CDs, New Music Put Recording Industry Profit Back on Track

It took eight years, but it appears that the U.S. recording industry is finally back on its feet. For now, at least.

According to figures released last month by the Recording Industry Assn. of America, the retail value of shipments of records and tapes reached $4.65 billion in 1986, topping the industry’s previous best performance of $4.1 billion in 1978.

Considering that the record business went into a devastating four-year decline beginning in 1979 and has been struggling ever since to stay even, the recent figures are fueling a bit of euphoria in the executive suites of major record companies.

In the midst of the slump in 1981, some experts had predicted the industry would never again reach its 1978 sales level.

But for 1986, industry leaders CBS Records and Warner Communications posted unprecedented pretax operating profits of $162 million and $151 million respectively, and performed even better in the first quarter of 1987, with CBS reporting a pretax profit from record operations of $68 million and Warner coming in with $47 million.

Expects Record Year

The CBS and Warner record operations are far outperforming those companies’ other entertainment divisions, said Geffen Records Chairman David Geffen, which means that “the record business can no longer be viewed as the poor stepchild of the entertainment industry.” Geffen’s 5-year-old firm has only 40 artists on its roster. “We had sales of more than $50 million last year, with (operating) profits of $8 million,” he said. “We’ll have a record year in 1987, with any kind of luck between $60 million and $65 million in sales. Every company that I’m aware of is making record amounts of money. It’s a boom across the board.”

The question is, how long will it last?

RIAA figures indicate that in 1986 the number of records, cassettes and compact discs shipped actually declined from 1985 by 5%, to 618 million units, far below the 726 million shipped in 1978. The overall rise in dollar volume and profitability is attributed primarily to the soaring sales of compact discs, which carry a retail price of $12 to $15, as opposed to $8.98 or $9.98 for records and cassettes. According to the RIAA, the value of CD shipments was $930 million in 1986, an increase of about 139% over the year before.

According to retailers, the preponderance of CD sales is coming from consumers replacing older albums, not buying new releases. Consequently, some record executives are worried that the popularity of the new compact disc configuration is just masking the fact that the record business is not expanding. “What’s going to happen when the consumer fills up on old products?” one executive asked. “Is this boom just an illusion? Are we living in a fool’s paradise?”

All the record company presidents interviewed for this article said they expect the upswing to continue for the foreseeable future. Of course, that could mean only a year in the historically shortsighted record industry, where, as one top executive put it: “Future planning is where you’re going to have lunch on Thursday.”

Indeed, the current euphoria among record executives stems from the fact that the fourth quarter, rather than the first, is traditionally the best for the industry. Therefore, they expect the remainder of this year to be even better, reflecting sales of just-released or soon-to-be released albums by such major artists as Fleetwood Mac (on Warner Bros. Records), Whitney Houston, whose last album on Arista Records sold 8 million copies, and Michael Jackson, whose 1983 “Thriller” album on CBS’ Epic label ranks as the best-selling album in history--about 35 million copies.

Polygram’s Turnaround

“I think it’s intelligent to have concerns about the future and, at the same time, feel good about what’s going on now,” said Polygram Records President Dick Asher, whose company is widely cited as an example of the industry’s recent turnaround. The European-owned firm was threatening to leave the U.S. market in 1983 after absorbing losses of $200 million over the previous 10 years.

But Polygram has rebounded since then with three platinum albums (sales of a million or more copies) by the rock group Bon Jovi and one by the rock band Cinderella. Bon Jovi’s “Slippery When Wet” album currently is No. 2 on Billboard magazine’s chart of best-selling records and tapes, with sales nearing 8 million copies, making it the biggest-selling record so far this year. The company also currently has a top 20 hit with the Robert Cray Band’s “Strong Persuader” album.

“I’m told that last year we had our highest profit ever,” Asher said. “I have to admit it’s a bit of a new sensation. In the first four months of this year, we’re already quite close to where we were at the end of last year.”

Adds Bob Krasnow, chairman of New York-based Elektra/Asylum/Nonesuch Records: “We’re not looking at a mirage. This will be our biggest year ever, and the bulk of our revenue is not coming from older products; it’s coming from new artists.”

