Edel Music Ag Business Information, Profile, and History

Company Perspectives:

We remain committed to our goal of being the world's leading independent music company. The geographical expansion of our activities and the broadening of our business base provide secure foundations for future growth. We will continue to expand our network both domestically and internationally and to target an international market share in line with that of our domestic level.

History of Edel Music Ag

German-based edel music AG sees itself as the largest independent player in the European music industry. With over 90 subsidiaries and affiliations in 15 countries, the company is among the world's largest producers and marketers of classical music as well as rock, pop, and jazz. Edel music operates a state-of-the art CD production facility in Germany and owns an interest in several record labels, including German 45 music, Danish Mega Records, Swedish Playground music, Belgium's Play It Again Sam, and Eagle Rock Entertainment in the United Kingdom. With an 80 percent share in the American music distribution company RED Distribution, edel music also has a strong foothold in the United States. The company's two major divisions, edel records Europe and edel North America contribute about 68 percent to the company's total sales in about equal shares. Another 24 percent comes from Play It Again Sam, a label focusing on cutting-edge progressive and alternative rock as well as club music. The remainder of the company's sales is generated by the company's licensing arm edel media & entertainment, the music publishing division edel publishing, and its production division edel services, which manufactures CDs, CD-ROMs, DVDs, LPs, and MCs. The company's founder and CEO Michael Haentjes owns more than 70 percent of edel music.

Beginnings as a Mail Order Company in 1985

Before Michael Haentjes founded his own company, he engaged in several other occupations, most of them connected in some way with the music industry. In the 1970s Haentjes studied musicology in his hometown Cologne. Previously he had played oboe and keyboards in high-school orchestras and rock bands. However, unlike many of his peers, Haentjes was more interested in music theory and song writing than in performing on stage. After his college years, Haentjes became a music teacher and freelance writer for music magazines. In 1979, he teamed up with Klaus Schulze, a former member of the synth-rock group Tangerine Dream, and co-founded the IC record label, which specialized in electronic music. The label was licensed by the German subsidiary of the major label Wea. Through that connection, Haentjes was hired as the assistant to Wea Germany's Director of Marketing. Later Haentjes took the position of CEO for the German branch of Warner Home Video. For a short time he worked for a Munich-based publisher of computer books before he returned to the music industry, where he took a position at the Hamburg-based record label Teldec.

Finally, in October 1985, Haentjes founded his own business, a marketing firm named Edel Gesellschaft für Produktmarketing. One year later, operating out of his home, Haentjes started selling soundtracks through a mail order catalogue. To Haentjes' surprise the business took off shortly after it went into operation. In its first year the company sold merchandise worth DM 600,000. In 1988 Edel released its first CD and sales started climbing. Haentjes' concept was simple but highly profitable: He acquired licenses for pop hits from other record labels, put them on pop music samplers with such titles as "Party People" and "Best of Eis am Stiel," and sold them through non-traditional marketing channels for much less than record stores were charging. The popularity of the tunes was the main criteria for Edel's music selections, and he drew heavily on material produced for TV. An edel compilation called "Get It" contained the music scores of highly popular TV commercials. Edel also produced CDs with the soundtracks of popular soap operas that aired on German commercial TV stations Sat.1 and RTL. In addition Edel kept producing and selling pop-star-related merchandise such as t-shirts and calendars. A book featuring American pop and movie star David Hasselhoff became the company's first bestseller, lifting the company's sales to DM 6.5 million in 1988.

From National License Merchandiser to International Record Company in the 1990s

In 1990, when a vendor was unable to deliver the number of CDs edel music wanted to order, Haentjes realized that depending on others could significantly his sales--in this case client orders worth DM 800,000. He therefore decided to build his own CD factory. With an investment of DM 12 million edel music's new production facility in the city Röbel, located in the northern German state Mecklenburg-Vorpommern, started operations in January 1992. The investment was only made possible by the continued growth of the company. However, to cover the existing risk Haentjes decided to transform his limited liability company into a corporation. In November 1992, the company became "edel company" music AG and Haentjes prepared to make his enterprise fit for an IPO if the cash flow was sufficient. It was not. In any case, Haentjes was reluctant to bring new shareholders into the empire he had complete control over. Edel's subsidiaries, including the original "edel" Gesellschaft für Produktmarketing, distribution arm "ideal" Vertrieb GmbH, and music production subsidiary "optimal" Tonträger Produktions GmbH, as well as the newly established subsidiaries in Austria and Switzerland, were organized under the new holding.

Besides music recordings edel music also manufactured and marketed textiles such as T-Shirts and sweatshirts with the images of pop stars for which edel music held some 500 licenses. The merchandise was manufactured in the company's production facility in Malchow--also located in Mecklenburg-Vorpommern--and sold in record stores, department stores, and about 150 jeans shops. Textiles contributed about nine percent to the company's total sales, which by 1992 amounted to almost DM 70 million. In 1994, edel music started making CD-ROMS, and this production service soon became a considerable revenue source. The demand grew so strong that the Röbel factory had to be expanded several times. By 1996, the facility's capacity had reached about 40 million CDs per year. The factory employed some 150 people who worked in three shifts. When DJ's from the dance music scene began demanding vinyl LP's again, edel music started manufacturing them after purchasing a used machine in Finland with the capacity to produce about 1 million units annually.

