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MUSIC TO WARNER'S EARS : Profit from Records Unit, the Industry Leader, Far Outstrips High-Profile Movie Division

March 20, 1989|WILLIAM K. KNOEDELSEDER Jr. | Times Staff Writer

In the auditorium at the New York headquarters of Time Inc. last week, a group of Wall Street financial analysts met with the three men who plan to run the largest media and entertainment conglomerate ever put together.

For about two hours, the analysts questioned Steven J. Ross, chairman of Warner Communications, Time Chairman J. Richard Munro and Time President Nicholas J. Nicholas Jr. about the proposed merger of their companies into Time Warner. Most of the questions focused on the likely impact of the deal on the magazine publishing, television, movie and video businesses.

"But Ross kept talking about the record business," recalled one analyst present at the meeting. "He took the occasion to point with great pride to how well Warner's record division was doing; he went on and on bragging about his record guys."

Ross has reason to boast:

In each of the past two years, Warner's recorded music division has earned more money than the higher-profile filmed entertainment division, posting pretax operating profits of $319 million in 1988 to the movie division's $203 million. The record operations accounted for 52% of Warner's revenue in 1987 and 45% in 1988.

"The record division is the engine of the whole company, and it's a huge cash generator," said Fred Anschel, an analyst for the New York investment firm of Dean Witter Reynolds.

Warner's major record labels--Warner Bros., Elektra/Asylum, Atlantic and Geffen--currently dominate their competitors to an extent that is unprecedented in the history of the recording industry.

Last week's issue of Billboard magazine offers dramatic evidence: Warner-owned or distributed record labels account for eight of the top 10 best-selling albums and tapes, 24 of the top 40, 44 of the top 100 and 75 of the top 200. Since the top 20 recordings account for the bulk of sales, for the moment, at least, it appears that Warner's current share of record sales in the United States may exceed 50%.

"It's amazing what's happening, just amazing," said RCA Records President Bob Buziak. "They're gobbling up market share like Pac Man."

Indeed, over the previous 15 years, Warner's market share fluctuated between 20% and 25% in a perennial teeter-tottering fight with CBS Records for first place. However, since CBS was purchased by Sony Corp. for a record $2 billion in January, 1988, Warner has blown past its archrival. The company's 1988 domestic record revenue of $1.05 billion nearly doubled those of CBS, which grossed about $650 million for the year, according to sources. Warner's profit margins, too, are twice that of CBS, 16% to 8%.

Could Be Understated

Some experts say Warner's record earnings are actually larger than what's reflected in the company's annual report.

"It could be close to $400 million (in operating profits) for 1988," said Geffen Records Chairman David Geffen, citing the company's "extremely conservative accounting practices" as the reason for the understatement.

"Warner has nothing capitalized," Geffen said. "If they build a plant, they write it off immediately. When they record an album, the cost is written off that day, whereas other companies will amortize the cost."

According to Lisbeth Barron, an analyst for McKinley Allsopp Securities in New York, Warner also maintains on its books a reserve for returned or unsold records that is "very, very high; nearly double what the actual returns are. And that helps understate their earnings."

"This is definitely a division that hasn't gotten the attention it deserves," Barron said. "Revenues are soaring, and profit margins are skyrocketing. It's probably more stable than the film division and certainly deserves equal billing and respect."

The base of Warner's success is a combined roster of more than 500 artists. "They have an incredible breadth of talent, from blues to jazz to country to rock," Barron said.

The company also has what is generally considered to be the most talented and stable management team in the industry.

"The Warner labels are run by men who understand that the most important thing in this business is relationships, that you need to spend a certain amount of money to maintain those relationships," Barron said. "(CBS President Laurence A.) Tisch didn't get that. Steve Ross understands that better than anybody."

Owns Other Labels

Ross built up Warner's record operation by acquisitions. In 1969, his Kinney System, New York's largest parking lot concern, took over the Warner Bros. and Atlantic record labels as part of its purchase of the financially troubled Warner Bros.-Seven Arts movie studio. Ross acquired Elektra Records in 1970 from its founder, Jac E. Holzman, who still works for Warner as the company's chief technologist. Ross acquired Asylum Records in 1974 from its founder, David Geffen. Established in 1981, Geffen Records is 100% owned by Geffen and distributed by Warner in return for a 50% share of its profits, a deal that runs through the end of 1990.

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