According to Krasnow, the record business is in better shape than it was even in the glory days of 1978, “because the audience has expanded.”

Older Customers Return

Industry experts say the popularity of the CD has drawn back to the record stores older, more affluent customers that the record industry had written off for years. These customers are buying not only reissues of their favorite old pop music, but also new artists and selections in other musical categories, such as jazz and classical.

Such a trend is good news for the industry for another reason: The price of jazz, classical and “alternative” albums is often higher than for mainstream pop or rock. What’s more, because the price of compact discs is relatively high, consumers have not seemed to balk at the higher prices the industry has posted recently on many albums and tapes.

“It’s not just some kid with long hair and an earring buying the new Grateful Dead album,” Krasnow said. “The audience is everyone, and they are buying all kinds of music. The customer who buys an album by (English rock group) The Cure will also buy a Linda Ronstadt album and a Barbara Streisand album, and one by (Latin singer) Reuben Blades.”

In 1986, Elektra Asylum released debut albums by four diverse artists--jazz/rhythm and blues singer Anita Baker; a Southern rock band called Georgia Satellites, and The Cure and Simply Red, another English rock group--”and they all went platinum,” he said. “Anita Baker has sold nearly 4 million copies around the world.”

“I think we’re in for a pretty long run here,” Krasnow said. “Sure, the older consumers are replacing old albums (with CDs), but the teen-agers are also back in force. On our new Motley Crue album, we’ve got the largest initial order (from retailers and wholesalers) we’ve ever had.”

The current depth of consumer tastes, Krasnow said, is what has encouraged Elektra to release not just a new record by “heavy metal” rock band Motley Crue, but also an album of Irving Berlin songs performed by a 28-year-old piano bar sensation Michael Feinstein. “Our classical division, Nonesuch, has positively exploded. Four years ago, it was dormant.”

Even troubled Capitol Industries-EMI Inc.--currently going through a management restructuring--expects a “dramatic improvement this year,” according to new Vice Chairman Joe Smith. Widely rumored to be up for sale by its European parent Thorn-EMI last year, Capitol has rebounded with top 20 debut albums by rock groups Poison and Crowded House and the long-awaited release of seven Beatles albums on compact disc.

The most popular Beatles album, “Sgt. Pepper’s Lonely Hearts Club Band,” will be put out on CD next month, the 20th anniversary of its original release. “We expect it to be the biggest-selling CD of all time,” Smith said.

“Even though total unit sales are down, the audience is much broader than before,” Smith said. “I’m seeing jazz albums selling in hundreds of thousands and country albums selling more than a million. And I think it’s just going to keep expanding. They’re selling a ton of the compact disk players, and the CD customer is spread over such a broad demographic scale. Even re-releases of Tommy Dorsey records are selling.”

“The important thing is, the consumer seems to have discovered music again,” said Gil Friesen, president of Los Angeles-based A&M; Records, the largest privately owned record company. “The industry is probably facing more problems than ever before--new technology is introducing turmoil, digital audio tape looms and who knows what’s next. But the thing that’s going to keep the business positive is the discovery of new artists who are making exciting records, and that’s going on,” Friesen said

Indeed, of the top 20 albums on Billboard’s best-seller chart last week, only nine were recorded by veteran artists.

Has 5-Million Seller

A&M; currently has a 5-million seller in Janet Jackson’s “Control” album, and a top 20 hit with “Keep Your Eye on Me” by veteran trumpeter Herb Alpert, who happens to be part owner of the company.

“We had a record year in 1986 and we’re doing better this year, which is our 25th anniversary,” Friesen said. “We like the record business.” Russ Solomon, president of the Tower Records chain, said the real winner in the current boom is the consumer. “Retailers are now carrying more CD titles in depth than they used to in either LP or cassette, so customers are being offered a broader choice of music. As a result, an older, more affluent audience is buying a lot more actively--I’m talking about the real older people. Like me. I’m 61.

“There’ no reason why the music business would turn down,” he said. “When do people not like music? I see no negatives on the horizon. There would have to be big social or economic upheaval in the country.”