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Get Four
|  | SEPTEMBER 22, 2004
By Tom Lowry Extended Play for Universal's Music Man Now on a roll, Doug Morris may be getting a new five-year, $70 million contract from the label's French parent, Vivendi After four decades in the music business' unforgiving mosh pit, Universal Music Group Chairman and CEO Doug Morris says he's still having a blast. His wildly popular urban artist, Nelly, has two new albums, Suit and Sweat, hitting the Billboard charts at No.1 and No.2, respectively. The last act with that kind of one-two punch was Guns N' Roses 13 years ago. Says Morris with a chuckle: "This is just fun, isn't it?" But don't be fooled by Morris' good spirits. It hasn't been all celebration for the honcho of one of the world's leading music companies. Once far and away the biggest, with market share nearly double that of its next closest competitor, Universal got slammed, along with all the other labels, by piracy and illegal file sharing from 2000 to 2003. And it stumbled badly last fall when it tried to respond by cutting CD prices. In January, Island Def Jam Group CEO Lyor Cohen, one of Universal's big hitmakers, was wooed away by Warner Music Group. In August, Sony (SNE ) and BMG Entertainment merged, creating a monster rival. And to top it off, French parent Vivendi Universal (V ), having sold most of its U.S. entertainment properties to NBC in May, was said to be mulling a sale of the leftover music unit. STRONG ROSTER. Still, the French insist they're committed to music. Indeed, BusinessWeek Online has learned that Vivendi is preparing to re-sign Morris, 65, to a new five-year deal in mid-October. The new pact, say sources close to the company, could be worth more than $70 million if Morris hits certain targets. Morris declined to comment, other than to say he's not retiring anytime soon. Vivendi officials declined to comment as well. But Vivendi CEO Jean René Fourtou gave Morris a veiled endorsement by telling investors on Sept. 14 that he expects more growth in shareholder value from "the continuing turnaround in the music market." Industrywide, album sales grew by 7% during the first half of 2004 after years of losses. Universal is high on its prospects for the second half, with new releases expected from chart-toppers such as U2, Shania Twain, Eminem, and Gwen Stefani. "When cutting costs, we've tried very hard not to touch our A&R [artist and repertoire]," says Zach Horowitz, president of Universal Music Group. Although first-half revenues were flat, at about $2.5 billion, Universal can boost revenues from tie-ins with NBC Universal, of which Vivendi still owns 20%, says Bear Stearns & Co. analyst Mark Harrington. DUSTUP WITH RETAILERS. The goal now, says Morris, is to build on the earnings momentum from the first half, when Universal posted operating profits of $18.3 million, vs. a loss of $51.2 million in 2003. In the next few months, he plans to wrap up $300 million in cost cuts, paring everything from marketing budgets to expenses for video shoots. Still, the most important move this year is Universal's gutsy challenge to some comfy, long-standing industry practices. Its plan to cut CD prices to stimulate sales -- called JumpStart -- alienated music stores and failed to prompt other music companies to follow suit last fall. The idea was to pare prices of new releases to as low as $9 -- and even lower for older music -- while ending lucrative payments to retailers to advertise its CDs, so-called co-op money. It figured the retailers could make up for those payments, which often weren't used for ads, with higher sales volume. After retailers squawked, Universal offered in March to restore some co-op payments but stuck with the basic concept. Retailers came around, and now it's working, says Morris. Universal's sales are up over 18% so far this year. During the week of Sept. 22, Universal had five of the top six albums on the Billboard charts. And online efforts seem to be working: Last week, Universal sold 1.5 million digital downloads, an all-time high. DREAM TEAM. To keep the hits coming, Morris is also focused on his executive talent, making up for Cohen's loss with a new team -- his version, he says, of the 1990s Chicago Bulls. With Antonio "L.A." Reid, from Arista Records, as his new Island Def Jam chief, the hiring of former Elektra Entertainment Group boss Sylvia Rhone, former Sony rainmaker Tommy Mottola, ex-Epic Records Group boss Polly Anthony, and Morris' longtime associate, Interscope Records' Jimmy Iovine, "there has never been a company like this," says Morris. "I want to stockpile talent." His colleagues say Morris, who started out as a producer, loves the music biz so much that last year he returned to the sound board to produce Nashville newbie Pat Green's hit song Wave On Wave, later nominated for a Grammy. Some observers say that kind of passion might one day prompt Morris to orchestrate a management buyback if the French ever decided to bail on Universal. He discusses this scenario now and then with his pal Steve Jobs, whose Apple Computer (AAPL ) made its own big plunge into the music business with the iTunes Music Store. But for now, no deal appears necessary as long Morris and his Paris bosses stay in sync.  With Carol Matlack in Paris Lowry is Media editor for BusinessWeek in New York
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