Public Subsidiary of Philips Electronics N. V.
Sales: $5.5 billion (1997)
Stock Exchanges: Amsterdam New York
SICs: 3652 Phonograph Records & Prerecorded Audio Tapes and Disks; 7812 Motion Picture & Video Tape Production; 7822 Motion Picture and Video Tape Distribution
Netherlands-based PolyGram N.V. is one of the world’s largest entertainment companies and in 1997 remained the number one record company in the world. Over 80 percent of its income comes from the music business, specifically the acquisition, production, marketing, manufacture, and distribution of recorded music, along with music publishing and participation in TV music channels. Its popular music labels, including A&M, Def Jam, Island, Mercury, Motown, and Polydor, accounted for 62 percent of PolyGram’s sales in 1996. Nine percent of its sales came from its classical music labels: Decca, Deutsche Grammophon, and Philips Classics.
Through PolyGram Filmed Entertainment (PFE), the company is also a growing presence in the film business, with four principal production labels: Propaganda, Working Title, Island Pictures, and Interscope. PFE sales accounted for 16 percent of total sales in 1996. Philips Electronics owns 75 percent of the company.
1962-75: A Joint Venture Becomes a New Company
Following World War II and throughout the 1950s, growth in the European record business was slow. Antiquated production machinery combined with tariffs and high publisher royalties made records relatively expensive to buy. That situation began to change in 1958, as the European Common Market began to form, and the original members agreed to lower and finally eliminate internal tariffs, which greatly helped record sales.
In 1962, Siemens A.G. of Germany and Philips Electronics N.V. of the Netherlands created a joint venture record company. Philips acquired 50 percent of Siemens’ Deutsche Grammophon Gesellschaft, a preeminent classical music label founded in 1898, and Polydor Records, its popular music division. Siemens acquired 50 percent of Philips’ subsidiary, Philips Phonographische Industries (PPI), which was renamed Phonogram. Philips was already in the record business, having purchased Chicago-based Mercury Records and its pressing plants in 1960. In 1966, Philips used Mercury Records to begin distributing its new tape cartridge system—tape one-eighth-inch wide enclosed in a cassette, that could be used for playing and recording music—and cassette players for the home and car.
Although the Siemens/Philips joint venture was successful in classical music, it did not generate enough money to pay to distribute the records internationally. The venture looked to the U.S. to boost revenues. In 1970, the Polydor Records division arranged for record distribution through United Artists, and in 1972, the joint venture bought Verve Records (one of the top jazz labels in the world) and the United Artists distribution network. Included among the acquisitions was 49 percent of the giant publishing operation Chappel Music and its music copyrights. That year, the joint venture and the new subsidiaries were reorganized as PolyGram N.V., with Siemens and Philips each retaining a 50 percent ownership.
1975-85: Adding Pop to Classical and Jazz
In 1975, PolyGram bought Robert Stigwood Organization Ltd. for $1 a share. While the $8 million price was well above market value, the purchase gave PolyGram the copyrights to the music of a number of rock stars as well as Jesus Christ Superstar and the original English TV productions of “Sanford and Son” and “All in the Family,” along with 50 percent of RSO Records. As part of the deal, PolyGram agreed to pay Stigwood $5 million a year for five years for the acquisition and development of screen properties. This propelled relatively staid Poly-Gram into the disco music scene.
Stigwood’s first film was Saturday Night Fever, starring John Travolta, with music by the Bee Gees, followed by Grease, with Travolta and Olivia Newton-John. RSO Records produced the soundtrack albums for both films in 1978. PolyGram also bought Casablanca Records, home of disco queen Donna Summer, KISS, and the Village People. Saturday Night Fever sold 15 million copies in the U.S., and Grease, sold 22 million worldwide. Together, Casablanca and RSO had record sales of $300 million in 1978, helping PolyGram to became the first company to have worldwide sales from music-and-entertainment of $1.2 billion. But while record sales were high, so were the costs of producing them, and PolyGram began losing money.
During the early 1980s, the company expanded its classical music base, buying Decca, the London-based classical record company, and establishing the Philips Classics label. It also created a new popular label, London Records.
