From: Bob Davis (earthjuice_at_prodigy.net)
Date: 2005-03-03 14:25:13
I didn't write this.
However I have certainly been illuminated by reading the way that Ritch Esra has connected the
dots together.
Read this if you are truly interested in understanding just why the the music industry is
currently in the state that it's in and why artists today are so willing to forgo affiliation
with record companies.
(corporate greed)
Read this if you want to understand exactly why INDEPENDENT artists and labels are going to
flourish and why we need to support them. Be sure to pass it along if you also want others to
understand as well...
Here links to NEW music from two such artists (one you know, the other you are going to know)
1. Chi-Lites:
http://www.soul-patrol.net/chilites2005.ram
<a href=" http://www.soul-patrol.net/chilites2005.ram "> New Soul/R&B From The Chi-Lites </a>
2. Krush
http://www.soul-patrol.net/krush.ram
<a href=" http://www.soul-patrol.net/krush.ram "> New Soul/Funk/Jazz From Krush </a>
Delete this if you would like to see things go back to "the way they used to be"...
-------------------------
Commentary
In these times of major label mergers, downsizing, the slashing of label rosters, and
thousands of record company jobs being lost over the last three years--not to mention the
enormous sea change and seismic shifts that technology has wrought--comes one of the most
disturbing reports we have come across. It further reveals just how profoundly out-of-touch
certain companies TRULY are when addressing the problems within their own record divisions.
The Financial Times reported 'Warner Music, paid its top five executives more than $21m in
salary and bonuses following last year's $2.6bn acquisition of the US music group by a private
equity consortium.' The article continues that of the top management, Edgar Bronfman Jr, the
Chairman who led last year's buy-out, received a $1M salary and $5.25M bonus. Lyor Cohen, head
of the US recorded music business, received $1M and $5.24M in salary and bonus, respectively.
Paul Rene Albertini, head of Warner's international operations, was pai d $1.25M in salary and
a $3.15M bonus. Departing Warner/Chappell CEO, Les Bider, received a $2.44M total payment.
These payouts include further guaranteed bonuses or change of control payments. According to
documents filed with the U.S. Securities and Exchange Commission, last year's total executive
remuneration was more than three times higher than Warner Music's $7M operating income for the
10 months to September 30th.
The management payments reflect Warner's success in cutting costs following last year's sale
of the Music Group by Time Warner. The company expects to deliver $250M of annualized savings
by May this year, achieved mainly through 1,600 job losses. What is so truly disturbing here
is that it speaks volumes about the value system of an owner of a company that would pay its
top-five Record Executives more than three times the amount of operating income for a
ten-month period while dismissing 1,600 employees.
What the article failed to mention was that in addition to the employee layoffs, Warner Music
Group also dropped 93 of the 193 artists signed to Warner Labels in the US, approximately 47%
of the artist roster during this same period. If the financial health of a company is truly so
dire that it calls for these kind of dramatic and severe cuts for the financial well being of
the company, how does one justify the kind of staggering bonus payouts to the top five
executives in the company? Don't get us wrong, we have no problem with executive compensation
when it's tied to actually rewarding performance, but in this case, one is truly hard pressed
to grasp or to understand what is actually being rewarded. The claim that the Warner Music
Group will save $250M of annualized savings mainly through the decimation of 1,600 jobs is not
something that we think should be financially rewarded.
On Feb 11th at the Grammy Foundation Entertainment Law Initiative luncheon in Los Angeles, WMG
Chairman Edgar Bronfman said to the 460 luncheon guests, "We must employ our creative
imagination – and we must resist the temptation to conduct business as we always have – by
experimenting with new approaches, new structures and new relationships, so that we can move
more quickly and appropriately respond to the ever-changing marketplace." He went on to
request that music attorneys bring a new level of creativity to the deals they forge. "Your
willingness to join with us is critical to the success of our industry."
We truly wish he had "resisted the temptation to conduct business like we always have" and not
given so much to so few while so many went without. In business, as in life, you lead through
example. Mr. Bronfman, with all due respect, you need to have to have your own house in order
before you have the credibility to make a request like that to the creative and legal
communities.
In an open letter to Warner Music Chairman Edgar Bronfman, Carlos Anaia, a five-year Warner
Music Group employee in London who was leaving the company wrote, "We understand that you took
on a huge task to turn around the ailing, forgotten division of AOL Time Warner, but informing
the already morale-drained staff (via a third party – The Financial Times) that the salary and
bonuses that the top five executives took individually equal more than 20 times my total
lifetime salaried income (assuming I started at 18 and retired at 60), is somewhat more than
insensitive. If you want to make us feel like maggots, you succeeded. Paul-Rene Albertini gets
paid $4 MILLION in total ? Hello!!? The only deals we are all aware of have all LOST money.
Walt Disney Records? It's still more than $15 million unrecouped. Milan Records? A French
turkey. Need I go on? What deals has this guy done that actually MADE money?"
