DreamWorks Agrees to Sell Label to Vivendi

Beating a retreat from much-hyped plans to unite music, TV and film, DreamWorks SKG has agreed to sell its record label, effectively becoming the first high-profile player -- and probably not the last -- to bow to the music industry’s nightmarish decline.

Under the tentative deal, DreamWorks will sell its recorded-music business to Universal Music Group, the world’s biggest record conglomerate, for about $100 million, sources said Thursday.

DreamWorks’ exit from the record business follows years of red ink, compounded by sagging sales, widespread digital piracy and other woes. The label earned a reputation as a haven for developing talent, but scored few hits, among those pop ingenue Nelly Furtado, rock band AFI and country singer Toby Keith.

The sale signals a dramatic reality check for the DreamWorks partnership, founded in 1994 by music mogul David Geffen, director Steven Spielberg and former Walt Disney Co. executive Jeffrey Katzenberg. Despite its initial ambitions of multimedia dominance, recent developments suggest the company is setting its sights lower.

Like its music business, DreamWorks’ film studio has had trouble measuring up to the early hype, with a production pipeline that has slowed to a trickle. Although DreamWorks scored big with “Shrek,” it has suffered recent box office disappointments including the animated “Sinbad,” and its TV unit hasn’t delivered many hits.

The deal comes as media companies are increasingly looking to bail out of the music business, which is struggling through a grinding three-year sales slide. Time Warner Inc. is creeping toward a deal to sell its recorded-music division to British giant EMI Group. Sony Corp. and Bertelsmann are in talks to combine their music companies into a joint venture.

“It’s another sad day in the music business,” said Simon Renshaw, an executive at artist management outfit the Firm, which represents such acts as the Dixie Chicks. “We’re getting to the point where you don’t know what’s next.”

The move is likely to result in deep cuts in the Beverly Hills-based label’s staff of 120, and the departure of label chief Mo Ostin, a 76-year-old industry legend who nurtured the careers of a roster of landmark artists from Jimi Hendrix to Neil Young to the Red Hot Chili Peppers.

The pairing of Ostin and his management team with Geffen’s track record as one of the most successful music entrepreneurs in history once seemed to augur success, but the label managed only a few surges on the charts.

In a rare interview Thursday, Ostin cited the difficulty that the independent firm faced amid a sinking market. U.S. sales have declined about 6% this year, after an 11% slide last year.

“You look at this industry and you see nothing but contraction and cutbacks,” Ostin said. “When you look at it from the perspective of a company that’s a start-up ... it’s very, very hard to continue in this environment.”

There had been indications that DreamWorks’ economics might be getting even tougher. The label’s distribution deal with Universal is expiring, and insiders say DreamWorks faces the prospect of far less generous terms than those granted in the company’s initial pact.

For its part, Universal, a unit of Vivendi Universal, believes it can reap profit by slimming down the DreamWorks operation.

In a tense companywide staff meeting Thursday, Ostin told employees they would hold onto their jobs at least until the end of the year.

“I said to them, ‘Don’t give up. A lot of you are young. Things will turn around.’ ”

He said the label might’ve had more success in a different era: “I’ve been in the record business for over 40 years. I’ve never seen a time this bad.... Our timing was bad.”