In the meantime, Philips Electronics, PolyGram’s parent, had been experimenting in optical electronics. Early in 1979, Philips produced its compact disk system. The result was a 4½ inch disk that, when played using an optical laser, offered an hour of sound, without any surface noise. In 1982, PolyGram and Philips launched the compact disk and disk player worldwide.
But by 1983, PolyGram was losing $300,000 a day, and had lost more than $200 million since 1977. Siemens wanted out of the joint venture. That year, Warner Communications and Poly-Gram began discussing a merger of their record businesses. The proposed merger was opposed by both the German Cartel Office and the U.S. Federal Trade Commission for its potential in reducing competition, and the merger was finally denied.
In 1984, PolyGram sold its music publishing house, Chapell-Intersong, to Warner for a price reported by Russell and David Sanjek to be in the $100 billion range. That same year, Alain M. Levy moved from CBS Disques in France to become chief executive officer of PolyGram France. Over the next five years, he built the PolyGram subsidiary into France’s largest recorded music company, holding over a third of the market share.
1985-95: Acquiring Record and Film Companies
In 1985, Philips purchased 40 percent of PolyGram from Siemens and the remaining 10 percent in 1987, thus owning it completely. In 1986, PolyGram reentered the music publishing business, with the establishment of PolyGram Music Publishing, and in 1988, it moved into the movie business as it bought 49 percent of Propaganda Films, a small independent filmmaker.
The year 1989 was a busy one for PolyGram. The company had a successful worldwide initial public offering of 35 million shares priced at $16 each. Later in the year PolyGram expanded its portion of the important U.S. pop market with the purchase of Island Records for $272 million and, in 1990, A&M Records for $460 million.
PolyGram’s music publishing business also grew in 1989 with the purchase of three publishing operations, Welk, Sweden Music, and the Island Group. By the end of the year the company also increased its foothold in the film industry, acquiring 49 percent of Working Title Films and establishing Manifesto Film Sales, which became PolyGram Film International. Film revenues for 1989 were approximately $65 million.
During 1990, Alain Levy took over direct management of PolyGram’s newly restructured operations in the U.S. Among his first efforts was the establishment of PolyGram Video U.S. and the creation of PolyGram Group Distribution, which was responsible for the warehousing, distribution, and sales of the company’s audio (records, CDs, and cassette tapes) and video products in the United States. In January 1991, he was named president and CEO of PolyGram N.V. and CEO of PolyGram USA.
Under Lévy, the company continued to expand, with a second international offering, of 10 million new shares, in 1993. One quarter of the company’s shares were now held publicly, with Philips Electronics owning the remaining 75 percent.
PolyGram bought CD manufacturing facilities in Germany, France, and the U.S. for a total of $122 million, acquired a 30 percent interest in Andrew Lloyd Webber’s Really Useful Holdings for $168 million, and strengthened its presence in various national markets with the addition of the Finnish company Sonet Media AB and Japanese labels Nippon Phonogram and Polydor KK. During this period, PolyGram was also becoming involved with music television, investing in VIVA, a German language channel, and buying 50 percent of MTV Asia.
A blend of innovation and diversity, PolyGram has evolved from its roots in music to become one of the world’s preeminent entertainment companies. A creative company, we are driven by the individualistic spirit of our collective music and film labels.
This attention to national and regional music markets was an important part of PolyGram’s global strategy. The company would put in management teams, often with local people, whose job it was to spot and develop local pop music acts, building them into national or regional stars, and, sometimes, international stars. By 1995, in addition to its national subsidiaries in Asia, Australia and New Zealand, North America, Latin America, and Europe, the company had established PolyGram Hungary, its first operating company in Eastern Europe, purchased a local record and music publishing company to create PolyGram Poland, and with the acquisition of 51 percent of BIZ Enterprises, established PolyGram Russia. In 1995, PolyGram Latin America bought Rodven Records, that continent’s largest independent record company. Contributing to PolyGram’s success in this area was its decentralized structure, which allowed its record labels to operate as autonomous units.
But the company was not ignoring the huge North American market. In 1991, PolyGram signed an international license agreement with Motown, the world’s leading black music label, and then purchased Motown in 1993 for $301 million. In 1994, the company acquired a controlling interest in Def Jam, the leading rap music label, for $33 million.
