Executive Musical Chairs Won’t Save Broken Record Business

Shifting of label executives and company ownership could throw scores out of work, thin the ranks of the major labels and streamline operations

Has the music stopped for the broken record business?

Pearl Jam and Gregg Allman may have new albums out Tuesday but with CD sales of chart toppers historically anemic the first weeks of 2011, record companies can't rely on old faves to keep beating the declining odds.    

“No other industry will go through as much change as the music industry will in the next six months,” a major-label senior executive told TheWrap.

What exact form that change will be is still taking shape but some hard realities in the trouble industry are apparent. The industry’s death knell has rung louder each passing year since CDs sales peaked at the turn of the century. 

Today the downbeat biz is financially shrinking, reshaping structurally and upending leadership at a combined tempo perhaps swifter than at any time since freely-shared files and 99-cent digital singles began to disrupt age-old record-label economics a decade ago.

Last year, according Nielsen SoundScan, album sales at retail fell almost 13 percent, . Translation: The sheer 326.2 million CDs purchased in 2010 were, for the fourth straight year, 20 percent fewer than the year before. While the numbers are not known yet, the value of record-label shipments industrywide undoubtedly fell in 2010 from 2009’s $7.7 billion, which was 12 percent down from the year before.

In the early weeks of the New Year, Taylor Swift held onto the chart top spot with 52,000 copies of “Speak Now” purchased, the puniest sales for a No. 1 album in 20 years of SoundScan tracking. On Sunday, the blog FutureHit.DNA posted an obit on an entire genre, rock, blaming the figurative fatality on the music-business environment.

“The business of selling music is over as we knew it," a former label chief said to TheWrap. "And the future of it is yet to be determined by anyone.”

On New Year’s Day, though, an ongoing changing of the industry guard propelled CEO Lucian Grainge to Universal Music Group helm with a mandate to cut “a lot of fat…without hurting muscle and bones.”

Anxiously, the world’s largest music company–where Lady Gaga, Kanye West and Justin Bieber record—now is bracing for Grainge’s projected hit list of cost-cuttings totaling $50 million to $90 million all the way to a remarkable $400 million. Those cuts will include dozens, if not hundreds, of jettisoned music workers, according to three senior insiders who spoke to TheWrap.

One highly placed Universal insider insists it’ll all be done discreetly and surgically, with a series of back-office meshing, a dozen employees quietly lopped here, 15 or so there. The budgeting for picking talent and hits will be exempt. Like other labels have already, Universal Music will drum up new revenues by expanding into new services, including managing artists and promoting their tours, not just the dismal business of putting out records.

Doug Morris, out as Universal Music’s CEO but left in place as the figurehead chairman until yearend, is negotiating an early escape to lead Sony, the No. 2 player, where CEO Rolf Schmidt-Holtz’s tenure ends in April. Morris’ likely departure to Sony, coming as early as this spring or early summer (or never), has set the industry abuzz about the tenures of his top lieutenants.

The management succession at Universal Music and Sony Music Entertainment is playing out like musical chairs. And an accompanying cacophony of speculation and uncertainty now echoes loudly around the fate of prominent label bosses for some of music’s biggest acts.  

Will Morris take along Sylvia Rhone from Universal Motown Republic Group? And does he retain the loyalty of one of music’s most successful executives of the last generation—Jimmy Iovine, CEO of Universal Music’s West Coast-based Interscope Geffen A&M and the new in-house mentor on this season of "American Idol."

There are at least two years remains on Iovine (pictured far right with the "American Idol" judges and host Ryan Seacrest) and Rhone's employment contracts, says a Universal Music executive. Iovine almost certainly will serve out the two years on his contract, if money is an incentive to stay. One highly-placed confidante says no one other company would likely pay Iovine the upwards of $15 million a year he gets through Universal Music.

Meanwhile, a prolonged internal power struggle to replace Sony Music’s Schmidt-Holtz appeared to have been settled with the departure notice by Barry Weiss, chief of Sony’s superstar-studded RCA/Jive division (where Britney Spears, Justin Timberlake and Dave Matthews Band are), wooed to—where else?—Universal Music, overseeing its East Coast portfolio of labels– Universal Motown Republic Group and Island Def Jam.

Industry executives tell The Wrap that Sony Music is eyeing Tom Whalley, purged recently from the top of Edgar Bronfman Jr.'s Warner Music Group’s namesake label, to succeed Weiss.

At the industry’s dire extreme, all or part of the EMI Group, smallest of the major-label groupings, is up for grabs by its jockeying larger rivals Universal Music, Sony Music and Warner pick at each other’s dwindling market share.  

However, with the sales situation so dire even Bronfman's Warner Music acquiring EMI "won’t mean a damn thing,” declares the former chief of a major label. “If Doug goes to Sony, it won’t mean a damn thing. Lucian’s rise at Universal won’t mean a damn thing."

Certainly the bottom line is still sinking. The industry’s years of incredibly shrinking CD sales and ballooning digital singles caught up to No. 1 Universal Music last year big time. Through September, a standard measure of profits (“earnings before taxes interest and amortization”) dipped 9.3 percent to $334 million from the 2009 period as sales inched down 1.7 percent. Now hold your breath for the fourth quarter report from Vivendi in March.

By all accounts, Island Def Jam may face the most far-reaching change at the top. For weeks, CEO Antonio “LA” Reid has been immersed in an exit drama that is supposed to culminate in his relinquishing one of music’s high profile operators for a startup boutique label, much along the line of his successful venture with songwriter Kenny “Babyface” Edmonds, LaFace Records, now part of Sony Music.

According to two highly-placed Universal Music execs, Island Def Jam missed its 2010 financial targets by $50 million to $70 million, but one label insider contends Reid bounced back in the yet-to-be reported fourth quarter to break even for the year.His negotiations are said now to be continuing after Reid, according several insiders, accepted and then rejected a deal.

Meanwhile, the bloodletting saga goes on at EMI, a buyout that has gone bust for British private equity heavyweight Guy Hand’s Terra Firma fund. Unable to earn enough to avoid breaching billions of dollars of loans piled atop the music company, EMI is already essentially in play — to be traded all or in parts to the highest bidder.

In the most popular scenario, Edgar Bronfman Jr.’s Warner Music Group swallows EMI Music whole, and KKR and partner BMG buys EMI Publishing. But Bronfman’s major rivals says he doesn’t have a beat on them, and EMI is angling to thwart its demise.

Among other things, the fabled British company is exploring of allowing rivals to distribute its releases in North America, with EMI receiving a fee, as much as 20 percent. It also is considering selling certain of its publishing catalogs for cash to satisfy lender Citigroup. Similarly, it may sell off its country, classical and jazz labels.

And, for now, no matter which of its rivals come away with something from the scavenger hunt, the plight of whole music industry sounds like a broken record.