LOS ANGELES -- Seagram Co. absorbed PolyGram Thursday in a move that shifts the company's focus from its struggling movie business to a music industry troubled by stagnant sales and rapidly changing technology.
The $10.4 billion acquisition turns Montreal-based Seagram into the world's largest music company with an international roster of artists ranging from country's Reba McEntire to rockers U2 and teen idols Hanson.Seagram has said it plans to reduce costs in its expanded Universal Music Group by $300 million. To reach the goal, Universal is expected to cut 3,000 or more of the company's 15,500 jobs and trim its artist roster.
"Everyone is going to start looking forward to see how smoothly the integration goes," said Linda Bannister, an analyst with Edward Jones. "This acquisition definitely puts Seagram in the music business with both feet. We'll have to see if they can take it to the next level."
Under the new structure unveiled by the company, two Universal labels focusing on rock, pop and rhythm and blues -- Island Records and Mercury Records -- will be merged into a single label. Polygram's Verve and Universal's GRP jazz labels also will combine. Both new labels will be based in New York.
Universal's Nashville labels, MCA and Mercury, will continue to operate independently. An East Coast music group will consist of the Motown and Universal labels while in Los Angeles, the Interscope, Geffen and A&M labels will operate as units in a West Coast group, the company said.
"The integration of these two companies presents a rare opportunity to create an organization that is well positioned for profitable growth," Doug Morris, chairman and chief executive of Universal Music Group, said in a statement.
The move to music comes on the heels of a series of costly box office failures that led to forced resignations by top executives at Seagram's motion picture business.
Two important fall movies, "Babe: Pig in the City" and "Meet Joe Black," flopped at their openings, leading to the departure last week of Universal Pictures chairman Casey Silver. Universal's chief executive, Frank Biondi Jr., left under pressure in October.
"Primary Colors," "Out of Sight," "Mercury Rising," "Black Dog" and "BASEketball" also were among the company's 1998 duds, leaving Universal in a battle with beleaguered MGM for last place at the box office.
In addition to the weak box office, Seagram is facing declining profits from its liquor business as a result of Asia's financial crisis.
The music business offers opportunity in an industry where failure is less catastrophic, said Scott David, an analyst with Schroder & Co.
"Music, it's really a business where you make smaller bets. You can control the risk better. You control the costs better," said David. "Marketing costs are less. It's a good cash business."
Yet the music industry also has its own set of problems.
In 1997, the sale of recorded music fell for the second straight year as consumers finished converting old LP collections to CDs. Sales last year fell 6.5 percent in unit volume and 2.4 percent in revenue to $12.2 billion, according to the Recording Industry Association of America.
A string of successful releases during the first half of 1998 boosted sales 6.8 percent in unit volume and 11.9 percent in revenue to $5.8 billion compared to the same period in 1997.
Despite the increases, it is unlikely the industry will achieve the dramatic growth rates enjoyed during the 1980s, when the CD revolution spurred the sales of millions of older albums converted to the new format, said David.
The industry also faces the challenge of adapting to Internet technologies that could make the CD and even music stores obsolete.
Traditional record companies are losing sales to MP3 technology, which allows high quality audio files to be downloaded from the Internet and stored on a computer disk.
Pirated versions of songs from established artists are being downloaded from a number of Internet sites. Equally disturbing for industry executives, some new artists are bypassing record companies by selling their music directly to fans over the Internet, and a few are giving their recordings away via the new medium just to gain exposure.
One company, Diamond Multimedia Systems Inc., already is marketing a Walkman-like player, the Rio, that can store and play hours worth of music downloaded with MP3.
But Internet-based distribution systems could be a boon, as was the switch to the CD, if the recording industry can find a way to adapt, said Ms. Bannister.
"There are new technologies coming down the pipeline. People already are buying music over the Internet. It could change the dynamics of the music industry," she said.