CRUNCHTIME: Warner Music Group

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Warner music group needs to rewrite its music business, preferably with an upbeat tempo.

Market share for Warner Music dropped to just 13% in 2001, according to Soundscan, a music research company measuring retail activity, from a high of more than 20% just five years ago. Cash flow has dropped to just under $450 million from a high of more than $600 million in 1996.

In its heyday, under former Warner Communications chief Steve Ross, the music division was a jewel of the empire. "It was a cash cow, and it fed investment in other areas, such as cable," said Harold Vogel, president of Vogel Capital Management. "Now it is being overshadowed. It's kind of an appendage."

After a number of executive changes at the top, Warner Music began to slip in its development of new talent. It also missed out on the consolidation frenzy that gripped the music industry over the past five years.

Like other AOL Time Warner divisions, Warner Music made sizable cuts, eliminating 600 positions through early retirement and layoffs. Though the company won't comment on actual dollar amounts, analysts estimate the cutback resulted in some $20 million in savings. To industry observers, Warner Music doesn't seem to have much fat left, having already streamlined and centralized some distribution operations. Still, one analyst noted, nothing is off the table. "In this environment, AOL Time Waner will leave no stone unturned," said Jill Krutick, analyst for Salomon Smith Barney, New York.

In one of its first statements after the announcement of the merger, AOL Time Warner pointed out that the company's ability to cross-market among its properties would instantly benefit Warner Music. "It's tremendous cost savings," said Rick Dube, Internet music analyst for Webnoize, a music Internet consultancy. "You can do as much in-house as you can with outside vendors."

AOL Time Warner executives said a marketing efficiency goal was achieved in launching Madonna's last release, "Music," using America Online's current music space This summer, AOL will launch AOL Music, headed up by former BMG Entertainment marketing chief Kevin Conroy. AOL Music will launch a music retail site, as well as a music TV cable network, all of which could help Warner Music.

Total Q1 Revenue $881 mil, down 6%

EBITDA* $94 mil, down 7%

2000 market share 13%

2000 revenue $4.1 bil

management Roger Ames, Chairman-CEO

artists Madonna, matchbox twenty, Eric Clapton, Red Hot Chili Peppers, Brandy, Kid Rock, Goo Goo Dolls, Missy Elliot, Tim McGraw, Barenaked Ladies and Don Henley

record companies The Atlantic Group, Elektra Entertainment Group, London-Sire Records Inc., Rhino Entertainment, Warner Bros. Records

distribution agreements Giant (Revolution) Records, Maverick Records, Qwest Records, RuffNation Records, Strictly Rhythm Records, Sub Pop Records, Tommy Boy Records.

* earnings before interest, taxes, depreciation and amortization

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