Consolidation

It's become a multibillion-dollar sport on Wall Street to watch American Airlines swallow Reno Air, or Exxon buy Mobil, or any of the dot-coms snatching
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It's become a multibillion-dollar sport on Wall Street to watch American Airlines swallow Reno Air, or Exxon buy Mobil, or any of the dot-coms snatching up the other dot-coms. Closer to home, Disney bought ABC/Capital Cities, Seagram's purchased PolyGram less than two years after acquiring universal, and real estate/radio network speculator SFX now basically owns the concert touring industry after a spate of bold and costly acquisitions. The world is getting smaller by the minute, and so is the studio business.

But you don't need a skybox at the New York Stock Exchange or a power table at Le Dome to watch consolidation roar through show business. There's been plenty of it going on in the studio community's backyard. Much of the activity has been across state lines and occasionally across oceans. In the past year and a half, London's Metropolis bought Sterling Mastering in New York; The Hit Factory purchased Miami's Criteria Recording; Quad Recording in Manhattan bought Quad Recording in Nashville (with names like that, it seems like a match determined by fate, not number crunching); and Todd-AO, the world's largest independent provider of sound services for the entertainment industry, purchased Sound One Corporation, New York's leading sound-for-picture facility. Before the ink was dry on that deal, Liberty Media Group, a division of AT&T, signed a letter of intent to acquire control of both Todd-AO and L.A.-based Soundelux Entertainment Group. Then in November, only a month later, Liberty announced a stock-swap purchase of Four Media Company of Burbank, Calif., making the Colorado company the largest provider of soundstages in the world.

The studio business is not unique, and the reasons behind the recent consolidations are much the same as those in other industries undergoing buyouts and mergers. Many who track entertainment-industry stocks will point to Sony's acquisition of Columbia Records and later Columbia Pictures in the late 1980s as the flash point for consolidation. Sony's intention, it seems quite clear in retrospect, was vertical integration. If you manufacture home stereos, Walkmans, television sets and VCRs and you make professional audio and video equipment, it makes sense that you would also want to provide the content that they channel.

When companies like Sony and Disney acquire film studios, networks or record labels, they are also often acquiring copyrighted intellectual property, ranging from songs to television shows to movie catalogs to record master archives. Known by entertainment accountants as "the gift that keeps on giving," content is often the reason that companies acquire other companies. Other aspects of acquired businesses may be shucked and shed, and if there is a painful side to this phenomenon, it's in that reduction process. When Seagram's scion Edgar Bronfman Jr. took over PolyGram in 1999, the first thing he did was require $300 million in cost reductions throughout the company's global empire. Part of that was felt in the pink slips that rained down at record labels and film divisions in the ensuing months, and part of it trickled down to the recording studio level, where A&M Studios was sold to Jim Henson's company and is still in limbo as of press time.

The up side can be dramatic, though. For instance, SFX's stock price rose fourfold after it began its acquisition spree more than a year ago. Stock is the magic word, explaining much of the fervor surrounding takeovers. The entertainment industry, like many other industries, has become increasingly beholden to stockholders. The Liberty Media/Todd-AO/Sound One/Soundelux deal, for instance, was essentially a stock deal. According to the proposed arrangement, which was expected to be final by the end of 1999, Liberty Media Group would acquire 50% of Todd-AO's outstanding Class A common stock and 100% of its Class B common stock for the issuance of 2.5 million shares of Liberty Class A common stock. Liberty would end up owning roughly 57% of the equity and 82% of the votes of Todd-AO. Similarly, Liberty would acquire approximately 55% of the equity and 92% of the votes of Soundelux in exchange for the issuance of nearly 1.9 million shares of Liberty Class A common stock. Acquisitions such as these can boost stock prices, if Wall Street approves of the way companies go about it.

The globalization of media parallels the development of globalized industry in general. Firms acquire other companies across state and national boundaries to give them longer reach and access to new markets. When Todd-AO acquired Sound One, Todd-AO was seeking to expand its service offerings into new markets, both in New York and as a gateway to Europe. When Liberty Media bought Todd-AO, Soundelux and, by extension, Sound One, it was seeking to acquire post-production services in-house. For the acquired service providers, the merger, in theory, represents an assured stream of work.