Throughout Ritch's own career in the music business, and especially in the last ten years, he
has always been fascinated by the extremely disproportionate amount of money paid to CEOs in
the Entertainment Business. Being in the music business for twenty-five years, we've seen
Major Label CEO salaries/benefit packages go from $200,000.00 - $500,000.00 in salary and
bonus payments in the mid 1980's to literally ten-times that amount, and more, just eight to
nine years later for the same job. Throughout the 1990's, the amount of money and compensation
paid to CEOs and other top executives at film studios and major labels continued to reach new
levels of financial absurdity, especially in the area of severance packages (the part of their
contract that kicks in if they are fired or "leave the company for any other reason"). You
want to know how absurd it's gotten? It's to the point now where if you really stop and think
about it, there's no real incentive for CEO's to try and s ucceed anymore, other than ego
(which we do not underestimate as an extremely powerful and driving force in this business).
Why? Because today, we live in an era where more often than not, contractually the
consequences of failure for a CEO have become far too financially lucrative! If you don't
believe us, look back over the last ten years and think about all of the labels that have had
regimen changes such as when EMI made Charles Koppelman CEO of its music division only to have
the entire EMI label close down a few years later with over 135 employees losing their jobs
(many with just a two week notice) while Koppelman exited with well over $30M along with other
contractual compensation. Consider also the revolving door of CEOs appointed Gerald Levin
(CEO/AOL Time Warner) to run Warner's music division in the mid 90's. Between 1994 and 1998,
Warner hired, promoted and fired Doug Morris, Bob Morgado and Michael Fuchs in that job
capacity. Each outgoing executive cost th e Warner Music Group between $15M – $25M to make a
hasty departure. Danny Goldberg also clashed with Warner's brass when he was President of
Warner Bros. Records during this time and exited the label after only two years on the job.
Goldberg went on to form Artemis, which he then just exited three weeks ago.
Of course, let us not forget the very well-documented hiring (and very public exiting) of
Michael Ovitz, who after eighteen months as President of The Walt Disney Co. (on a multi-year
contract) left with over $96M in compensation and stock options
- a matter that became a very public battle last year when the stock holders took Disney to
court over the enormous payout to Ovitz). Think about it – this works out to about $533,000 a
month, or maybe only $213,000 a month after taxes. Not bad for eighteen months' work, if you
can get it.
Finally, who among us could ever forget the all-time greatest, most stunning expensive CEO
hirings in the history of Hollywood? How stunning, you ask?
So stunning that a three-hundred page book has been written about it called Hit & Run: How Jon
Peters &Peter Guber Took Sony for a Ride in Hollywood. This non-fairy tale involves the powers
that be at Sony Corporation, who were convinced by then-CEO of Sony Music Walter Yetnikoff
that Peters and Guber were the only executives in the world who could run Sony Pictures,
despite the inconvenience of Warner Bros. having both men under contract. Sony HAD to have
them and ONLY THEM! The initial cost was somewhere in excess of over $100,000,000.00 million;
because in addition to the over the top executive compensation packages that both Peters &
Guber received, Warner Bros. was able to get a substantial ownership percentage of Sony's
Record Club (Columbia House) as part of the deal to release Guber & Peters from their
contracts. By the time both Peters and Guber left Sony Pictures only a few years later, after
a long series of failed movies and expensive studio cost overruns, Son y would write off
hundreds of millions of dollars (if not more) in one of the most staggeringly expensive hires
ever made by an entertainment company.
So what is it that drives otherwise fairly intelligent and rational business people to make
these irrational compulsive and often insane decisions about executive compensation at
entertainment companies? It's a question we've been fascinated with for years. In 1982, that
question was posed to then-CEO of Warner Communications Steve Ross by Ritch, who was the night
manager of the Beverly Hills Hotel, where Ross was staying. Ross's answer has never been
forgotten; he said, very assuredly, "In corporate leadership, what you're really being paid
for is your ability to make the right decisions for the direction and growth of the company."
To a 21 year old kid just entering the music business, that seemed to be a very simple, yet
logical, answer that made perfect sense. The response has probably been imbued with a greater
sense of importance over time, especially since it came from such a legendary captain of
industry in the entertainment business. Reflecting on that conversati on twenty-four years
later, we're saddened by how distorted and truly destructive executive compensation has become
at many of the major labels and the very damaging effects it has had on the companies. It's
distorted because it stops being about compensation at a certain point and becomes a misguided
sense of entitlement where, more often than not, there's absolutely no consequence for any
financial losses to the company as a result of the CEO's performance. Today, more often than
not, this is something contractually sanctioned by the corporation. It's destructive, we
believe, because as we've seen over and over, especially in the last four years in other
industries, the consequences of these types of compensation packages DO NOT promote any sense
of commitment, devotion or loyalty to a company, its growth, financial well-being or even in
the most extreme cases (e.g. Worldcom, Enron) its very survival.
