisions worked on the same floor at Warner's global headquarters in Manhattan. The CEO of Warner/Chappell, the company's publishing unit, had always been based in Santa Monica, for example, and rarely had anything to do with the labels. The label guys made their bonuses getting albums out the door and up the charts, after all, not by worrying about various rights deals. But since new deals had to be struck as new devices emerged, Bronfman reasoned that for Warner to become nimble, breaking down that wall was critical. Now the publishing business often tries to sign acts right alongside a label.

Then, to ensure that all of Warner's labels were on the same digital page, Bronfman created a position that would oversee all recorded music in the United States. He filled it with a giant in the business: Lyor Cohen, an entrepreneurial whiz who began his career as a road manager for Run DMC and went on to head what's now Universal Island Def Jam. Bronfman also hired his investment partner and brother-in-law, Alex Zubillaga, to run Warner's digital strategy team. Zubillaga, who in the mid-'90s built a cable company called Netono in Venezuela, came with no music industry experience, something Cohen calls a blessing in an industry that's "stuck on stupid."

While Zubillaga comes free of bad habits, Cohen comes with loads of respect throughout the industry. And they have drilled the digital message into all levels of the company. In October 2004 they brought the company's 50 or so A&R execs together for a first-of-its-kind gathering to teach them, as Cohen puts it, to stop thinking of themselves as "sonic Indiana Joneses" and instead seek all sorts of extra material for various digital outlets.

They even showed up unannounced at a video shoot for Rob Thomas's "Lonely No More" to do some hands-on evangelizing. Cohen and Zubillaga were going to a dinner in Los Angeles one evening in February 2005 when, to Zubillaga's surprise, Cohen instructed the driver to head to the set. The two execs chatted folks up, then pulled the director aside, turned the camera on him, and asked him about the video. They interviewed the manager and the women dancing. They asked Thomas about cell phones. It was the sort of behind-the-scenes material that doesn't automatically get shot but that Cohen and Zubillaga want the troops to see as a critical part of every music video. "You can come up with an idea, but you've got to take it down to the people," Cohen says.

Most Warner acts get similar treatment now. From the outset of an album's conception, the label heads, the band, the producer, a group of digital execs, and the marketing team all figure out what extras they can create and potentially sell--on the Internet, via cell phones, through some yet-to-be-determined partner. When Warner meets with a potential wireless partner, for example, the Warner side of the table is lined with people responsible for every part of the process. The upshot is that deals get done fast. Says Paul Reddick, VP for business development at Sprint Nextel, which has music agreements with all of the four majors, "These guys are superprogressive."

Warner began adding video and other digital extras to a handful of its albums on iTunes last May. It's a nascent approach, and currently iTunes is the only service in the United States with the capability to sell video downloads along with music. But Warner's efforts are far ahead of those of its rivals; through mid-February the company had sold 40 so-called premium-priced bundled albums, those served up with digital side dishes. All other music companies combined had sold 26, according to data compiled by Warner.

The early results of the bundling experiment are promising. Warner has found that when it adds material, customers are more than twice as likely to buy the entire package instead of a track or two at 99 cents. The version of Confessions that's selling best, for instance, is also the most expensive--the $12.99 bundle that comes with the video and a digital booklet with photos and extra tidbits.

In the week after the release of Depeche Mode's Playing the Angle, 92 percent of its digital sales were for the full album, which came bundled with a digital booklet and a code to receive priority access through Ticketmaster to buy concert seats. Sell the music simply as a digital CD with no extras, the company is finding, and people are more likely to purchase by the track--or potentially grab it for free. "We're going to be on the cutting edge of innovation," Bronfman says in a rare boastful moment, "regardless of whether the rest of the industry is following on our heels or not."

Armed with evidence that bundling sells, Warner has been urging Amazon.com (Research), AOL, Microsoft (Research), Napster (Research), RealNetworks (Research), Yahoo (Research), and a slew of others to figure out how to offer such packages, especially since portable devices that play music from subscription services--and that aren't called iPod--are getting better and better. "Not only will consumers want this, but they'll pay for it," Zubillaga argues. In fact, he says, his main frustration in general is that the technology isn't yet up to speed: "We have this wealth of material to make money off of, but we don't have the devices, the networks, the platforms to get it out there."

The outlets will increase, Zubillaga says, as more powerful devices hit the market and all sorts of companies embrace the potential of digital music. In January, for instance, Warner partnered with Skype, the Internet phone service owned by eBay (Research), to sell ringtones to its 75 million registered customers. Bronfman, Cohen, and Zubillaga have held several meetings with Amazon CEO Jeff Bezos, and Warner, along with other studios, is expected to be a major partner as Amazon rolls out its digital-media store.

Google (Research), too, has met with Warner folks, as recently as January. Bronfman says Google is figuring out what its music business model would look like. (A Google spokesperson wouldn't comment about potential products, saying only that Google currently has no plans to open a music store.)

Moreover, plenty of new markets exist, some of which can first be seen overseas, where networks are much more powerful and consumers are far more accustomed to using cell phones for video and music. In December, for instance, Warner teamed up with Japanese telecom KDDI and began selling mobile bundles--a package of audio, video, graphics, and text in a single downloadable file.

The Warner digital team then took the idea to Sprint (Research), which launched its own music store at the end of last year. "Alex [Zubillaga] will come to us and say, 'Why not sell a package of two ringtones, three tracks, and four video clips?'" says Sprint's Reddick. Sprint doesn't have the systems in place to do that right now, but "we're working on it," Reddick says.

