It's bonus time!!!!

When Lucian Grainge pulled the rug out from under Sony Music and Warner Music last month with the surprise acquisition of EMI, it left both companies sucking for any leftover oxygen. Warner was counting on picking up EMI at distress prices in order to benefit from economies of scale and provide growth opportunities for the future. Sony and its septuagenarian CEO Doug Morris were blindsided and destined to be the perennial Number Two. Warner Music, continuing to rack up huge losses, is a very distant third with 18.6% of the US market and is a virtual non-entity.

Now sources say that Warner is in serious discussions with Sony Music for a distribution deal, leaving the former major label as little more than a big production company. Even though Warner has a huge hit with Michael Bublé’s Christmas album, that’s really it. Sources say that the upcoming Warner release schedule is as barren as the Mojave Desert and with nothing in the pipeline and only one big holiday seller, the company will eventually be forced to make a lot of cuts. In fact, according to another source, “They’ll [WMG] have to just keep cutting and cutting until finally they just won’t be able to do the job any longer”.  Right now it looks as though the company may have a very hard time being competitive.

Sony, of course, will do anything they can to pump themselves up. You just know that the Sony brass is going crazy over the fact that Lucian Grainge has suddenly come out of nowhere to become the undisputed King of the World in what is now a two-horse race. Sony execs may think that cutting a distribution deal with Warner may give them bragging rights to the extra market share when in reality it’s nothing more than scrapping around for crumbs. Every little bit helps, I suppose.

We can discuss the pros and cons of a Sony/WMG distribution deal and Warner’s future after having doubled their losses last quarter, but to what end?  The more important question is “How will all of this effect Lyor’s bonus?”

© 2011, Wayne Rosso. All rights reserved.

Remember what happened to Moe Greene?

Today Hits Magazine reported that former Sony North America chairman Don Ienner has been added to Lucian Grainge’s executive stable at Universal Music in the form of a consultancy. The item goes on to speculate that Donnie along with Jason Flom and Tom Whalley, “both of whom are currently operating within Monte Lipman’s Universal Republic”, could possibly play a role in the “retooled” EMI.

Grainge has been locked in meetings for the last couple of weeks obviously figuring out just what he wants to do with EMI. Everyone knows that UMG will have to divest itself of some assets–in France, for instance, the combined UMG/EMI would control something like 60% of the market and EU regulators are likely to frown upon that. My sources tell me that the also-ran WMG  and Lyor Cohen–the Moe Greene of the music business–are doing everything they can to blow up the UMG/EMI deal. I really don’t think that Grainge has anything to worry about since he’s infinitely smarter than any Warner knucklehead and is just as tough as Lyor. In fact, he just may be the prodigal third Kray twin.

Who knows what Grainge is planning for EMI, but I find the Ienner association interesting. I know that I’ve been pretty rough on Donnie in the past, but I have to confess that he was successful at Sony. I don’t necessarily mean to diss Roger Faxon, but the betting is that he will go with EMI Music Publishing. He served his purpose as CEO of the music group by bringing stability to the company and tidying it up for sale (like I always said, he reminds me of Mitt Romney). But when I think about it, Don Ienner is just the kind of record guy that could revitalize EMI. He’s had some recent success with Hot Chelle Rae and I would imagine that he’s learned a lot from his unceremonious departure from Sony and is a different type of executive. He definitely has an energy and enthusiasm for the business and a genuine love of music that  EMI could certainly benefit from. Ienner, like Lucian, is very competitive, and together I’m sure that they would delight in kicking some septuagenarian ass.

The worm keeps turning.

© 2011, Wayne Rosso. All rights reserved.

Sean Parker--investor, entrepreneur and professional party planner

Industry sources tell me that Sean Parker is working furiously behind the scenes with Ron Burkle’s Yucaipa Companies to put together a winning bid for EMI. According to insiders, Parker really wants this to happen. The main competition seems to be Junior Bronfman, who’s new duties at Warner Music seem to consist solely of trying to outbid everyone else for EMI.