Again, vertical integration. AT&T has huge holdings in cable television (according to reports, Liberty made $5 billion when AT&T purchased Tele-Communications Inc. [TCI cable], giving it the money for the acquisitions). By controlling the means of production along with the pipes into the home, whether cables or phone lines, they assure themselves a consistent stream of content and means of distribution.

But another motive behind acquisitions is equally apparent, though it seems too simple: With the growth of media outlets-from cable channels to multiplex cinemas to the Internet to digital television-comes the need to fill those channels. This is why the History Channel can rerun World War II longer than the war itself, and why Hogan's Heroes and The Brady Bunch are part of our lives all over again. Quite simply, it costs less to buy previously produced content and pour it through media channels than it does to produce it from scratch.

Nashville-A Consolidation Case StudyConsolidation is a complex phenomenon, a series of linked events that depend on a number of factors. Its effects on the studio industry are visible most starkly in one particular market. Nashville came into the 1990s with a solid and sizable, if somewhat aged, studio base. At the turn of the decade, area studios had been existing in a sort of comfortable time warp. The impact of project studios virtually missed the city in the first half of the decade, thanks largely to the nature of its music business up to that point. Nashville was based around country music, a Machine that has a voracious appetite for songs and low-cost records, producing a landscape in which studios could run a steady stream of projects through their doors and fill in any cracks with the thousands of song demos that the Machine required.

Demos also provided the foundation for the numerous smaller facilities in town. Songwriters-one of the core constituencies of project studios-were simply too busy to become personal studio owners. The highly competitive nature of the publishing business in Nashville demanded high-quality demos, which studios and the city's massive musician base churned out regularly. Country record production was also highly centralized in the hands of a few powerful producers, many of whom were also the heads of the city's record labels, another factor reinforcing the status quo.

Nashville had always been a destination for non-country recording projects, but these tended to be centered on a few specific facilities (like Quad Recording, founded by producer Norbert Putnam, who produced artists such as Jimmy Buffett and Dan Fogelberg there, and The Bennett House, owned by producer Keith Thomas, producer for Vanessa Williams and other pop/R&B artists). Pre-1990s Nashville was almost feudalistic in nature, very much the soap-opera setting that director Robert Altman portrayed in his film Nashville. By the end of the decade, it would look more like Oliver Stone's Wall Street.

Then along came a rise in country music's market share, from around 12% to over 18% by 1994-this in a growing u.S. record business that approached $12 billion that year. Led by the success of artists like Garth Brooks and Reba McEntire, country became a media darling, and Nashville's cultural stock soared. It became apparent that Nashville studios needed to revamp to meet what looked like a long run as a reinvigorated music capital.

The lag time between this realization and actual execution, however, proved to be long and costly. The first significant move was the opening, in late 1993, of Masterfonics' The Tracking Room, which brought in Nashville's first SSL 9000J console, set in a Tom Hidley-designed studio. With a stated card rate of $2,500 per day-nearly 40% higher than the then-top-of-the-line rate in town-The Tracking Room raised the bar in Nashville and set the stage for a massive expansion of the studio base. Within two years, six more world-class rooms at three facilities would come online: two at the newly constructed Starstruck Studios (including two more SSL 9000J consoles); three at Ocean Way Nashville, a joint venture between L.A.-based Ocean Way and Memphis/L.A.-based House of Blues Studios (nee Kiva); and one, another Hidley 9000 combination, at East Iris. Each facility had cost in excess of $3 million to build.

What happened next was, in retrospect, entirely predictable: The bottom fell out of country music. As early as 1995, country began to decline in popularity and market share. By 1997, record labels were beginning to pull up shop in Nashville: A&M closed, as did Imprint, Decca, Almo Sounds and others. Revenues to recording studios, already reeling from a successive round of rate cuts generated by all this new competition, disappeared. It set the stage for progressively more intensive rounds of musical chairs, in which there was one less studio every time the music stopped. The effect on the studio business became clear in 1998, when several stalwarts of the community closed, from Sixteenth Avenue Sound in 1998 to Music Mill the following year. In January of 1998, Masterfonics entered Chapter 11 bankruptcy protection, listing debts of $2.9 million.

