Regrouping After the Boom

The face of the U.S. record industry changed dramatically in the ‘80s.

Compact discs have replaced vinyl. A series of mergers, consolidations and reorganizations are reshuffling the traditional balance of power between record companies. And new labels are sprouting with increasing frequency.

Through it all, sales reached a peak of more than $6.2 billion for 761 million units in 1988--up since the 1982 slump of $3.6 billion for 577 million units. But the growth was just a trickle this year.

Despite early projections of as much as 12% annual growth in 1989, sales during the first half of the year held about even with the same period of 1988, and analysts expect year-end figures to follow suit. The consensus is that though the CD market isn’t saturated in the United States, the CD boom that spurred the industry surge in recent years is over.

As the ‘90s begin, the opening of the Iron Curtain and the 1992 economic unification of Western Europe may hold to renewed growth for the industry.

“We just found out we sold half-a-million copies of the ‘Dirty Dancing’ sound track the first week East Germany was open,” said Bob Buziak, president of New York-based RCA Records. “I hear much talk about American companies buying radio stations and video retailers there. The result is they’re going to learn about American-style record retailing, and the Continent is ripe for that.”

Mara Balsbaugh, entertainment industry analyst for Smith Barney in New York, agrees. “Growth is going to be more dependent on product flow with the technology (expansion) now stable,” she said. “I think there’s good potential for that in Europe and the Pacific Rim, and now Eastern Europe and the Soviet Union.”

At present, Los Angeles-based MCA is the only one of the six U.S. distribution groups that does not already have its own international operation, but that is likely to change.

“We’re currently in the midst of analyzing the possibilities globally,” said Al Teller, who was appointed chairman of MCA Music Entertainment when Irving Azoff left to start his own label in September. “It’s just a fact of life that the overseas market has been enjoying a higher growth curve than the U.S.”

This new market potential, coupled with hopes that more technological developments--such as digital audio tape--could take off like CDs have, has helped infuse the record industry with confidence.

Proof of this is in the premium prices paid recently for both whole distribution groups (Sony paid $2 billion for CBS in 1988, an apparent bargain by today’s standards) and independent labels (PolyGram bought Island for $300 million and A&M; for $500 million in 1989).

Confidence is also mirrored in the expansion within the industry, with new labels coming from Disney (Hollywood Records) and Azoff (through Warner Bros.). Meanwhile Virgin, PolyGram, CBS and possibly RCA are all spinning off new labels.

Even so, the main issues on the minds of the key industry players at the start of the ‘90s reflect the weight of the late ‘80s growth.

* The stakes are higher than ever. As the major record companies grow or become part of larger and larger conglomerates, the consequences of failure are increased dramatically.

“You’ve got large companies with debt services they have to fill,” said Virgin’s co-managing director Jeff Ayeroff.

* Growth must be kept manageable, with music the central focus rather than deal-making.

“The way to grow is to get small,” said Virgin’s other co-managing director Jordan Harris, using the term cell division to describe the addition of the company’s new Charisma label, which will begin operation early in the new year.

Added his partner, Ayeroff: “CBS is adding three new labels. They realize how unwieldy size has become in the creative milieu. The record industry has spent too much time with the deal-maker, and the deal-maker’s time has not come.”

As such, the trend seems to be for executive talent to be drawn from music-oriented people rather than promotions executives and bean-counters. Capitol’s newly appointed president, Hale Milgrim, is just one cited as a music lover first and a businessman second.

“Whether they become presidents and CEOs, I don’t know,” said Warner Bros. Records president Lenny Waronker. “But it’s happening and you’ll see more music people in executive positions.”

* The large distribution groups need considerable product flow to support the systems. Hence the purchases of independent labels and the starting of new ones.

“As people look at their distribution mechanisms and the need to feed more and more hit product into them, the inability to grow internally has put the pressure on to buy it elsewhere,” said MCA’s Teller.

* A slump similar to one in the late ‘70s and early ‘80s may occur.

“The recent times we’ve been through compare to the last decade,” said RCA head Bob Buziak, pointing to the effect of a big film box-office summer taking some of the entertainment dollar away from music. “We saw retail come out of the summer slump by selling a lot of dance and youth-oriented records, and some feel we have suffered on the artist development side.”

Said MCA’s Teller: “A lot of artists came and went in the ‘80s without leaving a lasting impression, one-off artists that remain nameless and faceless but took up a lot of time and space at retail and radio. I like to think the pendulum will swing back to more well-rounded artists who can play live as well as do videos.”

But despite these doubts, analyst Mara Balsbaugh sees a rosy next few years--if some right moves are made and the bottom line is always the music.

“Even (in Eastern Europe) success is going to be a function of market share through having the right product or not,” she said. “Nobody’s got a corner on talent.”