CBS Records: Dominant, Lucrative and Troubled

It’s unlikely that rock star Bruce Springsteen spends much time thinking about the directors of CBS Inc., but it’s a sure bet that they have been thinking about him lately.

In the last two months of 1986, the broadcaster’s record unit sold nearly 5 million copies worldwide of Springsteen’s “Live: 1975-1985” album. At a wholesale price of more than $19 each for the five-record set, that represents nearly $100 million in revenue for CBS.

Springsteen’s album helped push pretax profit of CBS Records to $162 million for 1986, nearly double those of 1985 and the highest ever reported by any record company. Revenue was almost $1.5 billion.

That stellar performance came as CBS’ TV network has been struggling with lower ratings and weak advertising revenue. Overall CBS profits rose only 1% in 1986, and pretax broadcasting profits tumbled 31%.

Some experts say it was the expectation of such a glowing performance by CBS Records that led the corporate board to reject a recent bid from an investor group headed by CBS Records Group President Walter Yetnikoff to buy the record division for $1.25 billion.

That would have been by far the largest sum ever paid for a record company. But CBS’ rejection seemed to lay to rest widespread talk that new CBS Chief Executive Laurence A. Tisch wants to unload the record division--as he recently did with its music publishing operation, CBS Songs--to help reduce debt the company took on to defeat a 1985 takeover bid by Atlanta broadcaster Ted Turner. “I think the CBS board has made a corporate decision that their business is TV and records,” the president of a competing record company says. “They might sell everything else, but right now the cash flow from the record division is too important (to CBS).”

Adds John Reidy, an industry analyst for the investment firm of Drexel Burnham Lambert: “This is the dominant record company in the world, with more profits than any other. . . . It would be hard to improve on (its 1986) performance.”

Indeed, for the past 30 years, CBS has dominated the record business the way General Motors has traditionally dominated the auto industry. The company has carefully nurtured its record division, and the business has come a long way from the financially ailing American Record Co. that CBS bought in 1938. CBS surpassed RCA Victor as the largest U.S. record distributor in the mid-1950s.

The company’s three labels--Columbia, Epic and Portrait--boast an artist roster that is the envy of competitors, both for its size and the wealth of talent in every musical category--pop music giants Michael Jackson, Bob Dylan, Barbra Streisand and Luther Vandross, country and western singer Willie Nelson, opera star Placido Domingo and jazz trumpeter Wynton Marsalis, to name just a few on the CBS roster of more than 200 artists.

With about 6,000 employees worldwide, CBS Records deploys the most powerful--and the most widely emulated--armada of manufacturing, distribution, marketing and artist acquisition in the industry. So strong is CBS’ reputation as a marketer and distributor of records that many industry observers believe a 1-million-seller for any other label would sell 2 million copies if released by CBS.

Despite all this, however, industry sources say there is trouble brewing at “Black Rock,” as CBS’ Manhattan headquarters is known.

“I think the record company is less of a fortress than it was in years past; there’s some vulnerability,” a former top CBS executive said. “I think there is a crisis ahead.”

Part of the trouble centers on the supposedly strained relations between Tisch and Yetnikoff. “They simply do not get along,” said a record company president, who like most interviewed for this article asked not to be identified. “Walter yells and screams a lot, and Tisch is a very soft-spoken gentleman who cannot be pushed around.”

Yetnikoff has been president of CBS Records since 1975. A Phi Beta Kappa at Brooklyn College and graduate of Columbia University Law School, he is generally regarded as an extremely bright attorney and a dynamic, even charismatic, executive. He also has a reputation for being volatile, bumptious, profane and contemptuous of prescribed CBS corporate behavior. He declined to be interviewed for this article.

In a statement, Tisch described his relations with Yetnikoff as “excellent,” and any suggestion to the contrary as “completely off base.” He declined further comment.

“Walter is a passionate and charming bully; he seems more like a manager of boxers than president of a record company,” a Yetnikoff associate said, adding, “I don’t think I’ve ever met anyone that smart and that crude at the same time.” Yetnikoff’s openly hostile relations with former CBS Chairman Thomas H. Wyman, whom he often referred to privately as “the goy upstairs,” were something of a running soap opera in the executive suites of CBS and the record business generally. Until Wyman was ousted by the board last September, there seemed to be a colorful new anecdote making its way through the grapevine each week. A participant in two meetings with Yetnikoff and Wyman cites these examples:

- Yetnikoff walking into a meeting with Wyman and CBS corporate executives 20 minutes late, announcing, “I don’t work WASP hours.”

- Yetnikoff, while attending a weekend conference at Wyman’s vacation home in the Caribbean, showing up bloodied and disheveled at a cocktail party after crashing a motor scooter into the side of the house.

“Walter has always been a source of consternation and bewilderment at the company,” said the participant, who left CBS last year. (A spokesman for Yetnikoff said he was unaware of the two alleged incidents.)