In 1993 edel music acquired a catalogue with about 2,000 titles of classical music from the former East German government-owned label Deutsche Schallplatte. The collection included recordings of high profile ensembles, including Leipzig Gewandhaus Orchestra under the direction of Kurt Masur, the Dresden Philharmonic Orchestra, Leipzig's Thomaner Choir, and Dresden's Kreuzchor, which had never been published on CD. In 1994, the company took over Hamburg-based Castle Communications Deutschland GmbH, a company that licensed and marketed oldies. However, Haentjes realized that his company would soon reach its limit of growth if he remained dependent on recordings produced by other companies, which by this point viewed edel music as a competitor to whom they would no longer issue licenses that easily. Therefore, edel music initiated a new strategy that would spur further growth: by signing their own artists and expanding internationally to compensate for the stagnating German market, they became a full-fledged record company.

With favorable contracts and its high-quality recording facilities, edel music attracted first-class artists. Edel music was also able to make a deal with NPG Records, which had signed up The New Power Generation, the band of international pop star Prince, who was looking for a new label after a dispute with his former label. Other recording artists that signed up with edel music included the Irish pop group the Kelly Family and electronic pop dance acts such as Fun Factory, Blümchen, and "happy hardcore" group Scooter, which were especially popular in Germany. On an international level edel music successfully established the teenage star Aaron Carter. The Kelly Family's new album Over The Hump and Prince's single "The Most Beautiful Girl in the World" became top hits and edel music's profits soared. The company's artist roster also fueled its sampler business, since it was now able to trade in its own productions in exchange for licenses from other record companies. By 1995 the number of edel music's titles had gone up to 600.

In 1993 edel music acquired a 50 percent share in Swiss Phonag AG which started distributing edel's titles in Switzerland. Edel America Records Inc. was established in North Hollywood to market edel music's products in the United States and to acquire repertoire from American licensees. During the 1990s the company's sales continuously grew by two-digit figures. By 1995 edel music's 350 employees generated DM 170 million in sales. The company sold its products in over 70 countries and sales abroad accounted for roughly 18 percent of their total. Classical music accounted for about two percent.

Going Public and International Acquisitions in 1998

To finance edel music's further expansion, the company went public in 1998 and was renamed edel music AG. Founder and CEO Michael Haentjes, however, was determined to retain control over the company's operations and kept a share of more than 70 percent in the company. The initial stock offering in September 1998 raised over $41 million. Within the first five months of the company's IPO, the value of edel music shares grew eight-fold. In a second stock offering in 1999 the company raised another $108 million.

Michael Haentjes retired from his ten-year involvement in marketing and artist contact and focused on business strategy and development. The CEO used the cash boost for numerous acquisitions in Western Europe and the United States. Edel music bought shares in a number of reputable record labels, including an almost 75 percent in Belgian independent label Play It Again Sam (PIAS). The PIAS group consisted of 16 companies, including French label F-Communications specializing in techno- and house music. The deal also added the pop group Public Enemy to edel music's artist roster. Another acquisition was a 54-percent share in Eagle Rock Entertainment in the United Kingdom and stakes in Danish Mega Records, and Hard'n'Heavy label Roadrunner. Other acquisitions included American K-tel International Inc.'s music subsidiary in Finland and a majority share in the Netherlands-based ABCD/Eddy Ouwens Productions, a special products company experienced in the field of compilations that owned valuable licensing material. With the acquisition of a share in Mega Records edel music also entered the music publishing market through the Danish company's subsidiary Megasong Publishing.

Up until the end of 1999 edel music's products were distributed by Koch International. With revenues of about $7 million in the United States, edel music's California-based subsidiary did not fulfill Haentjes' expectations. He took a major step into the North American market when edel music acquired an 80-percent majority share in the largest independent distribution company in the United States, RED, from Sony Music in November 1999. Sony kept a 20 percent interest in RED, continued using the company for its independent label productions and offering packing, shipping, credit collection, and back-office services for the distributor. Edel music also took over Web-based Talent Net Inc., a firm in New York that ran an online database with over 2,000 music acts that also contained at least three recordings per artist. The site that offered artists free access was intended to strengthen edel music's Artist and Repertoire (A&R) base and was re-branded Broadbandtalentnet.com. Talent Net also had contacts with the Asian Web-site Cybermusic Asia. Edel music also expanded into music TV, one of the industry's major promotion tools.

