On Aug. 4, the Warner Music Group (WMG ) will report its second-quarter earnings, following its closely watched initial public offering in May. BusinessWeek Senior Writer Tom Lowry recently spoke with WMG CEO Edgar Bronfman Jr. about his company and the state of play in the industry in Bronfman's first extensive interview since the IPO. Edited excerpts of their conversation follow:
Q: Since the Warner Music Group went public in May, several analysts have complained that the company isn't giving them adequate guidance and that there isn't enough transparency in the numbers that you have given out. Why not give out more?
A:We elected not to give guidance, and I think it's the right thing to do. Fundamentally, it will get you in trouble. It drives poor behavior within the company. [If you have given guidance] and if things change, you're stuck making bad decisions in any given quarter.
Frankly, what we need to do is deliver performance consistently over a number of quarters. Analysts and the general investment community will eventually be more comfortable with the industry as a whole -- and certainly with the Warner Music Group.
Q: You're partnered with private-equity firms Thomas H. Lee Partners, Bain Capital, and Providence Equity Partners. They have already made back their initial investment. Have they discussed an exit strategy with you?
A:Their normal investment time frame is about five years. Sometimes it can be three, sometimes seven. It has only been two months since our IPO, and they're very bullish on our future and the fact that markets will come to recognize our prospects.
Q: As you go through the turbulent process of working out new business models and adapting your company to a new digital era, wouldn't it have been easier to avoid the scrutiny and remain a private company longer?
A:You can always say woulda, shoulda, coulda. But my view was that we will have to live as a public company eventually. It's better that this new management team get used to that now, rather than remain private for another two or three years.
It gives my private-equity partners opportunity that they don't have to wait around for. And frankly, it gives early believers an opportunity to participate in, I believe, a significant new valuation of the music business. Having a bunch of happy shareholders who were in early is a very big thing.
You can look at it another way. If we waited two or three years and the new valuation of the business is in full swing, investors would ask, "Why did you wait so long?" I'm confident that if we do what we need to do, the industry will grow, and the investment community will recognize that and reward the company with the proper multiple.
Q: You have taken more than $250 million in annual costs out of the company. How do you grow now?
A:It's always easier to save than to grow. There's no question we have saved. At the same time -- and I believe this is unrecognized -- we have made investments and laid the foundation for the future. We have invested in [artists & repertoire], executive talent, new media initiatives, and in new distribution agreements. This will get recognized in the coming quarters as we start to grow.
Q: There has been a lot written about your desire for redemption after your experience selling Seagram to Vivendi. Is redemption what drives you in your new role at Warner?
A:My needing redemption is really a press concept. I have had one other job in media, running Universal, and I will stand on that record. That was a great period for movies and the theme-park business, and we built Universal Music, through Polygram, into the world's largest music company.
And I don't know anyone would say owning 45% of Barry Diller's company [then USA Networks, now Interactive Corp.] is such a horrible thing. The calamity that was [Vivendi Universal CEO] Jean Marie Messier, from an operational standpoint, was not my issue. From an investor standpoint, we sold great amounts of stock long before there were any problems. The business was in the hands of someone who, before, had a phenomenal record but who turned into someone who could not handle that new level of responsibility.
I pursued Warner because I thought it would be fun. I thought I could create some value. I love music, and I love working with great teams of people.
Q: You were a guest again this year at investment banker Herb Allen's July media confab in Sun Valley. How did this year's event differ from others?
A:This year, for the first time, you felt like there was more of a confluence of interests rather than a separation of interests between the technology and content companies. This is a very positive thing. There have been a series of rulings recently, including the recent Grokster opinion, [that] over time should help the tech industry come to recognize that protecting copyright isn't antithetical to building innovative business models and creating new technologies.
Ultimately, there's more business for computer makers, telecom companies, software manufacturers, and chipmakers in legitimate businesses rather than illegitimate ones. They're going to come to understand that, and whether they like it or not, the courts are going to continue to support the rights of intellectual property. But at the same time, the content industries recognize they're going to need to be more flexible to accommodate new business models.
Edited by Patricia O'Connell