Since Junior has been shown the door, the new CEO Stephen Cooper has been wisely keeping his head down and staying under the radar. Maybe he realizes that the music industry doesn’t take kindly to outsiders and by staying down in his foxhole Lyor is more than willing to keep popping his head up and drawing fire. I mean really…there’s just nothing like a record executive’s ego. By keeping a low profile, Cooper can just do what he has to do and let Lyor take the media heat.

It would be very surprising for Junior to pull off the EMI deal even if he did place the winning bid. I still believe that a Warner/EMI merger would never get through EU regulators. Certainly EMI CEO Roger Faxon would prefer having a buyer who is not in the music industry, but would he really want Sean Parker as his boss?

There’s no doubt that if he won the deal, Parker would not be a passive investor. Far from it. As he displayed last week, he’s taken a very active role with Spotify. There’s no doubt that Spotify will be the biggest winner of all the competing services on the new Facebook platform, having acquired nearly a million new users in less than the week since the Facebook integration. He lives large and likes to put his fingerprints on everything he’s involved with, but as one Parker associate told me, “Sean’s just got too much money”. Others say that it would take a real stretch of the imagination for Faxon to live with answering to Sean Parker, who is at least 30 years his junior. Sounds like Sean and Roger could be on a quick collision course.

Unless, of course, Burkle, the older wiser wing man for Bill Clinton, can keep Sean under control. We do know that Parker would at the very least revive an old music industry tradition. He likes to throw a lot of big expensive parties. Woohoo!

© 2011, Wayne Rosso. All rights reserved.

Goobye Junior, hello Lyor?

When Warner Music announced that Junior Bronfman was getting kicked upstairs and being replaced as CEO by sexagenarian Stephen Cooper, a turnaround specialist and long-time Blavatnik associate, could mark the beginning of the end for Junior as well as the entry of yet another non-music industry guy in a top position.

The reports have Junior now concentrating solely on the purchase of EMI, which conventional wisdom says doesn’t happen. If that is the case, Junior is deemed to be toast.

In a memo addressed to the company, Junior made the claim that the switch was all his idea and painted a picture that had him working hard to convince Blavatnik that it would be for the good of the company. “I conveyed my strong conviction that my energies on behalf of the company would best be directed toward transformative transactions and long-term strategy…I want to thank Len and Access for being amenable to my kicking myself upstairs,” he wrote. Right, Junior.

What hasn’t become public are rumors that surround these machinations. Gossip from deep within the bowels of Warner Music has Junior and Lyor Cohen not getting along recently. As the story goes, Lyor convinced Len that Junior should be working on the EMI deal and that Cooper should be the man in charge. If Junior were to be unsuccessful in acquiring EMI, he would be out the door and Lyor would have free reign. Coincidentally Blavatnik financed Lyor’s fashion designer girlfriend Tory Burch in her business.

Since the company is no longer publicly traded, Junior and Lyor can’t continue to suck cash from the coffers like they’ve become accustomed, so in Lyor’s eyes this simply means that he won’t have to split his bonus with Junior. Junior has always thought of himself as a “music guy”, though he’s always been widely considered to be more of a dilettante. With an operational man, Cooper, in charge Lyor becomes the only real “music guy” at the company thus enhancing his position and ultimately his bonus.

So what about the EMI deal?  Everyone who bid for Warner Music a few months ago and lost to Access Industries is back with a vengeance, this time looking for a more level playing field than with the last auction. One really has to wonder if Blavatnik is all that concerned with acquiring EMI anyway and taking on that kind of additional debt when it has always been Junior’s egocentric Quixotic dream. You’ve got to figure that Junior has made enough of a cash from his pillaging of Warner Music and its time for him to move on to greener pa$ture$. Besides that, EMI CEO Roger Faxon, who always reminds me of Mitt Romney (he looks presidential), is working hard to make sure that the new owner of EMI comes from outside the music industry. That way he can at least keep his job by making the case that he has brought calm and efficiency to the company. In preparation for the sale, rumor has it that Capitol Records is only offering executives six-month employment contracts, thus limiting the payouts on any possible future post-acquisition cutbacks.

