A Game of Musical Chairs
L.A. shakeout expected from consolidation in record business
By RiSHAWN BIDDLE
Staff Reporter
After Richard Foos and Harold Bronson sold their remaining stake in Rhino Records to Time Warner Inc. in 1998, it took three years for the tiny music label to be fully merged into the media giant’s Warner Music Group, and another year for Rhino’s former offices in West Los Angeles to be closed.
Now Warner Music is being sold to investors led by liquor heir Edgar Bronfman Jr., and Sony Music is being merged with BMG Entertainment. The moves come at a time when the music industry much of it located in Los Angeles is facing some serious questions about its future.
Foos doesn’t expect a lot of dawdling around this time.
“The big labels are facing the death of their businesses, so they’ll have to cut quickly, and perhaps deeply,” said Garson Foos, who was president of Rhino and is now a partner with brother Richard in the year-old music firm Shout! Factory. “Maybe they’ll close a few offices in L.A., maybe not.”
Time Warner’s $2.6 billion agreement to sell Warner Music comes on the heels of Sony Corp.’s deal with German media giant Bertelsmann A.G. to combine their music businesses in a joint venture. Before that, DreamWorks SKG sold its music label to Vivendi Universal S.A.’s Universal Music for a reported $100 million.
The consolidation is being prompted by changing economics in the music industry, including free downloads on the Internet. And the impact will be felt in areas ranging from lost jobs to facility closures and consolidations, as the new entities strive to cut overhead.
Already, there are signs of a fallout in Los Angeles. Last week, DreamWorks placed onto the market 61,000 square feet of office space in Beverly Hills currently occupied by DreamWorks Records, according to Matthew Miller of CRESA Partners, who is handing the disposition. DreamWorks Records will vacate the space after Universal completes the acquisition and merges it into its Interscope division.
Unpredictable impact
As of 2001, the majors employed just 3,281 people locally, less than a one-fifth of music industry employees in L.A., according to Jack Kyser, chief economist of the Los Angeles County Economic Development Corp.
Since then, spates of cutbacks have further pared the payrolls, including Vivendi’s decision in June to waylay 75 staff members after shutting down its MCA label. While Vivendi, Sony and BMG declined to release their current figures, EMI Group Plc employs more than 600 in L.A. after a series of layoffs, while Warner Music has another 1,000 employees in L.A., according to spokesman Will Tanous.
Past waves of consolidation weren’t always felt so quickly. Rhino wasn’t fully absorbed until 2001, when it became part of Warner Strategic Marketing. Priority Records remained a stand-alone operation four years after EMI bought the remaining 50 percent stake in the pioneering hip-hop label.
This time, though, the changes could come quickly after the deals are completed. If the past is any guide, there will be layoffs.
After the dust settles, in-house record promoters may be sent packing, along with marketers and the artists and repetoire (A & R;) scouts responsible for rounding up new talent. Because most of these employees are under contract, they will usually receive a settlement of as much as 70 percent of salary remaining on their deals.
“You get yourself a good lawyer and work out the best deal you can,” said Michael Whited, an executive with startup label MSC Music & Entertainment who was laid off from Priority.
End of the road
Rosters of acts will also be pared down as labels are merged. Those that remain won’t have an easy time of it as the companies consider which songs to promote.
Universal had such a dilemma after merging its Interscope, Geffen and A & M; labels when it had to decide between releasing a single by the rock group Garbage or “Malibu,” the latest release from Hole, the rock group fronted by Courtney Love. It ultimately chose Garbage.
There will also be an impact in the real estate market.
Warner’s operations alone occupy 339,000 square feet of space, including the 193,000 square feet it took over in the Pinnacle complex in Burbank, while Sony Music inhabits a 150,000-square-foot campus in Santa Monica and distribution offices on Santa Monica Boulevard in Los Angeles.
The labels have been disposing of space for some time. During its two-year restructuring, EMI whose sprawl includes the Capitol Records tower disposed of offices in Beverly Hills and Priority’s old space in Hollywood’s CNN building. It’s putting together another space consolidation deal, according to real estate industry sources.
If Sony and BMG complete their deal, the new operation may try to dump BMG’s current West Coast outpost in Beverly Hills (some 85,000 square feet), home to its music publishing and sales units.
But the impact won’t be immediate, partly because many of the leases may not expire for five years or more. If the buyers can’t get the music units’ sellers to take back some of the space, they may have to cut deals with landlords to get rid of the space often paying the landlord a termination fee that includes tenant improvement costs, parking fees and other costs.
Failing that, they likely will try to sublease the space, or under a worst-case scenario pay rent until the lease expires. According to some estimates, Time Warner’s HBO may have to pay as much as $40 million over the next nine years for its former offices in Century City, which it vacated for new digs at Santa Monica’s Colorado Plaza.
But with the music industry’s reputation for unorthodox moves driven by ego or other motives nobody knows what will happen.
“You have smart companies in the music industry who will make a business decision and you have those that try to keep the rainmakers happy, or want to make fresh footprints in the snow,” said Rick Buckley, a senior vice president at CB Richard Ellis.
