During the '70s and '80s, Warner Bros.' music division turned out hit records by some of the biggest names in rock: Led Zeppelin, Prince, Van Halen, Madonna, R.E.M., Neil Young and Eric Clapton.
Even in the early '90s, long after the glory years, the Warner Music Group was buoyed by its impressive catalog of rock classics, as baby boomers bought compact disc versions of their cherished albums.
But when the boomers filled out their collections, Warner was faced with a grim reality: slow sales and the lack of any new, breakout artists. For the first eight months of this year, Warner's market share has slipped to about 17 percent down from 21 percent just two years ago.
Warner has now fallen behind Sony Corp., which commands about 18 percent of the music market.
"Ninety-six and '97 clearly were the years that this company will remember as difficult years," said Phil Quartararo, who became president of Burbank-based Warner Bros. Records Inc. last November. "Ninety-seven was one of the most difficult years in this company's history, no question. It was not a good year for performance."
It is now Quartararo's job to turn things around.
During 11 years at Virgin Records America, the 42-year-old Quartararo was a key executive behind the success of Janet Jackson, Smashing Pumpkins, Massive Attack, Ben Harper and the Verve.
He also helped introduce the Spice Girls to America.
With that track record, Quartararo was brought on board by Warner Bros. chieftains Bob Daly and Terry Semel. The executive duo, who have worked together for close to two decades in the film and television divisions, were made co-chief executives of Warner Music Group in 1996. The move followed a management shake-up that resulted in the departure of many key music group executives, including longtime President Mo Ostin, who had guided the Warner Bros. Records label since the early '60s.
While Daly and Semel initially were criticized by some for having almost no experience in the music industry and for stretching themselves thin by continuing to oversee other sectors of Warner Bros. Wall Street analysts now say that the changes have worked out well.
"My sense is that they will show tremendous growth in the second half of 1998, into 1999," said analyst Jessica Reif Cohen of Merrill Lynch Global Securities.
Most of the poor performance by the Warner Music Group has been attributed to a lack of hits at the Warner Bros. label and, to a lesser extent, its sister Reprise label, which was founded by Frank Sinatra. (By comparison, Warner's New York-based labels, Atlantic and Elektra, have done relatively well with such artists as Jewel and Sugar Ray).
Quartararo who oversees the Warner and Reprise labels has shown some progress with hit albums by Clapton and Madonna. In addition, the "City of Angels" soundtrack has sold about 4 million copies to date. Perhaps most important, new talent is being developed; the album "Stunt" by Barenaked Ladies was one of the top-selling albums last month.
"I think, overall, the goal is to restore Warner Bros. to its rightful position as the flagship company in the music industry," Quartararo said.
Reif Cohen said she expects Warner Music Group's earnings before interest, taxes, depreciation and amortization (or EBITDA, which is how record companies report cash flow) to increase from $550 million last year to $575 million this year.
"They were down in the first half of '98, so for them to beat '97 means they're going to have a great second half. And I even think they're going to beat our numbers," she said, citing strong anticipated sales for new albums by Alanis Morissette and other artists.
Reif Cohen said she expects Warner Music Group's earnings to rise again next year, likely hitting $650 million.
But Christopher P. Dixon, an analyst at PaineWebber, noted that even that figure would fall behind its performance in 1996, when its earnings were $744 million. That drop, he said, cannot be blamed completely on Warner's management.
"Some of that's due to the natural maturity of the CD business where, previously, we had a lot of people buying compact discs to replace their cassette library, which virtually has been done," Dixon said.
The problems at the company began in late 1992, with the unexpected death of Time Warner Chairman Steve Ross. Ostin, a Sinatra protege who has been credited with making Warner Bros. Records the most profitable record label in the United States, had reported directly to Ross and operated with the freedom to run his division without interference.
After Ross' death, Robert J. Morgado who had headed Warner Music Group since 1990 but was not actively involved in Warner Bros. Records' day-to-day operations took a more hands-on approach, leading to a series of clashes with Ostin, who left the label in 1994.
Morgado's hands-on role was supported by Ross' successor, Gerald M. Levin, because the division had been successful under his overall leadership. In 1993, the division's earnings were greater than those of every other Time Warner division, with the exception of cable television.
But the strife between Morgado and Ostin as well as between Morgado and other Warner label heads resulted in an exodus of executives who had a long history of producing hits for Warner, including Lenny Waronker, Danny Goldberg and Doug Morris. (Morgado left the Warner Music Group in 1996.)
Analysts said the shake-up chipped away at Warner's performance a downturn from which the company is just now recovering.
Quartararo said the departed executives, now working for competitors, were valuable to Warner, but that the company can still be successful without them.
"Hey, listen, those guys were the founders of this business," he said. "They are all very good friends of mine personally, and I have respect for what they did, but they are not the only people in the music industry. Change presents opportunity."
Reif Cohen agreed that the current management team at Warner, including Daly and Semel, who now share the position Morgado once held, provide strong leadership. "I think it's one of the strongest management teams around, in any industry," she said.
Even Waronker, who now is one of the heads of DreamWorks Records, part of start-up entertainment company DreamWorks SKG, thinks Warner is in a position to return to its glory days of old.
"The company went through a tremendous trauma, an ongoing trauma for a couple of years, and those people paid a price," Waronker said. "The quality of people there has been such that I think they've been able to get it together. I think they're doing fine now and that's great."
Howie Klein, president of Reprise Records, said he expects Warner to be buoyed by a number of releases by new and established artists coming out in the next several months, including the sophomore album by Morissette; a new album by Chris Isaak, whose single "Please" is No. 1 on the adult alternative charts; and a new album by the Goo Goo Dolls.
Klein said Reprise has also signed a number of new artists who he expects to hit it big, including British singer Lisa Hall and New York punk band Living End. New albums by Wilco and Muzzle are also expected to help those bands grow their followings, he said.
Klein said he thinks Reprise has held its own, given the weak music market last year, but expects the label to become even stronger in the months ahead.
"Even in the bad environment, we did OK. And we're doing great this year," he said.
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