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Back in 2004, when Edgar Bronfman Jr. and his private equity partners took control of storied Warner Music Group (WMG), expectations for the new management were anything but lofty. After all, Bronfman was widely derided in those days as a dynastic bumbler who while at Vivendi Universal lost billions of his family's fortune. And the music business was in crisis. Even now, Bronfman equates running Warner with flying a plane while fixing the engine.

Yet he has managed to do something that has eluded his rivals over the past four years: boost album sales, which still account for the vast majority of revenues in recorded music. Even as such rivals as Sony/BMG and EMI were sidetracked by management turmoil, Bronfman, 53, focused on the basics—nurturing artists who can move records. He and his lieutenants declined to comment, citing a quiet period ahead of Warner's fiscal-year earnings report on Nov. 25. But amid all the industry upheaval, Bronfman's achievement hasn't gone unnoticed. "Edgar," says Laura Martin, an analyst at Soleil Securities Group, "has shown real leadership."

None of this is to say Bronfman has solved the music industry's central conundrum: how to prosper in a digital age. Like most of its rivals, Warner continues to post anemic operating profits and essentially flat revenue growth. But closely guarded industry sales numbers reviewed by BusinessWeek show that Warner has opened up a surprising edge over its competitors. Warner's album sales—which include physical CDs, digital albums, and digital tracks (10 singles are now counted as one album)—are up 5% for the first 10 months of 2008 vs. the same period in 2004, when Bronfman arrived. Sounds less than thrilling—until you consider that Warner Music's rivals suffered double-digit declines.

How did Bronfman do it? He cut Warner's artist roster nearly 30%, ditching more than 50 acts that were no longer selling well. He refused to pay big bucks to keep the likes of Madonna and Nickelback out of rivals' hands. And he found some $300 million in annual cost savings. Result: Warner had more time and money to focus on new potential hitmakers.

FRESH ANGLES

Other music companies have slashed budgets for artists and repertory (A&R), the department that finds and nurtures talent. Not Bronfman, whose hundreds of scouts spend their nights in clubs, from Manchester to Seoul, and their days on MySpace (GOOG), finding new chart toppers such as James Blunt, Gnarls Barkley, and Panic At The Disco. The strategy is paying off: Warner's share of U.S. sales of new releases is up 7% since 2004, vs. a decline of 2% for the rest of the industry, according to Nielsen SoundScan, which tracks music sales.

All to the good. But doesn't the recording industry need to reinvent itself big time? It does, and Bronfman knows that. He was the first to package interviews and concert footage with digital albums as bonus features and charge a premium for them. Like his rivals, he's embracing ringtones and ad-supported music Web sites. He is licensing more songs for TV and movies. He is taking a piece of artists' concert and merchandising earnings. But making serious money from these initiatives remains a ways off. In the meantime, Bronfman is shoring up the traditional side of his business: finding hot acts and selling millions of their albums.

Fox News Corporation Founder Rupert Murdoch and wife Wendi Deng and a splash screen from MySpace.cn


As MySpace continues to struggle in China, a country with 250 million Internet users, major changes are in store for the company

Rupert Murdoch hasn't enjoyed much success in China. Quotas on foreign films hinder the efforts of Murdoch's Twentieth Century Fox to make inroads in Chinese cinemas. Government control of the TV industry has largely kept News Corp. (ticker: NWS.A) subsidiary Star TV, the Hong Kong-based Asia satellite TV operator, on the sidelines of the world's largest country. And rampant piracy and illegal Internet downloading mean News Corp. can do little to cash in on the popularity of shows such as Prison Break.

That's why expectations were so high for the launch of MySpace in China. Unlike the movie and TV industries, the Chinese Internet business is open to foreign investment. China has the world's largest online population, with more than 250 million using the Net; many of them are students or people in their 20s, prime users of MySpace in other countries. Murdoch's wife, Wendi, was born and grew up in China and took an active role in launching a local version of News Corp,'s social networking service (SNS), MySpace.cn, (BusinessWeek, 6/26/07) in the country in April 2007.

Murdoch's bad China luck isn't changing, though. MySpace China, a joint venture among News Corp., venture capital firm IDG-Accel (a partnership between Boston-based IDG and Accel Partners from Silicon Valley), and local investment firm China Broadband Capital Partners, doesn't have much to show for its effort. "MySpace.cn has not become a Tier 1 SNS site in China," said Beijing-based market researcher BDA China in an August report. The company is an also-ran in the Chinese SNS scene, dominated by local names such as Qzone, Xiaonei, and 51.com, and was hit last month by reports in the local and international media of a management shakeup, including the departure of Luo Chuan, who had left Microsoft (MSFT) China to be MySpace China's CEO.

Rethinking the Business Model

While denying Luo has departed, an executive at one of MySpace China's shareholders confirms that some major changes are in store. Zhou Quan, managing director and general partner at IDG Accel, which owns 10% of MySpace China, says executives are in the midst of rethinking the business model. Luo, he says, continues to work at MySpace China "almost full-time" and is taking an active role in discussions regarding the company's future direction. "There will be a total plan, not just a change in CEO," says Zhou. "They will come up with a new strategy."

Other people involved with MySpace China declined to comment. China Broadband did not respond to requests for an interview. A U.S.-based spokesman for MySpace referred questions from BusinessWeek to the China operation. "We are not in a position to comment on the reports regarding our CEO," said MySpace China spokesman Yitian Zou in an e-mail. "The company and business are doing well."

There's certainly a big gap between MySpace China and its Chinese rivals, though. According to BDA, MySpace China hopes to have 10 million registered users by the end of the year. In contrast, market leader Qzone, owned by Shenzhen-based instant-messaging giant Tencent Holdings, already has 105 million registered users. Another Chinese SNS operator, 51.com, has 95 million.