Cappi Frenger - View from WMME

Cappi Frenger, WMME's Director of International Services, tells Jean-Luc Renaud the story of the company so far, how it is copying with a changing marketplace, and the corporate vision.

Briefly, what is the history of WMME and what are your responsibilities within it?

Basically, Warner Music Manufacturing, or WMME, has been the centre of manufacturing logistics for the Warner group of Companies for the last 27 years. We opened in 1975 making vinyl records and then, obviously, cassettes and CDs as required by the music industry.

Later, when laser discs were introduced, albeit for a short time, we started serving the video part of the industry. With Warner Home Video and WAMO – our sister manufacturing logistics operations in the US – pioneering DVD in the ‘90s, we were on stage relatively early supplying the Warner Home Video needs for Europe and the Middle East.

I’ve always been responsible for all product and services as part of a relatively small management team in Alsdorf.

We try to keep it as lean as possible. So there’s a management team of just seven running the complete manufacturing and logistics operation, including distribution for the Warner companies and for a number of third party customers outside the Warner Group.

So now you concentrate on CD and DVD?

Yes. We gave up vinyl a couple of years ago, so it’s basically the two optical disc formats, CD and DVD.
In terms of the time, how demanding is the DVD part of the business?

For me personally, DVD is about 80% of my 14-hour day. The CD market, including the supply chain management, is relatively mature . . . so my team can handle this with basic supervision – I do not have to be involved all the time. DVD on the other hand has a new complexity and a new range of customers. These challenges obviously need more of my time, and a more hands on approach is required.

Given the relative youth of DVD, we are witnessing rather rapid consolidation in the business, with WMME as one of three big operations in Europe. How do you see this consolidation progressing over the next few years?

That’s an interesting question. When CD emerged there were major labels around the world plus a relatively large number of independent companies in each and every territory. Then came CD Rom which involved companies from outside of the music industry that had data to store, be it telephone directories, airline schedules, travel routings or encyclopaedias and games.

In a relatively short period the customer range became very wide. So, outside of the major replicating companies there was enough work to feed a number of smaller independent pressing plants.

At this point in time, and in my view also for the foreseeable future, DVD poses a different problem for the Industry. The multi-national studios are obviously still there but they are very limited. Their work is currently handled by a relatively small number of the larger replicators. Beyond the major studios the number of independent film distributors is also relatively limited. And beyond that there really isn’t much in terms of DVD work.

The games industry hasn’t really started yet with the exception of the proprietary forms like PlayStation and Xbox. The PC-based games aren’t really there even though it’s been “expected” for a number of years now. Then there is DVD Rom, but this still has a very limited potential customer base.

So the landscape has changed to a point where a handful of big replicators obviously enjoy a decent chunk of the business, but the wide range of independent CD manufacturers who, for the most part, have been investing in DVD over the last 2-3 years, have to compete heavily for work. Personally, I don’t see that this will change in the foreseeable future.

Do you foresee WMME buying smaller independent replicators?

No. Over the years, we have come to believe in certain things. Contrary to some of our competitors we have always handled the whole business from one central point – in Alsdorf, Germany – which is ideally located to service all European needs. We haven’t really seen a need to open satellite factories in other countries. We can supply the major European capitals overnight. The logistics are in place. And very much in the same way as there has never been the need for us to open, say, a factory in Spain or Scandinavia, there’s been no need for us to take over another replicator because we simply want to keep it all centrally controlled and handled. So far we’ve been successful.

You face price-cutting competition from Taiwan, China and maybe even Russia, where, apparently, the pressing capacity is ten times what the market demands. Given the experience of the manufacturers of DVD players – where the Japanese and European companies are exposed to the low cost manufacturing in China and Asia that cannot be matched – do you feel pressure to cut margins to beat price cutting companies?

With non-European factories, the way I see it – and I believe most of my friends in the Industry in Europe would see it similarly – there is huge capacity, in Taiwan particularly, and in other parts of the Far East. In the early days we asked for their help to supply us whenever we had bottlenecks. However, no matter what the price range of a DVD, the customer usually demands that discs be turned around in a week or under. This makes any serious off-loading to far-away regions totally impractical.