“Of course he sticks out, but so does the whole records division. The rest of the company tends to be stuffy. . . . They consider the record division bizarre,” the former CBS executive said. “Walter has always gotten away with his behavior because he’s very good at what he does--he makes a lot of money for the company--and because no one has ever been willing to throw down the ultimate gauntlet. He has intimidated a number of his bosses.”

Yetnikoff’s relations with Tisch, his new boss, started out well enough, sources say, but deteriorated rapidly last fall after the CBS board decided not to sell the record division to Yetnikoff’s investment group.

“Walter really thought they were going to sell, and he didn’t take it very well when they didn’t,” an executive who knows both men said. Several sources who talked with those attending the meeting assert that Yetnikoff shouted at board members and even hurled an ethnic slur at Tisch, who, like Yetnikoff, is Jewish.

Yetnikoff acknowledged his unhappiness over the board’s decision in a Wall Street Journal article last month. “I’ve been disappointed before, but not to this extent,” he was quoted as saying.

Issue of Cost-Cutting

That article and other sources also said Yetnikoff and Tisch are at odds currently over Tisch’s efforts to streamline the record division and cut operating costs. Just how deeply Tisch wants to cut isn’t yet clear, but Yetnikoff’s response is, sources say. In effect, he has argued, “If it ain’t broke, don’t fix it”--a position not without merit, considering the division’s 1986 performance.

Nonetheless, the consensus among record executives interviewed for this article is that the records unit would not suffer if cutbacks were made, especially in the area of promotion. They point out that CBS’ profit margins are lower than those of archrival Warner Communications, which also had a banner year in records. Warner’s record unit had sales of $1.13 billion and pretax profits of $150.6 million for 1986. That means CBS Records earned just under 11 cents before taxes on each $1 of sales while Warner earned about 13 cents.

“CBS is inefficient,” the chief executive at another record label said. “If they could get their margins the same as Warner’s, they’d be making $200 million.”

“It’s not just too many people on the payroll, it’s too much waste all around,” he continued. “Right now, there’s not an area of their business that couldn’t be cut.”

Of course, CBS’ competitors acknowledge that they have selfish motives for wanting to see Tisch put a damper on spending. If the industry leader spends great amounts on promotion, for example, the rest of the industry must do likewise to remain competitive, one executive pointed out. Therefore, if CBS Records cuts back, others will also be able to reduce their costs.

‘Dares to Fail’

“Walter is a courageous deal maker; he dares to fail,” a record company president said. But he added that Yetnikoff’s free-spending ways have “certainly raised the price of playing poker in this business.”

Critics point to Yetnikoff’s 1983 signing of the Rolling Stones as an example. The contract calls for the rock group to be paid $6 million for each of four albums, plus another $1 million per album in promotional expenses.

To break even on its $28-million investment, CBS must sell 4 million to 5 million copies of each Rolling Stones album. However, the group’s first CBS album, “Dirty Work,” released last year, so far has sold fewer than 2 million copies in this country.

In recent years, CBS is believed to have lost money on a number of multimillion-dollar contracts with big stars whose records subsequently did not sell well, among them James Taylor and Paul McCartney.

One former top CBS executive says bloated contracts with big-name artists pose an even broader danger to the company, “if you stop everything else and put all your effort and promotion dollars behind that artist’s latest record . . . even if that record makes money, the success is illusory because of potential sales you’re losing when you’re not minding the store with regard to your other artists.”

Just a Few Money-Makers

He asserted that CBS is becoming increasingly dependent on just a few superstars such as Springsteen and Michael Jackson, whose sales “represent an enormous proportion of the company’s profits.”

A spokesman for CBS responded that the record profit for 1986 “wasn’t just Springsteen. That was just icing on the cake--a thick coat of icing, but we had a great year anyway.”

By all accounts, Yetnikoff maintains close personal relationships with some of CBS’ major artists, particularly Springsteen and Jackson. Sources say he is counting on those ties to get his way in the battle with Tisch over cutbacks--even suggesting that if he left the company, some major artists might go with him.

“Walter apparently thinks he has Larry over a barrel,” a source close to Tisch said. “That sort of implied threat might have worked with Wyman, but not with Larry--he’s not easily intimidated.”

In fact, few in the industry believe that Yetnikoff will quit CBS, which pays him about $1 million a year in salary and bonuses. Fewer still believe that any artists would leave with him if he did. But some don’t discount the possibility that Yetnikoff could be fired by Tisch.

“I have serious doubts that he’ll survive if he keeps pushing Tisch the way he has been, especially in public,” one competitor said. “There’s a lot of talk that he’s already gone too far.”

But a former CBS Records vice president expressed doubt that Yetnikoff will ever be dumped. For one thing, she said, Yetnikoff has always been a favorite of William S. Paley, the 85-year-old CBS founder who returned last fall as chairman.

What’s more, “there’s just something about Walter that keeps the company running,” she said. “It’s a feeling that when everyone else has tried and failed, Walter can do it. Beneath all the bluster and posturing, Walter really understands and respects what the artists do.”