Then the consolidation began. Emerald Recording, one of Nashville's stronger players, sat out what had become a pro audio arms race in the middle of the decade and therefore had capital. Emerald bought Masterfonics' assets out of bankruptcy almost a year later. During that time, Seventeen Grand, a relative newcomer to Music Row, acquired Love Shack. Meanwhile, more facilities went on the block. In early 1999, Emerald continued its buying spree, acquiring The Workstation and looking at another studio still under construction. Around the same time, Gary Belz, owner of House of Blues Studios and a co-owner with Allen Sides of Ocean Way Nashville, stepped in and bought East Iris.

During this period, Nashville's studio base underwent a number of other changes. Both Emerald and Starstruck expanded their broadcast services, and Emerald expanded a post-production joint venture. One of Nashville's leading mastering facilities, MasterMix, moved into a new facility and added DVD authoring to its repertoire. And smaller studios began to inhabit the hulks of some of the departed facilities (for example, two studios took root in the former Sixteenth Avenue Sound). In fact, a number of new small studios and services developed in the later years of the decade, from CD-R replication services to Pro Tools-based tweaking. Nashville's studio infrastructure wasn't crumbling, it was evolving. And if a changing entertainment market was the driving force, then consolidation was the engine.

What's happened in Nashville is far from over. The players there have mixed responses. "There's a kind of maturity that's being forced upon Nashville at the moment," says Brett Blandon, manager of Ocean Way Nashville. "We're in a zone in between the original good ol' boy way of doing things and the cutting edge. Nashville's finally becoming accepting of change, if for no other reason than it has to."

Josef Nuyens, owner of Castle Studios, is less sanguine. "I don't think anything's going to really change in the end," he says. "At least, not as far as studio revenues are concerned. My long-term prediction is that many of the studios that are growing by consolidation now are going to break apart five years down the line because they won't be able to carry the weight that the cost of these new acquisitions brings with them."

Recording Arts owner Carl Tatz encapsulates a lot of unspoken sentiment when he says, "I'm curious about how the ending to all this comes out. But in a way, I want to know but I don't want to know."

Nashville's experience has definite implications for other markets. Most notable among them at the moment is Miami, which in many ways is now where Nashville was in 1992: on the cusp of having its local music culture intersect with mainstream pop. Records from Ricky Martin, Enrique Iglesias and Jennifer Lopez are doing on the Billboard Hot 100 what Billy Ray Cyrus, Clint Black and Reba did six years earlier. The acquisition of Criteria Studios in Miami by The Hit Factory in New York set in motion a continuing series of studio openings and renovations. Two huge post-production and multimedia service facilities, Power Plant and The Hollywood, have either announced their intentions or actually started to build there.

The similarities between the two markets are striking. But so are the differences. Where Nashville's music base was dependent upon the success of country, Miami's Latino music has ready markets throughout the world, and Miami has already evolved into the production and post-production hub for much of that work. (Country tried to project itself globally in the 1990s, but with the exception of a few markets, such as Brazil and Ireland, failed to achieve any notable success.) This doesn't mean smooth sailing for Miami. As Nashville's experience indicates, the lag time is long between realizing that a market is hot and opening the doors to a new facility that will service it, yet a market's time at the top is growing ever shorter. And early entry into a hot market is no guarantee of success, as Masterfonics found out.

The two biggest music recording studio markets, New York and Los Angeles, have thus far not felt the impact of consolidation. (The post-production business in Los Angeles has undergone a radical transformation over the past six months that dwarfs recording-studio consolidation in both facilities and dollar amounts.) In a sense, New York underwent that years ago when the record companies headquartered there, such as RCA and Columbia, began entering their global phases and closing their own recording studios. Los Angeles has seen some turnover, but there are no indications that its studio base is about to change. The city seems to be benefiting from the resurgence of rock music sales and airplay, and L.A. has always been the guitar-god mecca.

But that doesn't mean things won't change. Consolidation is an evolutionary business process, one that will likely affect all industries at one time or another. Change is the only constant, and that is something the entertainment industry and the studio business have in spades at the moment.