No matter how good our colleagues in China or in other areas are, there’s a problem if you need to turn around something in five days. You lose at least a day getting the elements down there and no matter how quick they are they must contend with fly times, customs clearance and trucking it into us. That is going to take at least another two days. So they will lose out on the logistics at the end of the day.

Also, you need to look carefully at prices and make sure you include everything. If you take Taiwanese prices plus freight and duties you will find many replicators in Europe competing at the same level. You need to look at the landed price, which includes all the additional costings.

Obviously, some of our smaller European competitors who are hungry for work must try to undermine their competition or, say, undermine the current pricing level, to keep a foot in the door. We have to face and cope with this as it is part of the game. That is the way it was in the CD world and there’s no reason why DVD should be any different.

One advantage of being big is that you can offer a one-stop shop. The range of services from, I guess designing, pressing, packaging, fulfilment. In this chain is packaging the area with the best margin? I’m asking you this because now we see a turn towards the multi-disc box and a focus on boxes which, in themselves, are becoming interesting to make, rather than just the small plastic compact disc. Is part of the strategy to spread the cost and the margin across a variety of operations? Some of which are bringing in more revenue than others?

In theory, yes. However, when you provide a quote the customer will compare the price of the disc with other suppliers. The refinement and packaging elements, particularly manual packaging, is often considered less important than the disc itself. Even though it may be the most expensive part of the whole project.

When you have an elaborate package, particularly when it comes to manual assembly, you have room for manoeuvre with costing and pricing. So if you need to be doing 250,000 sets by hand in one day you have to provide the people, space and logistics so that a decent margin is possible in theory. In reality, though, particularly when it comes to an all-in comparison studio system whereby we supply box lots of the same titles to smaller territories, the margins can disappear in no time.

Take an example where you have 50 orders for 25 each for a territory like Slovenia and another 50 order lines with 50 each for a territory like Iceland. The preparations alone can take more time than the actual job by the time you have picked the elements, brought them to a manual assembly table, and supervised assembly. But obviously that only holds if you provide a really integral service, including serving the smaller territories that otherwise would have no access to product at all.

When you started pressing DVD you, as part of Warners, had the blockbusters and the motion picture catalogue. We saw first the big, recent movies released and then the catalogue. With the catalogue almost done, you have the backlog of television series. Now, there’s a view that the amount of work is really contracting. So is it now the turn of music? Is the music DVD collection the next big thing?

Well, not really. Warner, in fact, has an impressive catalogue in film and that is there to stay. We have the same in the music industry, you wouldn’t believe how many Doors and Led Zeppelin releases we put through each and every year and, as player penetration increases over the next two or three years, the catalogue will get sold. Also, great catalogue titles such as Dr Zhivago will be joined one day by The Matrix and the Harry Potter movies. However if catalogue is to be sold for a number of years to yet another new emerging range of customers it has to be properly exploited.

The use of DVD for music videos has been surpassing all expectations. The number of titles is also limited - we did a little under 10% in music videos last year covering Warner Vision’s catalogue with all sorts of front line titles. In the days of VHS music video was not hugely successful, but the DVD format has given this genre a new lease of life.

While I don’t think music is the next major step, I do think it’s here to stay, and it has a life which is probably bigger than most of us anticipated. And it’s a totally different approach to a musical product.

As you know, Warner has always been behind DVD-Audio. We re-launched it last year in August with about 60+ titles. At the moment the overall figures are relatively small and it is critical that a lot of marketing effort is put into it.

When we moved from vinyl records to CD audio quality there were obvious advantages that didn’t need to be explained. Going from VHS to DVD had even more positive benefits. Here, however, to go from CD audio to DVD-Audio will be a difficult thing to market because many music consumers are sufficiently happy with the quality that the CD has to offer.

What other markets, using DVD, you would like to see developed which would bring extra business? Say the cover-mount market or mini-DVD?

First you have to differentiate between the physical format, such as Mini-DVD, and a content format. WAMO make the 80mm disc and we’re in a position to make them as well. However, the real demand is yet to be seen. Personally, I like it as a nice presentation and promotional tool, but it will not cover the major content things like movies or video clips. It could be a nice format for a music single with one or two tracks on it but this idea has not been really pursued by the content providers. If that changes then of course we’ll be happy to step in.

