Major Label, Major Headaches
By DAVID GRAD
After two years of flat revenues, the news from Soundscan, the company that electronically tracks purchases via the cash registers of major retailers, is that CD sales were up nine percent in 1998. This was greeted by publicists at the major record labels (BMG, EMI, Time Warner, Sony and the newly consolidated Universal) as confirmation that the industry was finally back on track. The more realistic view is that the '98 uptick was just a brief respite in what promises to be an ongoing period of volatility, as exemplified by the recent merger of Polygram and Universal, which at the very least will see several labels gutted, hundreds of dropped acts and thousands of staffers laid off.
Meanwhile, the growing predictability of their pop products, along with the challenges of digital distribution and Web-based technologies, is keeping not a few music moguls awake at night. And though it is clear that they'll find ways to maintain control, the majors are going to be fighting ever harder to hold onto their 70 percent market share. The better minds at the majors readily admit that while '98 was a good year, the coming of the millenium may give them cause for a very mixed celebration.
"I think the majors are going to be pleased with 1998," says Howie Klein, president of Reprise Records (a division of Time Warner). "I'm ecstatic with the fourth quarter."
With some of last year's biggest sellers, like the City of Angles soundtrack and Bare Naked Ladies' Stunt, he has reason to count himself among the industry execs granted the Midas touch in '98. But when asked about the continued health of the majors in the coming century, Klein sounds decidedly less ebullient: "The growing corporatization of the music business scares me very much," he soberly admits. "The focus on quarterly profits and the mainstream kill is going to be ultimately detrimental to artists, their work and the industry as a whole."
Pointing to the increased "corporate concentration" of radio stations, retailers and record labels, Klein says, "When I got into the business, it seemed like all the people who made the ultimate decisions were music people, or what you would call record guys. But now, as part of these mega-corporations, which are all burdened with varying amounts of debt, we have to do more than make a profit. We have to make huge profits, and the entire industry is becoming progressively more and more unbalanced in favor of the shareholders ... The corporate side of the industry wants to see brand-new bands break immediately and become gigantic in two months. When you talk four months they're already thinking, 'that's artistic development,' which is a bad word."
Those pressures for the quick kill are being felt even within the once-sacrosanct creative quarters of the majors. Klein points out that stock options, previously a benefit only extended to the very top echelons of the industry , are now being used as incentives to the humblest manager. He applauds, the "democratic idea" behind letting employees partake, but cautions, "Management has become addicted to these hugely valuable financial vehicles. My fear is that people will fight a little less hard for what we know are the long-range interests of our artists and their music in favor of the quick pop hit and quarterly earnings, because that's what makes the stock prices go up."
He illustrates the change with an anecdote: "The other day I went and visited a friend of mine who works at another label. I hadn't been there in a long time. I was walking around, going into offices and meeting people, and I discovered that almost everyone was watching the Financial News Network and keeping an eye on the stock ticker."
Danny Goldberg agrees that long-term development is not a high priority at the majors these days. The president of Atlantic Records 1993-'94, chairman and CEO of Warner Bros. in 1995, Goldberg recently lost his job as chairman and CEO of the Mercury Records Group (which included Mercury, Motown, Def Jam, Verve, Deutsche Gramophone, London Classics and Phillips) in the ongoing shake-up at all former Polygram labels after their absorption by Universal.
"When I was in that structure, I certainly felt tremendous pressure to make short-term numbers," he says. "Most people at record companies start out loving music, but the agenda of the institutions they work for gives them less flexibility than was the case five years ago."
He agrees with Klein about the nefarious influence of Wall Street, and cites additional problems. "In the early 90s, the conversion of sales to a $16.98 CD price [from lower LP prices] drove double-digit increases in revenues, which permitted the people at big companies to have some money left over to do longer-term development. But since the compact disc matured a few years ago, it has caused a tightening of the reins on money ... [T]hat translates into less money for tour support, followup albums and advertising --- the things that collectively we call artist development." Still, he takes exception to the oft-quoted claim that baby acts have a six-week window of opportunity at the majors these days. "I think that's an exaggeration," he says, but then he does concede, "Six weeks is a point where you have to triage. Some [acts] go to another phase and some don't."
Tragically, this slash-and-burn approach to the creation of pop culture is not only costly in terms of squandered talent; it doesn't even make good sense economically. "What is best for the quarter is not best for the company or the shareholders over the long-term," asserts Klein. "Wall Street is looking for the Alanis Morissettes of the world, who seem to come out of nowhere and become gigantic. They don't understand how to appreciate Bare Naked Ladies, which took us eight years to break. Right now, Stunt has sold three million copies, and will certainly hit the four or five million mark. What I think the corporate types do not take into account when they analyze the extent of their success is that Bare Naked Ladies have also sold a million of their back catalog, and it costs us nothing to sell those records --- no videos, no tour support, it's pure profit for the company."
David Pullman, one of those number-crunching types Klein disparages, agrees that the majors ignore back catalog at their own peril. An investment banker and managing director of the Pullman Group, he revolutionized the securities markets two years ago when he packages the future royalties from David Bowie's 25-album catalog as a $55 million bond offering (a successful gambit he has since repeated with offerings based on the songs of Motown's Holland-Dozier-Holland and Ashford & Simpson.)
"The reason why we see the assets in catalogs becoming more and more valuable is that there are less and less catalogs being created," he explains. "People in the industry are really focused on the blockbusters. They are not looking to develop artists or a group of songwriters for catalog." The increasing use of samples only makes these assets more valuable.
Pullman estimates that 50 percent of the wholesale price of a unit of back catalog is pure profit --- the industry's traditional hedge against market volatility. "The 'super' acts they're trying to market are going to be short-lived and the quality won't be there, because the money is being put into the marketing and advertising as opposed to the music itself. Take rap --- they're selling out their future to make their buck today. They make a lot on record sales, but they sample so much they don't make any publishing income. And publishing, not record sales, is the thing that goes on forever."
New York Press, Jan 27-Feb 2, 1999.