Warner is also preaching to the cable and phone companies about ways to sell "ring back" tones for the home. Just as is possible on cell phones, someone could assign a song to a specific number that would play each time that person called. Here, too, the service is beginning elsewhere first. France Telecom recently introduced ring-back service for its Internet phone users. "This will be an important market in 2006," says Patricia Langrand, executive vice president for content at France Telecom. "And we start everything with Warner."

All these possibilities--and plenty not yet thought of--are why Bronfman remains convinced that the music business is ripe for growth, even though it will also be in a state of constant flux. "I don't think there's anything here--with the exception possibly of addition and subtraction--that isn't going to change," he says, sitting in his wood-floored office that has the feel of a Soho loft.

Ultimately, he emphasizes, the potential audience for digital music is vastly larger and far more attractive than that for the traditional record business ever was. "Instead of worrying about the 1 million or 2 million people who may or may not be walking into the 10,000 or so record outlets in the United States, I now have an installed base of somewhere between 30 million and 40 million iPods, however many additional MP3 players, the coming cell phones, portable devices, and on and on," he says. "And if I can get each of those people to buy a little music, this industry is going to do just fine."

It all sounds logical, but there's still a long way to go. The digital portion of Warner's revenues reached 7 percent in the company's most recent quarter. Overall profits are improving, though, since the margins on digital are fatter than for physical CDs; net income doubled in the latest quarter to $69 million. Most promising, Warner's digital growth picked up enough momentum that in the last quarter it made up for the drop-off in CD sales. "Replacing the physical has been the name of the game," says Bishop Cheen, a debt analyst with Wachovia Securities. "Now the hard part is really making it grow."

Yet the digital story remains a tough sell on Wall Street, since big profits are still several years off--and might never materialize. Moreover, the majors' role could dwindle because Web-empowered artists can get their music out by themselves. Those threats are a major reason why Wall Street hums with almost constant speculation that Warner will eventually have to bulk up by merging with EMI--something the companies tried to do twice prior to Bronfman's arrival.

Not surprisingly, Bronfman waves off such talk as a distraction. His effort to transform Warner, he says, will take years--and will shape his legacy. There are skeptics who still dismiss Bronfman as a dilettante so enamored of Hollywood and the glitzy music business that he simply bought his way in. He once acknowledged, after all, that some people think of him as part of the "lucky sperm club." How else could he forgo college and pursue a career writing songs (Dionne Warwick and Celine Dion have recorded his tunes) and producing movies (he made The Border with Jack Nicholson), only to be handed a corner office at Seagram?

Yet these days Bronfman certainly doesn't come across as a guy eager to hang with the beautiful people. In fact, when he arrived at Warner's party after the Grammys in Los Angeles, his approach to working the room was hardly mogul-like. After he made his way past the slinky women handing out champagne and around the packed dance floor, Bronfman strolled out onto the crammed balcony and nestled between two potted acacia trees. "I'm hiding," he said only half-jokingly while making small talk. From there, he chatted with a few celebs--Kevin Spacey, the guys from Green Day--mingled with co-workers, and, long before the party slowed, slipped out a side exit.

The partying that's part of this business isn't what Bronfman is about. What turns him on is the stuff of management books--"I love building teams," he says--and music itself. His current passion is an up-and-coming British singer-songwriter named James Blunt.

When Bronfman was in London in January 2005 watching videos of Warner International acts, he was struck by a raw clip of Blunt singing a song called "High." Bronfman was blown away--by the song itself, by Blunt's unusual voice, and by his magnetism. Blunt's backstory didn't hurt; he's a former British soldier who served in Kosovo and elsewhere. Bronfman reached for his BlackBerry and fired off an e-mail to Cohen back in New York. "James Blunt is a star," he typed.

Blunt's album, Back to Bedlam, was the top seller in the United Kingdom last year, and Atlantic was preparing to promote it in America. But with Bronfman's personal endorsement, there was no doubt that the 29-year-old Blunt would win the full Warner treatment, complete with street-marketing campaigns, digital videos, and ringtones, plus a handful of tieins with television shows. After Blunt appeared on Saturday Night Live, Atlantic's marketing team launched a keyword campaign on Google to ensure that Web surfers typing in names of Blunt's songs would find information about the singer.

The night before the Grammys, Blunt made his first-ever L.A. appearance at the House of Blues. When he and his four-piece band took the stage, the jam-packed room went wild. Up in the balcony, Bronfman perched on a stool and leaned against the railing. His arms folded, he showed little expression, but every now and again he looked almost blissful--eyes closed, body swaying to the beat.

The VIP floor was abuzz with praise for Blunt at the end of the concert. One passerby patted Bronfman on the back and said, "You must be happy." Bronfman smiled and responded, "I'm a very happy man." The next day Blunt's album hit No. 9 on the Billboard charts--great news for the company, since Blunt has just launched his first-ever U.S. tour as the headline act.

"Translating a European artist is not a slam-dunk by any stretch of the imagination," Bronfman says. "But I honestly believe James is someone who we'll be writing and talking about five albums from now, even eight albums from now." And if that happens, and if Bronfman's business bet is as spot-on as his musical bet, perhaps the next time he and Madonna are hanging out among scented candles, they'll be raising a glass not to her comeback, but to his.

Paul Sloan is an editor-at-large at Business 2.0. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.