So what could possibly be the primary reason corporations continue to do this? It's driven, we
believe, by a core yet completely misguided fear that no one else is capable of doing the
job -- NO ONE!! Consequently, these executives have to be given whatever they ask for! Nothing
reflects this mentality more clearly than the often-obscene severance packages you see CEOs
carrying away when leaving or being fired from a company. A further manifestation of this
mentality in the business is reflected in the hiring of the same CEOs and executives over and
over again regardless of their track records or past performance levels. As we always say "the
names in this business never change, just the addresses underneath them." This practice of
rotating top executive rotation further creates the very powerful perception that there are
very few people who can actually do the job. In 25 years of being in this business, we've
never believed this, yet it's a very difficult view to chang e, especially at the highest
levels of a company.
A few years ago at a party, Ritch asked a CEO of a major label why this practice seemed so
prevalent at the top executive levels of the music & film industries and the response was
astounding. He said, "What you have to understand about the decisions to hire executives at
that level, very often the boards of the company hiring them are much more comfortable with
someone who's already had the position and done the job regardless of their past track record.
They would often rather hire someone who's actually done the job rather than select someone
they don't know regardless of their ability!"
It was a sobering statement to say the least from someone who really understood this process
and the mentality that goes into these choices. It also provided real insight into why so few
companies today have any executives that go up all the way in the ranks. There are a few, such
as Jason Flom, Sylvia Rhone and Jordan Katz, but not many.
So, the question at major labels today should be, "How do you inspire a level of dedicated
commitment and accountability in top CEOs to grow the company when the consequences of failing
to do so are so financially lucrative?"
In this day and age, all of our firmly held beliefs about the way things are in the music
industry are continually being broken apart and we're repeatedly being challenged by the
sobering new financial realities in the post-merger major label world now emerging: Viacom's
$18 billion decrease on their radio station valuations; Sony and BMG merging their recorded
music operations worldwide; the fracturing of powerhouse NYC law firm Grubman, Indursky &
Schindler, once one of the largest and most powerful law firms in the music business, who
recently had one of its name partners, Paul Schindler, depart to a competing law firm as well
as laying off several attorneys. It's a very powerful statement of just how out of touch and
destructive corporate values like the financial compensation packages at Warner Music are to
even their own financial well being and survival. The tragedy, and again we use the classic
definition of tragedy as "a fall from greatness due to an unseen flaw in one's own character,"
(and labels truly don't get much greater than Warner Bros., Elektra & Atlantic, historically
speaking), is that the Warner Music Group truly does not get it! They don't see it. They still
believe, "this is the way our business needs to be run."
This isn't so much a case of "corporate greed," but rather something that has become much more
pernicious, especially in the last ten years, and that's this pervasive mentality of "I truly
don't give a shit as long as I'm taken care of." The Enron & WorldCom scandals are absolutely
classic examples of this mentality on a grand scale in every respect!
Ultimately, this just illustrates how Warner Music (and the other labels who subscribe to this
mentality in this day & age) still have a real commitment to maintaining & keeping a broken,
malfunctioning business in place rather than seeing what can be done to creatively re-invent
it in a new way. Their solution is to reduce personnel and cut the amount of artists of the
roster, while continuing to pay themselves and their top executives as if they had just had
the greatest year of their history. There's absolutely nothing creative about that! The real
tragedy here is not that Warner Music spent $21M on five executive salaries and bonuses,
(while letting 1600 people go as well as a drop a significant percent of the Artist roster),
but that they felt compelled to do so. As Bob Lefsetz, a leading music industry consultant and
writer so aptly said recently, "To be this out of touch is to demonstrate you should not be
running this enterprise." And in a creative industry like musi c that has always thrived on
innovation (radio, TV, CDs, the Internet, iPods, satellite & internet radio), and in a time
where such rapidly developing and emerging technologies are creating dramatic changes in the
culture at an alarming pace as well as creating incredible opportunities and challenges, what
great artists starting their career in music would want anything to do with a company that
cares more about itself and its own survival than it does about the artists and music on the
label? Is it any wonder the Major Labels Market share continues to stagnate? Or that their
ability to break new artists has reached an all time low? This is exactly why major labels in
their current state have no future in this New World Order. If they are to be a part of it,
they're going to have to reinvent themselves in a completely new way that reflects the world
and times we live in today, not the past.
In closing, we're reminded of a quote that a brilliant man named Breck Costin once said:
"Always remember that your fantasies have to die before your dreams can come true."
Best Always,
Ritch Esra and Stephen Trumbull
Publishers
818-995-7458
ritch_at_musicregistry.com
---------------------------------------------
1. Chi-Lites:
http://www.soul-patrol.net/chilites2005.ram
<a href=" http://www.soul-patrol.net/chilites2005.ram "> New Soul/R&B From The Chi-Lites </a>
2. Krush
http://www.soul-patrol.net/krush.ram
<a href=" http://www.soul-patrol.net/krush.ram "> New Soul/Funk/Jazz From Krush </a>
______________________________
Bob Davis
earthjuice_at_prodigy.net
______________________________
IT'S BLACK HISTORY MONTH!!!!
CELEBRATE IT, SHOUT ABOUT IT
DON'T BE ASHAMED OF IT
MAKE SURE THE LEGACY CONTINUES
http://www.soul-patrol.com/
<a href="http://www.soul-patrol.com"> BLACK HISTORY MONTH </a>
______________________________