The path ahead for Steve Cooper is yet to be seen. The previous owners gutted the label that once was known as a bastion of musical artistry and good taste, now with a mere trace of its glorious history. We know one thing about the future, though. Cooper, who in the past has restructured such companies as Krispy Kreme Donuts, will soon learn that Lyor Cohen is no cream puff.

© 2011, Wayne Rosso. All rights reserved.

Justice, and licensing, is expensive.

Lawyers for EMI are confident that they will prevail in their lawsuit against Michael Robertson’s MP3Tunes, according to well-informed sources. The label also believes that they will get a ruling on the case fairly soon, though Robertson has heard nothing indicating an imminent decision from the courts.

A reason for this optimism on the part of EMI is unknown at the moment, but if a ruling either way were to come down soon the timing could prove to be extremely awkward.

As everyone knows by now, both Amazon and Google have abandoned the licensing process in favor of the music locker model almost exactly like MP3Tunes. However sources say that both companies are currently engaged in licensing discussions with the major labels.

If a ruling should come down, say by the end of summer, who would have the leverage, Google and Amazon or the labels? Clearly a win for MP3Tunes would definitely give Google and Amazon great leverage and also give a lot of breathing room to services like M Spot.

Obviously a win for EMI would be bad for the MP3Tunes and M Spots of the world, but not necessarily for the big boys. The labels would use any perceived leverage to pry more up front cash from Google and Amazon, but they certainly would be foolish to sue and I doubt that they ever would.

Should MP3Tunes win Google and Amazon’s hand gets stronger, but it’s really all about the money and the legal outcome of the MP3Tunes case will basically dictate how much these big players will pay to get into business with the major labels.

Then again there’s a third possible, and probable, outcome no matter which way the ruling comes down—an appeal. This, of course, would draw out the process and in the meantime not really have a lot of impact on either side in the licensing negotiations between Google, Amazon and the labels.

As I said earlier, it all comes down to the money. Throw enough cash in front of a record label and it’s surprising how cooperative it can be. The 1 to 2 years that it takes to close a licensing deal can suddenly be done in 2 weeks, and that kind of cooperation really costs.

© 2011, Wayne Rosso. All rights reserved.

Who needs Junior and Len's excess baggage?

The game is on. Citi has started preparing the final papers for the auctioning of EMI. The bidding floor is expected to be $2.5 billion, according to a report last week in The Wrap by Johnnie L. Roberts, with at least half a dozen buyers readying offers.

Of course Len Blavatnik’s name is the first that pops up when speculating about prospective bidders, but at this stage he comes with some baggage that may not make the transaction as quick and clean as Citi would like. Sources tell me that Citi definitely wants to get EMI off its books before the end of the year and although Blavatnik may make a substantial offer, he is also now the target of a number of shareholder lawsuits over the purchase of Warner Music and that could spook Citi in a big way. Not only are the lawsuits a potential problem, though some observers think that they’ll eventually go nowhere in the courts, but Blavatnik would definitely face regulatory scrutiny that a KKR, Ron Burkle or Tom Gores would not. The whole Warner Music sale has had a very fishy smell to it and Citi has had enough trouble fumigating the remnants of Guy Hands and Terror Firma. If the Blavatnik bid isn’t off the chart and is just competitive, why would Citi need the aggravation?

It’s no secret that EMI CEO Roger Faxon has been pushing to keep the company together as opposed to selling it off in pieces, and he’s right. Roberts interviewed a moronic ex-EMI employee who stated, “For the success of both, it’s inevitable that they come together. Neither, especially EMI, can exist as a standalone for any great length.” This, of course, is sheer stupidity. EMI, if run correctly, could easily remain an independent company in spite of the slow death of the music industry. And don’t forget that the publishing arm spits out a ton of cash that plenty of the EMI bidders would love to get their hands on.

