Sony BMG plans to wring more cost savings than it originally expected from the merger that created the record company 10 months ago, but meaningful revenue gains for both itself and the industry are s
Sony BMG plans to wring more cost savings than it originally expected from the merger that created the record company 10 months ago, but meaningful revenue gains for both itself and the industry are still years away, chief executive Andy Lack said Thursday.
Digital downloads, ring tones and a new dual disc format, all of which have excited consumers, investors and record companies to varying degrees, are merely helping to stop a five-year decline in music sales, not expanding the industry, he said.
"They're staunching the bleeding of the loss of revenue on the top line," Lack said at the Reuters Telecoms, Media and Technology Summit in Paris.
"I don't think the prognosis is all that attractive going forward in '05, '06 and '07," he said.
Sony BMG, which was formed in August 2004 by combining the recorded music units of Sony Corp. and Bertelsmann AG, now expects to deliver more than $400 million of cost savings, Lack said, after an initial estimate of about $350 million. It has cut its workforce to 6,500 -- a reduction of 2,000 jobs.
"We have too many lawyers and accountants and too few A&R (artist and repertoire) people on a relative basis," Lack said.
"If we have 6,500 people worldwide, what's the percentage of people digging to find a new artist or new song? I can't get a clean number ... but the answer is probably 10%, which is an appalling number when you think what our core competency is."
Sony BMG Music Entertainment is a 50-50 joint venture between the Japanese and German media conglomerates and home to artists such as Usher, Britney Spears, Maroon 5 and Gretchen Wilson.
It is the world's second-biggest seller of recorded music, narrowly behind Vivendi's Universal Music.
Lack said the transition from CDs to downloaded music and the battle against piracy would have to shake out before there was organic growth for the industry.
"To say you can measure it between now and 2008 would be a tough challenge," he said. "Sony and BMG combined maybe had $4.5 billion to $5 billion of revenues in 2003. It'll pretty much be that number in 2008."
Lack said, however, that he would like to wean the industry from its widespread obsession over market share and get the focus back on profitability.
"There has been a lot of unprofitable market share," he said.
Universal Music and Sony BMG each have about one-quarter of the market. EMI Group and Warner Music Group Corp. have one-quarter combined, while independent labels take up the remaining quarter.
Lack said he thought that, by the end of the year, Sony BMG would be as profitable as Universal Music, although comparing the two companies was difficult because Sony BMG excludes the world's second-largest market, Japan, and Universal includes a profitable arm selling music rights.
"I think in 2005 we have a good shot at being the most profitable ugly duckling at the dance," Lack said.
At the same time, he said he believed that his smaller rivals could be very profitable, too, by virtue of their size.
There has been widespread speculation that Warner, which listed its shares on the New York Stock Exchange earlier this month, and EMI would eventually have to merge to compete.
"I think it's a great time to be an independent, or smaller than the larger majors, because smaller is often better, more nimble," Lack said. "Do I think EMI and Warner need more market share to compete? No."
As the record industry continues a bumpy transition to digital, Lack sees a promising bridge in dual discs, which have a CD on one side and a DVD on the other. Sony BMG released Bruce Springsteen's latest album -- which reached No. 1 on the U.S. charts -- in dual disc format.
The company plans to roll out dual discs, which work on all existing CD and DVD players already in consumers' homes, throughout Europe in the autumn.
It will take until after the holiday season to increase manufacturing capacity and to make more artists available on the format, Lack said, leaving it difficult to forecast revenue or profit from dual discs.
"This is not revolutionary -- putting a CD and DVD together -- but it is evolutionary for the consumer," Lack said. "It just makes sense."