For one glorious day on June 11, Time Warner hit the lofty figure
of $50 a share, roughly the price that Paramount Communications
offered for Time Inc. in 1989 when it tried to break up the merger
Time and Warner Communications.
Here today, gone tomorrow.
In the weeks since, the news from Time Warner, the entertainment
giant, has hardly been music to investors' ears. According to
analysts who have spoken with company executives, Time Warner has
indicated that when it reports second quarter results on Wednesday,
its music division is likely to post a 25 percent drop to about $120
million in its operating cash flow, or earnings before interest,
taxes, depreciation and amortization.
Over all, Time Warner may still report a increase in cash flow for
the quarter of 13 percent to 15 percent, to about $1.18 billion.
But the problems at the Warner Music Group partly explain why the
shares dropped back, closing Friday at $46.25. Whether temporary or
not, the downturn of recent days ended a solid climb: the stock had
made steady progress after dipping to less than $30 just shy of a
While less visible in some ways than Times Warner's movie and
cable television divisions, the music group is uniquely valuable in
the company's empire. With high profit margins and low capital
expenditures, the division last year generated 16.5 percent of the
company's $4.5 billion in combined cash flow.
The expected downturn in music revenue doesn't change the fact
that Warner Music remains the industry gorilla, with a 21 percent
share of the market. But these days, just being big no longer
generates the cash or cachet it once did.
"It has not broken any new groups recently," one rival music
industry executive, who spoke on condition of anonymity. "In their
heyday they were hitting home runs with major new artists in every
field. How are they going to be the cutting-edge ruler they were for
so many years?"
It is rare, of course, for a label to go a decade or so without a
dry spell artistically. But at Time Warner, this particular dusty
stretch comes after the division has been roiled by management
changes in recent years, including the departures first of Robert
Morgado and then Doug Morris as the unit's chief executive.
Time Warner's chairman, Gerald Levin, was widely criticized for
replacing longtime music executives with Michael Fuchs, the former
chairman of Home Box Office. But Fuchs, too, was later ousted and
replaced by Robert Daly and Terry Semel, already co-chairmen of the
Warner Bros. film division.
Changes followed at many of the company's individual music labels,
including Atlantic Records.
Such turmoil in any entertainment operation often generates deals
seemingly aimed at assuring outsiders that a new team is committed
the future and willing to invest heavily. Thus, there was no
surprise when the company struck a deal worth a rumored $80 million
with the rock group R.E.M., whose first album under it, New
Adventures in Hi Fi, was a commercial disappointment; indeed, the
deal is now viewed as an impulsive and costly mistake. …