My guess is that EMI will bring nearly as much, if not a little more, than Warner. I’ve always maintained that it is a better buy with better assets. Frankly, I think that WMG needs EMI more than EMI needs those knuckleheads. Warner has been thoroughly plundered during Junior’s reign. One of my favorite quotes is from a recent Forbes interview with Lyor Cohen who, when making his justification for demanding additional rights from artists in 360 deals, said that Warner Music needs the extra cash to retain “the very finest, most seasoned, most creative, thoughtful, transformative” executives to run the company. These guys, including Cohen’s own multi-million dollar package, are the same guys who have lost hundreds of millions of dollars for the company over the last several years.

If the WMG executives were that enlightened they would have signed a US Spotify deal by now. They will, and soon, but “creative, thoughtful, transformative”? No.

One thing is for sure though. You can bet that Lyor Cohen has a golden parachute with a platinum lining—just in case.

© 2011, Wayne Rosso. All rights reserved.

If the rumor is true, the new Apple music cloud service could be underwhelming

A new rumor is circulating about the features, or lack of them, of Apple’s soon to be launched music cloud service. The word is that the service will only store tracks purchased from iTunes as opposed to a users entire music collection. With the caveat that this is just rumor at this point and not completely verified, it makes sense given the label’s paranoia about allowing pirated content into any locker service.

If in fact this rumor is true the new iTunes locker service would certainly lack some of the excitement users have grown to expect from Apple. Furthermore, as opposed to locking Apple in as the dominant cloud service that many observers postulate as inevitable, it could just bust the space wide open.

I’ve been playing around with both the Amazon Cloud Player and Google’s Music Beta. Both seem to work well, and certainly provide convenience of access. The Android Music Beta app is pretty good. The bad news is that it takes forever to upload a decent sized library to either of these services. But the good news is that once a user uploads his library, he’s very unlikely to switch services.

With iTunes you’ll surely be able to purchase a track and have it automatically added to your locker. Amazon can do the same. Google cannot, as it does not currently have and retail licenses. Advantage Amazon.

Yet Amazon has another advantage going forward, and that’s pricing. They consistently undersell Apple, and everyone else for that matter, but their big Lady Gaga Born This Way $.99 MP3 album sale rocked the entire business. It probably cost Amazon a good $3 million or more, but it was a great way to expose customers to their locker service as well as get a lot of “free” exposure. Amazon is the Best Buy of the online world in that it can afford to use music as a loss leader to bring users into the site. Who goes to Amazon and only buys one item? They’re great at selling you a lot of stuff you just didn’t realize you needed until you got there.

To my mind this leaves a giant vacuum that could be filled by Spotify. Why not Rdio or Mog you ask? Because they just haven’t got the vibe or the excitement of Spotify. Nor the track reccord. There’s such a well of expectation built up for Spotify in the US that their mobile app would instantly go to the number one position on every app store download list and would certainly dwarf both Mog and Rdio.

With all of this activity happening in the space and the labels having no choice but to acquiesce to unlicensed locker services like Amazon and Google, it’s high time that the music industry, EMI in particular, drop its ridiculous litigation against MP3Tunes and Michael Robertson. Michael is the guy who really gave birth to the modern digital music business and is a true visionary. Instead of taking out their frustrations on Robertson, the labels should maybe wise up a little and actually listen to what he has to say. He’s already proven several times that he’s smarter than they are and they’ve already lost the war.

© 2011, Wayne Rosso. All rights reserved.

However EMI CEO Roger Faxon has been telling everyone who’ll listen that such a deal will never happen because it would not pass the regulatory smell test. And that may very well be the case. Impala has already staked out a hard position against any such merger and you can bet that both Universal and Sony would not necessarily be thrilled with it either.

