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Polygram Turns Up The Volume


The Corporation

POLYGRAM TURNS UP THE VOLUME

It wasn't too long ago that PolyGram Chief Executive Alain Levy was probably the least known entertainment mogul in the U.S. True, he headed one of the world's biggest music companies. But few Americans outside the music business had ever heard of Levy. Indeed, London-based PolyGram was best known in the U.S. as the stodgy producer of such highbrow fare as Pavarotti and Friends and Die Frau Ohne Schatten conducted by Sir Georg Solti.

Nowadays, Levy has a much higher profile. Over the past few years, he has transformed the once-sleepy classical music company into an entertainment powerhouse in the U.S. He has snapped up three major U.S. record labels, the most recent being the $325 million purchase of Motown Record Corp. last year. Along the way, PolyGram's U.S. arm has become the home of such pop royalty as U2, Aaron Neville, and INXS.

And Levy, 47, an urbane Frenchman with a Wharton School MBA, has ambitions far beyond the confines of pop music. He is aggressively diversifying into a wide range of entertainment products, from Broadway musicals to home-exercise videos. He even has his sights set on Hollywood. Although PolyGram lost $140 million during its last foray into the film business in the early 1980s, Levy has already acquired a number of small independent producers. And there's speculation in the motion-picture industry that PolyGram may buy all or part of troubled MGM/UA Communications Co., which Credit Lyonnais must sell under French banking laws by 1996. Buying MGM "would certainly make things easier," says Levy, PolyGram's CEO since 1991. "But I'm far from seeing it as the only option."

Levy's results have so far been music to investors' ears. Merrill Lynch & Co. analyst Harold L. Vogel expects PolyGram's North American operating profits to surge 35% this year, to $73 million, while its revenues climb 16%, to $1 billion. And that's helping to fuel PolyGram's worldwide operating profits, which should increase 16%, to $563 million, says Vogel, as its revenues rise 11%, to $4.3 billion. After rising 70% last year, shares in PolyGram, which is 75% owned by Philips, the Dutch electronics giant, are trading on the Amsterdam and New York exchanges at around 40.

So far, though, most of PolyGram's success story has played out overseas. The company was founded in 1962 as a joint venture between Philips and Germany's Siemens to make albums that would be played on their record players. In 1987, Philips purchased Siemens' stake. Today, PolyGram dominates the European and Asian music markets, which together produce 72% of the company's revenues. And it continues to expand its international franchise. In just the past year, the company has acquired four new subsidiaries in Eastern Europe. PolyGram is neck-and-neck with Warner Music Group Inc. and EMI Music as the world's largest music company.

"VISION." Now, Levy wants to crack the U.S., the richest entertainment market in the world. Last year, North America accounted for only 23% of PolyGram's sales. More important for Levy, U.S. performers have huge appeal in other countries. Many of PolyGram's non-English-speaking acts, such as Japan's Zard, have a hard time finding audiences outside their home countries.

Naturally, the music business has been the cornerstone of PolyGram's U.S. push. PolyGram has built up its presence in the U.S. by buying up established companies and keeping the subsidiary's local identity. Before acquiring Motown last year, Polygram bought Island Records Inc. and A&M Records Inc. in 1989 to add to its long-held Mercury label in the U.S. PolyGram's U.S. market share in music has nearly doubled since 1989, to 14%.

In many cases, Levy has freed the labels' executives from the marketing and distribution chores that are more efficiently handled by PolyGram. The labels can then focus on the crucial task of finding new talent. In recent years, his record-label chiefs have proven adept at discovering profitable new acts, such as Billy Ray Cyrus and Vanessa Williams. And PolyGram's executives seem to relish their freedom. "It's so much like [late Time Warner Inc. CEO] Steve Ross did in his day, allowing the place to run autonomously to show its collective and individual strengths," crows Motown CEO Jheryl Busby.

Levy is also known for his skill at cultivating talent. PolyGram's boss, who first joined the company as head of its French operations in the mid-1980s, can often be found milling around backstage at concerts. And he's known for encouraging PolyGram's artists to branch out into unconventional projects. Take Jon Bon Jovi. Levy encouraged him to develop his talents as a solo songwriter. That led to his soundtrack for the movie Young Guns, which sold more than 4 million albums for PolyGram and garnered a Golden Globe award. "Alain and I had the vision to do it," recalls Bon Jovi. Levy's involvement in the project, which included helping to pick songs to record, left the rocker "pretty surprised."

But Levy doesn't want to be confined to pushing CDs and cassettes when the entertainment economy is exploding. That's why Motown's Busby is racing ahead with plans for several new ventures, including a string of Motown aafes that would serve up Motown tunes as part of the ambience.

