Record Labels Find Gold in the Vaults

To hear industry insiders tell it, you’d think EMI Records has been having a very rocky year.

The label lost its hottest young band, the Red Hot Chili Peppers, to Warner Bros. Records. It dumped one of its top pop talents, Richard Marx, after an ugly spitting match with big-shot manager Allen Kovac. And then the label let Natalie Cole jump ship to Elektra Records, where she promptly recorded the biggest album of her career.

But is EMI running scared? Far from it. In fact, the label could turn a tidy profit this year. Some of the credit goes to EMI’s breakthrough success with Queensryche--and a series of hits from up ‘n’ comers like Roxette and EMF.

But there’s a far more crucial reason why EMI--which normally would be struggling during the industry’s prolonged sales slump--has found a way to prosper. It’s the music industry’s new magical word: catalogue.

For several years record companies have been raiding their vaults and re-packaging old albums, often in the form of lavish CD box sets, selling them to consumers eager to relive the artists’ glory days. Industry experts say catalogue income often makes up as much as 40% of many labels’ total sales.

The economic incentive is simple: To establish a new artist, labels are forced to spend big bucks on studio costs, splashy videos, independent promotion, tour support and incentive programs with record stores. With catalogue albums, labels slash virtually all these costs.

“Catalogues have become incredibly valuable,” says Robert Smith, head of marketing at Geffen Records. “Look at an artist like James Taylor. He left Warner Bros. years ago, yet his Warners catalogue goes gold every year. He’s selling 500,000 albums, at approximately $8 apiece (for budget-priced purchases)--that’s $4 million in business every year.”

Eric Clapton’s “Crossroads” box set, initially released in 1988, has sold more than 500,000 copies--and still sells 80,000 copies a year, according to PolyGram Records. Atlantic Records’ Led Zeppelin box has sold nearly 750,000 copies--at $45 apiece. Even more amazingly, Columbia’s Robert Johnson box topped 300,000. So when EMI marketing chief Jim Cawley discovered what EMI had in its vaults, thanks to decade-old acquisitions of such labels as Liberty, Alladin and Imperial Records, he was ecstatic.

“It’s like someone handed you the keys to this sunken ship and you went underwater and swam around and everywhere you looked, you saw all these hidden treasures,” says Cawley, whose label is putting out collections by Fats Domino and such blues legends as T-Bone Walker, John Lee Hooker and Lightning Hopkins. “When we saw what Columbia did with its Robert Johnson box, we started talking to retailers, who told us that this was just a wide-open field.”

EMI is taking pains to refurbish its old masters (Imperial used to speed up Domino’s singles to make them sound better on the radio--EMI has returned them to their original speed).

But what makes EMI execs excited is the box sets’ huge profit potential. Take the Fats Domino box, which offers four CDs at a $50 list-price. “If it only sells 100,000 copies--and we’re betting it does at least twice that,” says Cawley, “we’d make more profit on Fats than if we’d sold 1.3 million albums by a current artist.”

Cawley says the label has orders for more than 10,000 Albert Collins two-CD packages, which already puts EMI into the black. Consider the economics: With each Collins’ CD set, which retails for about $20, EMI makes a profit of about $7. On a more extravagant CD box set, labels have even higher profit margins, upwards of $10 to $12 a shot.

It’s no wonder that EMI is hoping for a box-set bonanza with its new artists as well. In early November, the label will release a Queensryche box featuring both a 65-minute video and a live CD of the band’s performance of its “Operation Mindcrime” album, complete with a hefty booklet featuring photos, lyrics and liner notes.

According to Cawley, EMI needs to sell only about 125,000 copies of the box, list priced at $39.98 for CDs, to turn a profit. “If Queensryche’s fans are willing to pay $28 for a T-shirt, we think it’s within their range to buy the box set,” he says. In fact, Cawley predicts that as long as consumers are willing to “trade up” (translation: pay again for new CDs), the industry can charge more money for new product too. “If you’ve just paid $45 for a Led Zeppelin box set,” he says. “I don’t think you’re going to hem and haw as much over whether a new album is $9.98 or $10.98.”

Is this greed or shrewd business? Some industry execs worry that hits packages could flood the market. “If you put out a box set by an artist who also has a new album in the marketplace, you risk forcing the consumer to choose between the two,” says Geffen’s Smith. “And if your box set starts eating into the sales of the artists’ new album, then you run the risk of really hurting their career.”