When you think about it though, it’s really in Faxon’s best interest to bad mouth a WMG purchase of EMI. If that happened Roger would be out of a job and as we all know, there aren’t a lot of music industry CEO jobs around at the moment.

To his credit, Faxon seems to have steadied the ship a bit since taking full command. Katy Perry is still hot, though overexposed, and the financial future of the company is more encouraging since Citi assumed ownership and restructured the debt. There’s not as much angst seeping from Wright’s Lane as there used to be. The paranoia that ran rampant through the EMI offices during the reign of Terror Firma seems to have dissipated and employees are said to feel a little more secure for the time being.

We don’t really know how many of the bidders for Warner Music were real and how many were just kicking the tires. Some Warner shareholders are upset with the sale and are taking legal action. They contend that the sale was an insider deal; that a larger bid was rejected in favor of a lesser one from a former board member, Len Blavatnik of Access Industries. This could potentially foil the deal, even though Warner would owe Access a $57 million kill fee if the sale does not close.

One thing the Warner Music auction did prove is that there are still some suckers out there who are willing to put up a few billion for a record company. The down side for Roger Faxon is will the new EMI owners, whomever they may be, want to keep him around?

Faxon has already proven that he’s an adroit operator. His castration of Guy Hands was silent and swift. I’m sure that he’s figured every angle, but you never know. Maybe Roger could end up with Junior’s job.

© 2011, Wayne Rosso. All rights reserved.

Lassie! Come back!

There have been several analyses of last week’s purchase of Warner Music by Len Blavatnik’s Access Industries, the best of which is Ed Christman’s Billboard piece that ran on March 6.

Christman says the deal was good for both sides. Junior most likely gets to keep his job since his close pal Len bought the company. They’ll probably go after EMI, which Junior has coveted for some time now. Blavatnik paid $700 million more for Warner Music than Junior & Company originally paid for it back in September of 2005 and since then has racked up over $429 million in losses. Initially shares of WMG were offered at $17. The sale price ended up last week at $8.25 a share. The original investors, Balavatnik among them, saw a return of 2-3 times their original investment, which they were repaid prior to the initial public offering. Usually investors like to see much bigger returns, especially after holding on for 6 years, but I’m sure they were happy to get whatever they could for a dying company in a dying business. However WMG is capable of spitting out a decent cash flow when run properly and that’s the upside for Access and Junior was excited the other day when he announced Warner Music losses for the previous quarter were marginally less than expected.

There is also a class action suit brewing alleging that the Board of Directors engaged in a little monkey business with the bidding process. Since we know that Junior is already a convicted felon in the EU (he was convicted of insider trading in France), and that he’s a close personal friend of Blavatnik, I wouldn’t be a bit surprised if there were some shenanigans going on. In fact, I wonder how big a bonus Junior will get for selling the company.

If you’ll recall, you first read about Blavatnik and his relationship with Junior here over three months ago. I outlined a scenario that has more or less come to fruition. Len was always Junior’s ace in the hole.

What brings me true sadness is that now Warner Music will no longer be a public company and thus will not be required to release quarterly and annual statements. This, of course, was always a treasure trove of juicy information and I’m totally bummed that I will no longer have access to that.  The filings and earnings calls always provided plenty of ammo to make Junior look like a putz.

Oddly, this may force Junior to curb some of his antics. Previously, he and the board screwed the shareholders royally and never gave a damn about taking advantage of them by reaping huge bonuses and salaries while at the same time losing millions. Now that there is a single owner, Blavatnik may just keep Junior on a tighter leash.

So the bad news is that we’ll no longer have quarterly conference calls and SEC filings. But the good news is that Junior’s not going anywhere and will always be the source of endless amusement.

Am I crazy or am I the only one who’s starting to miss Guy Hands?

© 2011, Wayne Rosso. All rights reserved.