ANDY LACK FACES THE MUSIC
By Patricia Sellers

(FORTUNE Magazine) – This year's merger of Sony Music and Bertelsmann's record business created the world's No. 2 music company (behind Universal) and a new challenge for CEO Andy Lack. The risk-loving Lack, 57, joined Sony Music in 2003 from General Electric, where he had run NBC News and then the entire network. At Sony, Lack took charge from legendary Tommy Mottola, who was forced out amid runaway costs and mounting losses. The new entity, Sony BMG, gives Lack a strong platform with such hot artists as Usher, Jennifer Lopez, and Beyoncé, plus classics like Bruce Springsteen and Elvis. In his elegant office at Sony's Manhattan headquarters, Lack talked about his woes and opportunities with editor at large Patricia Sellers.

What message did you send when you arrived?

I had to take our guys and remind them, "We're losing about $240 million a year." Yet every person I met said, "We're doing pretty well. We're making some money." I'd say, "Where is it? Show it to me." P&Ls often didn't account for the real costs. The most surprising thing to me was to find that, even though a record company is in business to find new artists, our pipeline was thin all over the world. Our basic reason for being was fragile. One of the drivers of the merger was to fatten the pipeline.

Now you have better artists. You've cut 1,000 jobs and are expected to eliminate 2,000 more to stay profitable. But isn't the industry still really sick?

The industry has lost close to $10 billion in annual revenues--going from $40 billion to $30 billion. In the U.S. it has probably found the bottom. In America we're down 4% this year. Parents are clamping down on illegal file-sharing. Education is working. Lawsuits are working. But what happened in America is now happening internationally. France and Spain and Germany will see substantial revenue declines this year because piracy is really hitting them. Latin America is a mess. There's no profit in Asia.

How do you get your arms around piracy?

We've got a new technology called Snocap, developed by, of all people, [Napster founder] Shawn Fanning. He's met with all the record companies. Others are developing similar technologies--software that can filter the abuse and stop people from stealing. It will be a game changer. Peer-to-peer services have said, "We can't control this. We're really sorry." No more "sorry"! We will challenge the services. If they're breaking the law, they'll go out of business.

Okay, but how do you grow? Apple rules legal downloading. Can you get a piece of the digital profits?

Digital music is now 2% of our revenue. In five years it could be 20% to 25%. Sony has a product coming next March that will be the 21st-century Walkman. It's a handheld PlayStation, but you can also listen to music and watch films on it. Also, Sony BMG and Warner Music have been working on the DualDisc, a music CD on one side and a DVD on the other. It's just gone into the market. We also need to develop programs with our music that put our audience in closer touch with our artists. We're partners in one of the hottest shows in Britain, called The X Factor. We have the rights to all the artists who emerge from that show, and we have 50% of The X Factor's TV rights in the U.S.

So Mr. NBC wants to produce TV shows. Would you dare go up against MTV?

We've been approached by partners. We wouldn't do it with another record company. I'd partner with a distributor. What about a music channel online--produced by an MSN, a Yahoo? Whether it's a DirectTV or a Comcast or a Yahoo, they're saying, "Hey, you have content." I don't know, but it's the most exciting damn thing to think about.