THE LEFSETZ LETTER: The Warner Movie

Thomas H. Lee is the star of this movie.

It's all about the nineties. And the year of the apocalypse, 2000.

Somehow, someway, the public lost sight of reality in the last decade of the twentieth century. All investing principles went out the window. It was no longer about fundamentals. Profits to earnings ratios were irrelevant. Rather, it was a giant came of craps, with a PATINA of legitimacy on top.

Wall Street only cares about money. Ask a record exec, he knows. They don't care if the record is good, just as long as it SELLS! And the quarterly numbers go up, and the stock moves accordingly.

Wall Street is the dealer, the house, and it wants to make its wares as ATTRACTIVE to the public/player as possible. And the way you do this is to let people make money, by creating a bull market.


Bob Lefsetz, Santa Monica-based industry legend, is the author of the e-mail newsletter, "The Lefsetz Letter". Famous for being beholden to no one, and speaking the truth, Lefsetz addresses the issues that are at the core of the music business: downloading, copy protection, pricing and the music itself.

His intense brilliance captivates readers from Steven Tyler to Rick Nielsen to Bryan Adams to Quincy Jones to music business honchos like Michael Rapino, Randy Phillips, Don Ienner, Cliff Burnstein, Irving Azoff and Tom Freston.

Never boring, always entertaining, Mr. Lefsetz's insights are fueled by his stint as an entertainment business attorney, majordomo of Sanctuary Music's American division and consultancies to major labels.

Bob has been a weekly contributor to CelebrityAccess and Encore since 2001, and we plan many more years of partnership with him. While we here at CelebrityAccess and Encore do not necessarily agree with all of Bob's opinions, we are proud to help share them with you.


It became addictive. To the point where those employed started to bend the rules. Why not trump up the analyst reports. Who's gonna know? Everything's going up. These words will be forgotten. So, we're letting our big customers in at a low price and screwing the public who can't TOUCH the stock at offering price. Isn't this like average concertgoers being unable to buy the good seats? Screw the public, we've got to take care of our buddies, the institutions, who keep us going.

And it all worked until one day it was evident that there was nothing there. The "new economy" was built on air. Many of these companies had NO income. Or a pittance. Dot coms went out of business. But not until Time Warner and AOL merged. That's what you've got to give Steve Case credit for…TIMING!

But then the market started to reel.

And then came Napster.

Richard Parsons wanted to instill order in his house. Even more so, he wanted to stop the free-fall of the stock. So, looking for assets to sell, he BLEW OUT the Warner Music Group.

Oh, Thomas H. Lee knew Parsons was desperate. One of the worst poker players of all time, Parsons let EVERYBODY know he wanted to get rid of the music group. It was as if he was driving it around with a for sale sign in the back window. Featuring an ever-decreasing price. He'd seen the Internet movie. The music group could soon be worth NOTHING! It had to go, before the market crashed completely.

I guess Richard Parsons belongs in the same camp as Andy Lack. Someone COMPLETELY ignorant of the business they're operating in.

Unlike the dot coms, Warner Music Group had MILLIONS of assets. Songs and recordings. You call these COPYRIGHTS! Protected by the LAW! ALREADY throwing off cash, but able to generate income for DECADES to come. Hell, wasn't Congress constantly extending the TERM of copyright?

Why Mr. Parsons believed music copyrights would be worthless in the future flummoxes me. After all, aren't the other assets of Warner Brothers, FILMS, copyrights too? And the TV shows? And the written words?

But a short-sighted Mr. Parsons couldn't see that far ahead. He couldn't see that Napster was a way station. That IT could be
monetized, but certainly music would be worth something in the future. So he let the music group go. AT A FIRE SALE PRICE!

And who purchased it? CARPETBAGGERS!

God, give Thomas H. Lee credit. They know when an asset is undervalued. But their TRUE skill is in gussying something up for
Wall Street. Yup, they bought Warner and then took it PUBLIC! They got all their money out, loaded the enterprise up with debt, and then continued to ride the horse, waiting for someone to buy it in the future, like NOW!

Going back to the beginning, Wall Street isn't about music, it's about MONEY! And Thomas H. Lee, despite being located in Boston, is part of the Wall Street club. What they did was buy a used car, a used MERCEDES, and then shined up the exterior in order to lay it off on a rube, THE PUBLIC!

Oh, they polished up Warner. The exterior, the FINANCIALS, looked GREAT! That's what accounting rules will do for you. What was going on inside? God, as long as it's GOT a motor, who can tell?

Warner is in the music business. They've got two label groups. Music publishing. It all LOOKS good. Just on the inside it's ridden with cancer. There's an ever-decreasing number of infighting employees functioning in an old-fashioned way in a newfangled sphere. New music is a quagmire. It costs too much to sign and market. And there are too few places to expose it. You need a COMPLETE redesign. But, if you can forestall that long enough, if the car will just run until someone BUYS it, you ESCAPE! With mucho dinero in your pocket.

Thomas H. Lee knew Warner had to merge with EMI. And, it also knew those RUNNING EMI saw themselves as music people. They WANTED their jobs. Whereas Thomas H. Lee invested in many industries, they'd just as soon move on. So, like an ace poker player, they've been playing their hand. THAT'S why they rebuffed EMI's offer. They don't want to appear desperate, like Richard Parsons. The key is to make EMI feel desperate. Like their business is going down the tubes. So EMI will pay a PREMIUM!

Really, it's like buying a used car. And Thomas H. Lee owns the lot. Thomas H. Lee controls the game. All EMI knows IT NEEDS A CAR! And there's only ONE LEFT!

Edgar Bronfman, Jr. was just a pawn in Thomas H. Lee's game. Lyor Cohen? His efforts were irrelevant. As long as the company
financials were jiggered to look good, Thomas H. Lee didn't care WHAT was happening at the company. Knowing that the REAL assets were the publishing and recording catalogs. And that these were VERY desirable. It was just a matter of waiting for the right customer. And they had one in mind from the moment they purchased the operation.

What did Woodstein say? Follow the money? THAT'S how you analyze the history of the Warner Music Group. It's only unsophisticated players like those at "Hits" who are caught up in the personalities. It's about cold, hard cash. And you must never get emotional about it.

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