lAGGING l.a. LABELS MAY BE CASUALTIES OF pending merger

The planned merger of Time Warner's Warner Music Group and British record company EMI Group could land hundreds of local music-industry employees on the unemployment line, because lagging labels and other operations targeted for downsizing are based here.

Executives who will head the proposed Warner EMI Music said last week that the combined company's various labels would remain intact, but noted that about 3,000 of the company's 22,500 jobs would be cut as part of an effort to save $400 million.

Most cuts will come from manufacturing, distribution and management, but other employees also will be reviewed, executives said. And the roster of artists who aren't selling a lot of records may well be trimmed.

The news spells trouble for EMI Distribution and Warner's WEA Distribution, both based in L.A.

"The distributors have been targeted. That's going to be the first thing to be cut," said Michael Nathanson, an analyst at Sanford C. Bernstein.

Music publishing companies EMI Music Publishing in New York and the L.A. based Warner/Chappell also are likely targets. As for labels, EMI's Capitol Records and Virgin Records, as well as Warner's Warner Bros. Music, all based in L.A., have been lagging and are considered the most likely candidates for streamlining or downsizing.

While artists & repertoire executives, marketers and artists aren't the most likely to be cut, there's still the possibility of significant turnover.

"Often when there's a consolidation of two big companies, the creative people leave," said Richard McDonald, an analyst at J.P. Morgan Securities.

But not all the news is bad for the local music industry. In fact, the Warner EMI consolidation is expected to help L.A's small and mid-sized labels attract talent and experienced executives.

Smaller labels already have been capitalizing on another music merger: In 1998, Seagram Co. acquired PolyGram for $10.4 billion and integrated the company with Seagram's Universal Music Group. Last year, hundreds of local jobs were cut in an effort to save about $300 million in operating costs though insiders say most of those people were able to find new jobs with smaller companies relatively easily.

"You've combined labels in the previous merger, you're presumably combining a whole bunch in this merger that's a lot of artists in the street," said Jay Cooper, entertainment lawyer at Manatt Phelps & Phillips. "It may open an opportunity to pick up a number of these artists and for these (laid-off) executives to build a new structure. It could allow new players to enter the picture."

The merger could also help bolster online music ventures, many of which are based in L.A., in the booming business of providing downloadable music.

"When the Universal-PolyGram merger went down, or even during a number of the various downsizings that have taken place, companies like ours got a heightened level of inquiries," said Marc Geiger, chief executive of ARTISTdirect, a music-focused Web company. "For companies like ours that are growing very rapidly, when enlightened executives get let go, there's clearly a need for experienced management and talent."

Representatives from Warner and EMI said no decisions will be made until the merger is approved, a process that could take six months.

"Until this meets regulatory and shareholder approval on the EMI side, no contemplation of (job cuts) will happen. So it's premature to speculate and have any of those discussions," said Warner Music Group spokesman Will Tanous.

Executives at Warner and EMI have good reasons for keeping quiet; they learned some powerful lessons from the recent merging of Universal and PolyGram.

"PolyGram and Universal officials were quoted as saying they were in business to sell music and wouldn't want to keep any (artists) who couldn't sell half a million copies," said Lou Mann, president of media properties for House of Blues Inc. and former general manger of EMI's Capitol Records. The result, Mann said, is that some artists left the combined company's labels a few of them promising musicians who might have been big sellers if their talent had been allowed to develop.

Warner fell from first in total U.S. album market share in 1997 to fifth in 1999, with only EMI lagging behind it, according to SoundScan, which tracks music sales. The combined company would be the largest based on overall sales, with $8 billion in annual revenues, but would be second to Universal in record sales. Warner and EMI take in additional revenues from their music publishing and other divisions.

The decision comes during a prolonged industry downturn. Because of its declining sales, EMI has been considered a likely takeover target for the past several years.

EMI's Capitol and Virgin labels and Warner Music Group's Warner Bros. Records are considered the weakest labels at the combined company because they have had few successes cultivating new artists, and they have all suffered internal problems.

Capitol was plagued by morale problems after a series of management changes that included the sudden departure of Chief Executive Gary Gersh in 1998. Gersh had been making headway in reviving the label by signing new acts, including the Foo Fighters.

Morale at Virgin also has been faltering. In one highly publicized incident in 1997, employees complained when EMI's Ken Berry appointed his wife, Nancy, as vice chair of Virgin Records America and Virgin Music Worldwide. Nancy Berry was previously executive vice president at Virgin, and critics asserted that she won the job through nepotism.

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