In the classical music field, the early 1990s was a period of boom conditions. Because tastes in classical music were far less volatile than those in pop and rock music, PolyGram’s goal was to increase the number of people listening to and buying classical records as well as to develop new artists. To bring classical music to a larger audience, the company held special events, such as the Three Tenors concert in Rome in 1990. Among PolyGram’s classical artists were soprano Jessaye Norman, the world’s reigning diva; tenor Luciano Pavarotti, the best selling classical artist in the history of the record industry; and internationally acclaimed conductors John Eliot Gardiner and Sir Georg Solti. New artists included Romanian soprano Agnela Ghiorghiu, Welsh baritone Bryn Terfel, and Ceclia Bartoli.
Early in his tenure, Levy also set out to make PolyGram “a significant participant in the global film market.” He acquired the remaining 51 percent of Propaganda Films in 1991, and the following year established PolyGram Filmed Entertainment to produce, acquire, and finance feature films for distribution to theaters, television, and home videos. Also in 1992, the company bought a controlling interest in Interscope Communications, an independent U.S. film production company, for $35 million, signed three-year production agreements with Jodi Foster’s Egg Pictures and Tim Robbins’ Havoc Inc., and, in a joint venture with Universal Pictures, formed Gramercy Pictures, to market and distribute small and mid-budget films in North America.
In 1993, PolyGram bought the remaining 51 percent of Working Title Films, and in 1994, acquired Island Pictures. With the purchase, in 1995, of the remaining 49 percent of Interscope Communications, PolyGram had four film production companies which, like the record companies, operated as autonomous creative units. The company also was involved in producing and distributing local language films, through such investments as half ownership of French production house Cinéa and Hong Kong-based TedPoly, and ownership of Meteor Film Productions, the leading independent film producer in the Benelux countries. Among the company’s international films that received critical and box office success were Nell, Four Weddings and a Funeral, French Kiss, Dead Man Walking, The Usual Suspects, Mr. Holland’s Opus, and Trainspotting. PolyGram’s film revenues in 1995 reached $750 million, and represented 14 percent of sales.
On the video front, the company bought the U.K. operations of Vision Video Ltd., one of the United Kingdom’s largest video production companies, and 75 percent of Abbey Home Entertainment, the largest producer of children’s video and audio programming in the U.K.
Other activities in 1995 included the purchase of International Television Corporation Entertainment Group (ITC) and its film and television catalog for $156 million, the signing of a two-year agreement with Def Pictures to produce films, and the formation of a new joint venture, the Leonard Bernstein Music Publishing Company. Finally, during that year Phonogram Records changed its name worldwide to Mercury Records.
1996 to the Present—Reorganization and Local Repertoires
The music industry faced some significant challenges during the second half of the decade. Huge record store chains (hypermarkets) increasingly dominated the retail scene both in the United States and in Europe. Because these chains usually offered a fairly narrow range of records, based on hit charts, it became harder to promote new artists or to market classical music and jazz or back catalogs of pop music. While this was occurring, the huge North American market, which accounted for nearly a quarter of PolyGram sales, experienced its worst conditions in 15 years.
Despite an eight percent growth in 1996 sales, due primarily to the success of national artists in France, Italy, Spain, and Japan, PolyGram’s net income dropped by three percent, and the company instituted several changes. It reorganized its classical music activities, sharpening the focus of each of its labels and reducing the number of recordings and releases. Philips Classics and new labels POINT and Imaginary Road were combined into the Philips Music Group, whose goal was to combine core classical music with more contemporary music and crossover artists from popular music. Deutsche Grammophon was concentrated on traditional European music, including early music recordings, and producing albums that widened the appeal of its star artists. Decca remained focused on opera and vocal recordings along with soundtracks from films such as Braveheart.