The critical thing is that the industry had been expecting more just as they had expected the PC and the games industry to jump on the bandwagon, but again outside of the two proprietary formats, the PS2 and the XBox, not really much has happened.

Surely, we’ll see the day soon when the major chunk of PC games will be on DVD as well. What we’re not seeing is many original CD Rom applications being re-copied onto DVD for the very simple reason that everyone now uses Internet services for travel guides, hotel guides, telephone directories and so on. You don’t need a physical disc copy anymore that you slide in your drive to get the information. It’s a lot easier to just take it from the Web than to go and buy the disc then physically take the information home.

So outside of film and music, from the traditional CD Rom applications, there will not be much beyond the games industry.

Consumers are less attracted to a CD cover mounts these days because so many magazines have a disc on the cover and the contents are often at a level where you simply wouldn’t bother looking at it, let alone installing it. The attraction for the consumer ultimately depends on what is on the disc. We’ve done a lot of cover mount DVDs with video clips, particularly with Warner Music artists. And, yes, there will be more magazines using them in the near future, but I don’t think it’s going to be a major part of the business.

You mentioned the Internet: at some point do you expect the on-line delivery of content to eat into the market of packaged media and have an impact on the pressing sector?

Yes. The world will move in this direction. The questions are: How quickly is it going; How easy is the access; and What is it going to cost? At this point in time the costing issue has not been defined and made known to the consumer. So if we leave aside the illegal downloads that nobody really wants to be involved in, we’ll have to see at some point how we are going to step from a physically packaged media to an Internet download. And can there be a peaceful co-existence, so to speak, over a number of years?

There is one aspect of this concept that we should not neglect – people still like to own something and hold it in their hands, use it, watch it, put it on their shelves afterwards and tell their friends, "Hey look at this! I’ve got the complete Friends series on DVD " And it all looks nice on a shelf, like an encyclopaedia or other books, but you can use it and have something touchable and something you can feel affectionate towards.

After a while, there will be one-off consumption of content where you use the Web and download something as you watch television for example. But for a long while to come, hopefully, there will still be a need for something physical in your hands.

Incidentally, are you doing the Region-2 titles for Warner, or is that being done by WAMO in the USA?

Most are being done by WAMO. We do all of Region-2 PAL, so WAMO serves basically the West and then other parts of the world. The Latin American countries are done locally as well as the Australasian world. For Warner Vision music titles we supply to Australia, Latin America and Asia.

You are doing work for third parties?

Yes, we have a sales team in Alsdorf, a UK sales office, and more recently a representative in France. We believe that there are third party customers who’s needs we could service effectively from our plant in Alsdorf, but also appreciate the necessity to have experienced account handlers on site in each territory. It is this commitment to third party business that led us to set up offices in the UK and France, both of which are proving to be very successful.

In the old days, companies had a long working relationship with the same people. Are you finding that clients coming to you for one job will go to a competitor for another similar job because, on this particular deal, they get a better price? How do you maintain the client base?

We are carefully building up a client base outside of the Warner Group of companies. So far we have maintained our independent customers by convincing them with every order, every day that we are worth doing business with. Otherwise they would have long been gone. Yes, like every manufacturer, we are facing situations where people have come back to us and said they’ve got a better offer elsewhere.

We have some examples where customers have gone elsewhere and then came back to us after a little while. We don’t like to be in the game of doing one job for a customer and then never seeing them again unless it is a one-off job for a really large title where somebody is looking for additional capacity. We did a major title last year for one of the other studios that we don’t usually work with but we had been asked for that specific title. We quoted for that specific title and we did it and we knew there was not much more to come, and that was fine. But that is usually for one of the few blockbuster titles that you have in a year.

At the end of the day, given our reputation, we can’t afford to be complacent. We are working with much more sophisticated and knowledgeable customers nowadays and they will stay with replicators if the price and service are right – there is no longer the insecurity of once you have found a good replicator you should stay with them.

At WMME, we think it is more important than ever to stay on our toes and make sure that we are the ones providing the best price and the best service....

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