Elsewhere, PolyGram is busily diversifying into other realms of American entertainment. In addition to staging live concerts, PolyGram is dabbling in Broadway production. In 1991, it purchased 30% of composer Andrew Lloyd Webber's Really Useful Holdings, which produces The Phantom of the Opera. PolyGram also produced the Broadway musicals Jelly's Last Jam and Damn Yankees. Besides generating their own revenues, such shows also led to soundtrack albums for PolyGram.

Still, Levy insists that the film business is key to PolyGram's future. He reckons that between box-office receipts and selling soundtrack albums and home videos around the world, no other entertainment product has the revenue potential of movies. And in true PolyGram style, Levy is establishing a presence in Hollywood by buying up film producers. So far, PolyGram has spent about $200 million to acquire and capitalize Working Title, an artsy British company responsible for My Beautiful Laundrette; Propaganda, the cutting-edge producer of Twin Peaks; and Interscope, home of such middlebrow hits as Three Men and a Baby. It's an eclectic group. But Levy says the diversity is key to developing distinctive films that will appeal to different audiences. He vows that films will account for 25% of the company's revenues by the end of the decade.

Reaching that goal won't be easy. PolyGram's first Hollywood adventure flopped in the early '80s because it funded big-budget movies without having the ability to distribute the films and the subsequent videotape versions. Maintaining their own distribution systems allows studios to keep valuable video and cable rights that would otherwise be sold to help pay the cost of making the films.

For now, PolyGram Films International is busy distributing PolyGram movies abroad. In the U.S., PolyGram has struck distribution deals with Walt Disney Co. and MGM. It also founded Gramercy Pictures in partnership with Universal Studios to distribute artsy, niche movies. But by the end of 1996, all distribution agreements expire.

NO HURRY. So Levy is faced with two options. First, he could build a distribution system from scratch. His second option is to buy an existing distribution network. The most likely candidate may be MGM, say industry insiders. MGM owner Credit Lyonnais is expected to ask for as much as $2 billion for the money-losing studio. Levy is coy on the subject. Still, he says he's prepared to pull out his well-capitalized checkbook for the right deal.

Philips appears to be willing to bankroll Levy's aspirations. PolyGram's parent accepted a dilution in its stake, from 79% to 75%, when PolyGram issued 10 million new shares to pay for Motown. Philips CEO Jan D. Timmer declined to be interviewed for this story, but Levy says Philips would likely consider further dilution if PolyGram wanted to make more large acquisitions, though none are now planned.

Some film-industry executives take Levy's measured pace as a sign that he isn't willing to spend what it takes to build a major film company. So far, PolyGram has made only inexpensive films. And last year, Levy avoided the high-priced bidding wars for Castle Rock Entertainment and New Line Cinema Corp. Both companies were ultimately bought by Ted Turner. What's more, as scores of entertainment giants, such as Disney, Warner, and even Japan's Sega Enterprises Ltd., diversify into new products, PolyGram may find it tougher to conquer the U.S. market.

Still, Levy won't be hurried. "Someone who's willing to lose a lot of money on a consistent basis should be in Las Vegas and not running a major, publicly quoted company," says Levy, who vows to take the time to learn the movie business before making a big move. And if Levy figures out the movie business as well as he has the music business, the rest of us are in for quite a show.

HOW POLYGRAM

ENTERTAINS AMERICANS

Total 1993 sales in North America: $871 million (+18%); Total 1993 operating income in North America: $54 million (+100%)

POP MUSIC

With record labels that include Island, Motown, and A&M, PolyGram saw 30 albums go platinum last year. Its top performers include Bryan Adams, Sting, U2, Jon Bon Jovi, and Elton John.

MOVIES

PolyGram has released seven feature films since the beginning of 1993, including Four Weddings and a Funeral, Backbeat, and The Air Up There. It expects movies to provide 25% of revenues by the end of the decade.

TELEVISION

PolyGram's Propaganda unit made its name with the Twin Peaks television series. It's working on several new shows for the upcoming season. In collaboration with other major music companies, PolyGram is helping to launch a music television channel this year that will compete with MTV.

LIVE ENTERTAINMENT

On top of a 30% stake in Andrew Lloyd Webber's Really Useful Holdings, which produces The Phantom of the Opera, PolyGram produces Broadway musicals such as Damn Yankees. PolyGram is making plans to stage the 25th anniversary of Woodstock this summer.

HOME VIDEO

PolyGram has been selling sports and music videos for several years and started distributing its own films to video stores last September. Hottest sellers include sports videos and Billy Ray Cyrus concert tapes.

MERCHANDISING

PolyGram makes and distributes caps, T-shirts, and other paraphernalia tied to its stars and non-PolyGram artists as well.

DATA: COMPANY REPORTS, BUSINESS WEEKElizabeth Lesly In New York, with Ronald Grover in Los Angeles and bureau reports


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