NEW YORK (Reuters) - The world's leading music companies, hit by falling sales of CDs, are switching to a new groove -- buying merchandising, management and other companies to diversify and boost profits.
Just this week, Universal Music and Warner Music Group announced investments in companies specializing in artist management or Web networking, segments they might not have considered part of their core operations in the past. "Our return needs to be enhanced through a broader partnership with artists," Warner Music Chief Executive Edgar Bronfman said on a conference call with analysts on Tuesday.
Warner Music said it had invested around $110 million to increase its stake in artist management company Front Line Management, whose clients include Jimmy Buffet, Neil Diamond and Christina Aguilera.
"While the overall music business, including management, touring, sponsorship, merchandising ..., is growing, the recording business at present is not," Bronfman said.
NO MORE BUSINESS AS USUAL
Music companies make most of their money from sales of recorded music, usually as CDs, followed by music publishing.
Major record companies have traditionally acted like venture capital firms by seeking out unknown talent, taking a risk in developing artists.
If an artist has a hit album, the record company can usually recover its investment and make a profit through CD sales. But CD sales have fallen 20 percent in the first half of the year, more than the companies and analysts had forecast, as fans increasingly buy music online.
Piracy also remains a major drain on profits.
And despite their role in cultivating unknown talent, record companies make no money from the artist's touring, personal appearances, advertising and merchandising.
That is why the music companies, from Vivendi's Universal Music to EMI Group Plc and Warner, are beginning to bulk up resources in areas which had previously only been ancillary revenue streams.
Warner's management has been one of the most vocal about the need to diversify its revenue sources to include areas such as new digital businesses, touring and merchandising.
In June, Warner Music formed a joint venture called Brand Asset Group with Violator Management whose clients include rapper 50 Cent.
"This where the restructuring they talk of becomes important," said Tuna Amobi, analyst at Standard & Poor's.
"The challenge is to work with the artists and come up with management models that are beneficial to the label," he said. "It's not going to be an easy thing to do.
THE FULL BENEFIT OF TALENT
Other industry majors are looking to reduce their reliance on recorded music sales.
Universal Music Group said on Monday it had taken a stake in Loud.com, a hip-hop social networking site which offers competitions to win cash and recording contracts.
The deal follows an $88 million deal by Universal to buy British management and merchandising firm Sanctuary, whose artists include James Blunt and Elton John.
Though analysts understand why the majors are making the moves, they caution these companies will need to change the way they work with their most important asset: the talent.
"The Big Four have always been predatory and artist management is a very personal kind of business," says Bishop Cheen, analyst at Wachovia Securities.
"With the big majors this has not always been their strongest suit," he said. "But diversifying is still absolutely the right strategy."
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