Besides its aggressive acquisition activities, edel music generated new business through deals with big players in the entertainment industry. In 1998 edel music made a license deal with Buena Vista Music Group, a subsidiary of U.S. entertainment giant Walt Disney, giving edel music the rights to market throughout Europe Buena Vista's catalogue, including Disney's film scores from Snow White to The Lion King, as well as future productions. In 1999 the company started cooperating with EM.TV & Merchandising AG, a company that owned the rights to about 20,000 half-hour TV programs for children produced by Junior.TV GmbH & Co. KG, a joint venture between EM.TV and the German media concern Kirch Group. edel music's international activities also included a license deal with the firm SWAT Marketing in Asia and a deal with the Australian label Shock Records.

Consolidation: 2000 and Beyond

In the two years after edel music's IPO, as a result of its fast expansion through acquisitions, the company's sales grew significantly. In 2000 alone, edel music's consolidated sales jumped by 260 percent, passing the DM 1 billion mark. However, this did not translate into the expected higher profits. While edel music had turned up profits until it went public, they dropped significantly during 1999, and the company slipped into the red. One of the main reasons, the company announced, was that the release of four new album's of top edel artists Aaron Carter, Jennifer Page, Blümchen, and Sash had been delayed. However, none of the company's German artists had sold 250,000 units yet--which equals the industry's "gold" standard--and none of edel's international artists sold over one million units by 1999. On the other hand, CEO Haentjes explained, his company was able to realize higher profit margins from album sales than major record labels, which had to pay their established artists significantly higher royalties. However, industry insiders saw a number of other reasons for edel music's losses. The numerous acquisitions had to be integrated into a functioning whole to realize acceptable profits. Other reasons for the company's losses were the cost of bank loans used to finance the company's investments, external management consultants helping with the company's reorganization, the cost for closing down the company's subsidiary in Argentina, and losses in the U.S. from fixed-price deals with the Dollar gaining in value against the EURO, as well as from investments in less successful artists.

After the company had issued several profit warnings starting in late 1999--at a time when companies listed on the "Neuer Market," the German equivalent to the NASDAQ, crashed in share value by the dozens--the stock market reacted promptly. From an all-time high in 2000 of EUR 67 per share, edel music's value dropped to a mere EUR 3.60 at the end of that year. By January 2001, stock market analysts valued edel stock at less than its own capital base. The first chapter of dynamic expansion was closed by a lack of funds. Next on the agenda came consolidation and corporate restructuring. In 2000, edel music reorganized its operations into business divisions that managed the company's 90 or so subsidiaries and affiliates. The three main divisions were edel records Europe, edel North America, and PIAS, which together generated about 90 percent of the company's total sales. The other three divisions included the company's licensing arm edel media & entertainment, the music publishing division edel publishing, and its production division edel services.

In spring 2001, edel music finished its restructuring program in Germany. The next step was to take the same kind of measures in the company's European operations. The full integration of all business units into a profitable enterprise was edel music's major management challenge. In August 2001, the company announced that it would change its main focus from distribution to developing its own content. Edel sold its 12 percent stake in national music TV channel Viva and terminated its distribution and licensing contracts with Disney. Looking ahead, company founder Haentjes, who still owned over 70 percent of edel music, was planning to strengthen the company's repertoire base, to expand its activities in the music publishing field, and to explore future digital download technologies and business models through its new subsidiary edelNET GmbH. Another strategic focus was to strengthen the company's impact on the British and American markets. Edel music's CEO confirmed his intention to stay independent but did not completely reject the idea to partner up with other companies in the global music business. Michael Haentjes' future vision of his industry, which had been suffering from declining sales in Europe during the second half of the 1990s, was based on the assumption that the Internet would change how the music business was done. He envisioned cooperating with Internet distributors of music content while retaining all of his company's rights. Internet-based "music platforms" offering music for free digital download, while charging consumers for the download of top hits from popular artists, seemed to be the most likely development besides traditional CD sales.

Principal Subsidiaries: edel records GmbH; RED Distributions Inc.(U.S.A.; 80%); edel distribution GmbH; edel media & entertainment GmbH; PIAS Group s.p.r.l. (Belgium; 74.9%); Mega Scandinavia A/S (Denmark); Playground Music Scandinavia AB (Sweden; 51%); phonag records AG (Switzerland); edel America Records Inc.; S-Curve Records LLC (51%); Deston Songs LLC (50%); edel classics GmbH; A 45 music GmbH (75%); ABCD Records B.V. (Netherlands); Eagle Rock Entertainment plc (U.K.; 54.58%); Phonag Schallplatten AG (Switzerland); Eddy Owens Productions B.V. (Netherlands; 52%).

Principal Competitors: Zomba Records Limited; BMG Entertainment; EMI Group plc; Universal Music Group.

Chronology

• Key Dates:
• 1986: Michael Haentjes founds a mail order business for soundtrack records.
• 1988: The company puts its first CD on the market.
• 1991: A CD manufacturing plant is built in Röbel, Germany.
• 1992: Edel becomes a corporation.
• 1998: The company goes public on the Frankfurt stock exchange.
• 1999: Edel music acquires American distributor RED Distribution.
• 2001: Edel group's Baha Men receives a Grammy Award for "Best Dance Recording."