PolyGram also reorganized its European music distribution and marketing operations, laying off some 500 people in the process. Among the changes in its U.S. operations was PolyGram Group Distribution’s move to promote all the company’s record labels by expanding its sales force and focusing on direct sales in stores, and a restructuring of the Mercury and Motown labels, including relocating Motown from Los Angeles to New York City. While the restructuring was going on, PolyGram continued to invest in its other pop music labels, acquiring the remaining 51 percent of London-based Go! Discs and another 10 percent of Def Jam. The company also expanded its music TV activities, establishing Atomic TV, a cable music television joint venture in Poland with Poland’s Atomic Entertainment and Planet 24, a U.K. television production company.
On the non-music side of the company, PolyGram Filmed Entertainment (PFE), while still in the red, saw its sales increase by 25 percent. PFE bought out Universal Pictures’ share of Gramercy Pictures, became a one-third partner with Robert Redford and Showtime Networks Inc. in Sundance Channel, which showed independent and foreign films, opened a distribution company in Australia, renewed its agreement with Egg Pictures, and produced and distributed the prize-winning French film The Eighth Day (Le Huiteme Jour). PolyGram Video, a division of PFE, continued to bring out new titles in its National Football League video series. PolyGram also got into the restaurant business, investing in two Motown Cafés, in New York and Las Vegas.
In 1997, the company continued the restructuring of its U.S. music operations with the formation of the Mercury Records Group to oversee the management of Mercury, Motown, and PolyGram Classics and Jazz in the United States. Before the year ended, PolyGram had to call on competitors to help manufacture and distribute over 33 million records, CDs, and cassettes of “Candle in the Wind 1997,” Elton John’s tribute to Diana, Princess of Wales.
But most of the activity that year had to do with PFE, as PolyGram continued to build its production and distribution system worldwide and positioned itself to produce and market bigger-budget films for the U.S. market. PFE formed PolyGram Films to release major studio level features, signed production agreements with Alan Parker’s Dirty Hands Productions and the Jones Company, and acquired the film catalogs from Consortium De Realization SAS. That purchase gave PolyGram one of the largest post-1948 film libraries in the world. Propaganda Films signed an exclusive first-look deal with David Fincher.
PFE also established PolyGram Television (U.S.) to develop and distribute programming for network, cable, syndication, and other markets in the U.S. and worldwide. In mid-year, PolyGram Video teamed up with parent Philips Electronics to bring digital video disks (DVD) to video store customers with a joint hardware-software rental program. The video division also continued to market various videos through supermarkets, often with merchandise discounts and rebates.
The two years of restructuring efforts paid off, as PolyGram’s net sales rose 17 percent in 1997 and operating profit was up 11 percent. The music division outperformed the market with sales and profits up 17 percent, keeping PolyGram the number one record company in the world. PFE saw a profit in the fourth quarter, and sales for the year grew by 16 percent. The company kicked off 1998 with the announcements that PFE and Warner Brothers were teaming up to jointly finance and distribute movies produced by Castle Rock Pictures and that Ivan Reitman (Ghostbusters, Stripes) and Tom Pollak, former head of MCA’s Universal Pictures, had formed a new production company with PFE.
As Deutsche Grammophon began the celebration of its 100th anniversary, the music-and-entertainment industry remained both expensive and volatile. However, PolyGram’s investments in national repertoire were paying off with the success of local and regional artists. This helped counterbalance problems in the U.S. market. The company was also aided by the intense competition among Europe’s rapidly expanding television distributors who were willing to pay top dollar for PolyGram’s movies and catalog films. With subsidiaries in over 40 countries and its range of creative operations, PolyGram looked forward to maintaining its leading position in the music business and increasing its position in the film industry, where PFE was the leading European film company.
PolyGram Holding, Inc. (U.S.) and PolyGram subsidiaries in 42 other countries; A&M Records Inc. (U.S.); A&M Records Ltd. (U.K.); Decca Record Company Ltd. (U.K.); Def Jam Records, Inc. (U.S.; 60%); Mercury Records B.V.; Island Entertainment Group, Inc. (U.S.); ITC Entertainment Group Ltd. (U.K.); Motown Café, LLC; PolyGram Merchandising Inc. (U.S.; MTV Asia (Singapore; 50%).
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——, “Music: Pitsville, U.S.A.: Motown Is Leaking Money and Struggling to Produce Hits. Can It Be Saved?” News week, December 2, 1996.
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—Ellen D. Wernick