PolyGram blames slipped discs for 18% downturn

PolyGram, the world's largest record company, yesterday underlined the problems besetting the global music industry by reporting a sharp drop in annual profits.

Ageing rock stars, the general lack of new blockbuster acts and maturing markets for compact discs are being blamed for the overall slowdown in sales, despite mainly favourable economic conditions world-wide.

Last year PolyGram, majority-owned by Philips, the Dutch electronics group, saw net income drop by 18 per cent to 608m guilders (pounds 197m). The biggest hit came in the music division where operating profits fell from 1.15bn guilders to 1.11bn guilders. A 160m guilders charge was also taken to cover the cost of making around 550 staff redundant.

"This was a challenging year for PolyGram's music division, particularly in the US where market instability is likely to persist for the next six to 12 months," said Alain Levy, president and chief executive officer.

In response, PolyGram is revamping its Motown operation by moving the famous soul music label's headquarters from Los Angeles to New York in a bid to recreate its heydays of the 1960s and early 1970s.

The group's European music distribution and marketing are also being reorganised and its classical music division is being restructured.

Mr Levy admitted the $41bn (pounds 25bn) global music market had reached a plateau in 1996, when it grew by only 3 per cent after several years of double-digit increases, but he forecast future annual growth rates of at least 5 per cent. "We do not believe the music business to be a mature industry," he said.

Nevertheless, Mr Levy acknowledged there was a shortage of good record releases. "I think the issue is one of creativity. The music makes the market," he said.

PolyGram was dealt another blow before Christmas when the Irish band U2 delayed the release of their new album, Pop, until next month.

Significantly, no PolyGram act sold more than 5 million albums for the first time in recent years, increasing the record company's hefty marketing costs as a proportion of sales. PolyGram's top selling album in 1996 was The Cranberries' To The Faithful Departed, which sold 4.4 million copies, followed by Bryan Adams' 18 til i die at 3.9 million.

Industry observers say the six big record companies, which control almost 80 per cent of all music sales, are trying to cater for increasingly fragmented local markets and tastes at the expense of established pop stars.

"At the local level each individual record company is selling their own indigenous artist. That means the likes of Phil Collins, Sting and Bryan Adams are not selling in the volumes they used to," said Martin Talbot of Music Week magazine.

Analysts are also concerned that the growing popularity of sounds such as hip-hop, country and gospel - coupled with an ageing listenership - mean the music industry is unlikely to grow at historical rates without a new and exciting technology.

"We do not believe there is a high probability that one sound will transcend enough of the market niches to be as broadly popular as it may have been in the past," commented Goldman Sachs, the US investment bank, in a report.

New technology, notably the emergence of compact discs (CDs) and the portable Sony Walkman in the early Eighties, was a key driver of music sales as fans shifted entire record collections from vinyl to the new format.

Nothing new is on the horizon today. The arrival of the digital compact cassette (DCC) was almost still-born while demand for Sony's Mini Disc looks limited to Japan, which has always had a stronger appetite for new technology. And although music companies and retailers have created web sites on the Internet, they are unlikely to appeal to a mass market over the next two to three years.

While bootlegging has become less of a problem, at least in the developed economies, the growth of discount retailers like Wal-Mart in the US - the world's largest music market - and the greater buying clout of supermarkets in Europe have added to pressure on record companies' margins.

This in turn has led to a greater concentration of sales of top 40 hits at the expense of back-catalogue sales, which used to earn some big labels up to 40 per cent of their income.

All this has affected sentiment towards EMI and PolyGram, the two quoted European record companies whose shares have been sliding down the stock market charts in the last six months. EMI has fallen from 1,485p to 1,161.5p, while PolyGram has slipped from 100 guilders to as low as 76 guilders.

But nobody is writing off the music giants yet. Indeed, the success of Britpop in spawning bands like Oasis, Blur and Pulp has breathed new life into British music industry.