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Thursday, May 12, 2005

Bronfman Serves Warner on the Rocks

Although I'm still a relatively young man, I harbor no illusions about my age. We're all growing older. I'm no exception. I do what I can to deny the aging process and one of the best tricks I've found to do that is playing with my pension fund investments.

Managing my profit sharing plan affords me the opportunity to feel like a big shot, buying and selling stocks. My Quicken program automatically updates the quotes and prices so that not a day goes by when I don't know my financial position. But the real reason why my pension fund keeps me young is that I can still tell myself, "Hey, I can afford to take a little risk here because I can't even touch this money until I retire."

And from what I can tell, retirement is still a long, long way off, which makes me feel younger. Or at least less old.

High risk is what long term accounts are for, in my book, so I always turn a scrupulous eye toward stocks whenever I think about buying or selling. I'm absolutely relentless when it comes to the riskiest issues of all, the IPO's. The first thing I look at when buying any stock - including IPO's - is (of course) the company's brand strategy.

IPO's are the acronym for Initial Public Offerings, the first day of trading when a company goes public. Most people believe that the first day of trading is the best day, with the stock doubling or tripling in value by day's end. It does happen. It also doesn't happen, as in the case of Warner Music.

In my past writings, I've pointed out the folly and pandemic spread of Caretaker Management Syndrome, the disease sweeping American corporate management in which people in ivory towers with no brand-building experience -- usually rich kids -- are left to run companies into the ground. Such was the case this week with the IPO for Warner Music.

Lest anyone overlook it, Warner Music's fate has been entrusted to none other than that poster boy for CTM, Edgar Bronfman. Bronfman, heir to the Seagram's liquor fortune, first plied his skills to Universal's entertainment, primarily music and movies. Although you can look up the details on the web, the story goes something like this:

Star-struck, failed songwriter Bronfman liquidates his family fortune to buy Universal/MCA for billions. Once in control, he issues mandates that completely ignore anything and everything having to do with the company's brand strategy, including (at one point) orders that everyone working for him wear black. By some miracle (ya think?), one of his songs ends up in as the title tune for a Universal movie. Within years, however, Universal is flat on its back, forcing Bronfman to sell out - at something like a $2 billion loss.

You'd think that a guy like this would sit it out and lick his wounds. Maybe go back to what his family knows best: liquor. But stardust doesn't wash out easily. Bronfman re-grouped and pitched as many gullible investors as he could to charge back into the music business. Strange as it may seem, he got the money and found himself, once again, at the top of a music company. This time Warner Music.

Now, let's see how qualified YOU are to run a music company:

If you watched Apple's success with the iTunes store, the re-launch of Napster and the proliferation of digital, downloadable music services, would you launch an IPO for a traditional, non-digital music company? Wait a minute. Let me add one more thing: Would you choose to launch Warner Music's IPO the very same week that Yahoo announces its own downloadable music service?

If you answered, "No," congratulations! You're now more qualified than Edgar Bronfman to run an international music company! Yup, you can throw away that resume now. Rescind all those applications for those Home Depot jobs, because you have more smarts than some rich kid who still can't manage to get a razor close enough for a clean shave.

What a dope. The guy takes one of the biggest brands in entertainment history and still can't figure out how to leverage it into a mega-brand worthy of a dynamite IPO. To add insult to injury, Warner's IPO was scheduled to go out at $24 per share. At the last minute, the price was lowered to $17 per share. At the end of the day, the IPO actually lost value, finishing out under $17 per share.

Had Bronfman known enough to build the Warner brand before trying to milk it, he may have had a chance. He didn't. And my prediction is that Warner's brand value has no place to go but further down.

They say that the rich get richer. That may be true.

They certainly don't seem to be getting much smarter.

4 Comments:

Anonymous Anonymous said...

maybe he needs a tax loss?

8:58 AM  
Blogger Cannell said...

I am reminded in this article of the folly throughout the dot com era. Remember when outrageous spending was based on nothing more than the greed of "cashing in."

It's like Deja Vue all over again, but you'd think that the multi billion dollar lessons of 2001 would have a longer shelf life.

I think the lessons here are universal and apply to any business venture. The lesson being the need to acquire experience, and starting at the bottom is not something to be overlooked.

I am also intrigued by the speed of business today. If we slip back into the 50's it's hard to believe that a third generation rich kid could possibly bring down a dynasty in no time at all.

So, I ask you, Rob, what is it about the speed of business today and the new technologies that can wipe out brands from the minds of men?

How do we manage to forget, or lose sight of, favored brands in the blink of an eye?

Or do we?

Is it really the abuse of a brand, that you are so quick to point out, that does the damage? Or is it also the fast pace of business that is just so unforgiving?

12:55 PM  
Blogger Rob Frankel said...

I don't think it's the speed of business as much as it is the speed of expectations. When you couple the third generation management with two generations of McDonald's, the result is people who expect more results in much less time.

Interestingly, there's another pattern that's equally distressing: many of these caretaker managers make careers out of destroying companies. They get hired, slash costs to create stories in the press about "bringing the company back to profitability" and then leave town when their ineptitude results in a weakened brand.

Sort of like corporate serial rapists.

It happened at Maytag, when they brought in a bean counter from Pepsi as CEO. It happened at Kodak (see next week's blog entry). In fact, it happens with alarming regularity.

Back to your point, business doesn't really happen any faster than it did before. Just try launching a new brand and see. But people are less patient.

And don't let that techno thing fool you, either. Just because your e-mail gets across country in the blink of an eye doesn't mean the guy at the other end is going to move any faster after he opens it. Human nature is still human nature.

Thanks for your comment, Cannell. Thought-provoking as usual!

7:56 PM  
Anonymous Anonymous said...

Tis sad; very sad indeed. A fool and his money soon go separate ways.

12:44 PM  

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