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NEW YORK - The world's leading music companies, hit by falling CD sales, are switching to a new groove: buying merchandising, management and other companies to diversify and boost profits.
This week, Universal Music and Warner Music announced investments in companies specialising in artist management or web networking, segments not 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 yesterday.
Warner Music said it had invested around US$110 million ($146.2 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.
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 fell 20 per cent in the first half of the year as fans increasingly buy music online.
Piracy is also a 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 are beginning to bulk up resources in areas which had previously 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 is where the restructuring they talk of becomes important," said Tuna Amobi of Standard & Poor's. "The challenge is to work with the artists and come up with management models that are beneficial to the label. It's not going to be an easy thing to do."
Other majors are looking to reduce their reliance on recorded music sales.
Universal Music said this week that 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 a US$88 million deal by Universal to buy British management and merchandising firm Sanctuary, whose artists include James Blunt and Elton John.
Although analysts understand why the majors are making the moves, they say 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 personal kind of business," says Bishop Cheen, an analyst at Wachovia Securities. "With the big majors this has not always been their strongest suit. But diversifying is still absolutely the right strategy."
- Reuters
