What’s Wrong With the Record Industry (And How to Fix it)

The scene: late afternoon in a record company executive suite in Los Angeles.

The subject: problems facing the $40-billion-a-year record business.

The mood: gloomy.

Three executives have agreed to discuss the state of the industry, but only on the condition of anonymity. Their bosses wouldn’t like what they’re saying.

“There was a time when everyone in the business would sit around and talk enthusiastically about all the great music being made, no matter which label it was on . . . John Lennon . . . Curtis Mayfield . . . Velvet Underground . . . Joni Mitchell,” one of them says.

“Today, all anyone talks about are growth projections. The only thing corporations care about is EBITDA.”

The term causes the others to burst out laughing.

EBITDA stands for “Earnings Before Interest, Taxes, Depreciation & Amortization,” but just think of it as the bottom line. To many music executives, it is a symbol of what’s wrong with the record business.

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For the last three anxious years, the party line in the business has been that the current fiscal stagnation is cyclical. All it’ll take to rejuvenate things is some hot new trend, the theory goes.

Of the more than a dozen executives interviewed in recent weeks, some still adhere to the cyclical theory--but the majority are singing the blues. They believe that there is such a wide range of deeply rooted problems that the health of the industry itself is threatened.

Sales are up 6% so far this year in the U.S., and some industry leaders stress that proposed tougher piracy laws around the world could mean a dramatic increase in international revenue. But those laws haven’t been passed and may be unenforceable anyway, and the mild sales upswing pales in comparison with the double-digit growth in the early ‘90s.

Privately, there is a widespread malaise at the giant labels, much of it growing out of unrealistic corporate mandates demanding growth of 10% or more a year to help pay down debt at such companies as Time Warner, EMI, Sony and Viacom.

This change in the business was triggered in the late ‘80s when international conglomerates noticed the millions being made in the record industry. They stepped in and purchased the record companies, buying out the music-savvy entrepreneurs who had built them and installing their own business executives in hopes of pushing the profits higher.

In trying to meet the corporate demands for increased sales to drive up stock prices, the companies have found themselves wasting hundreds of millions of dollars through such practices as signing too many acts and paying too much for them.

Executives are under such pressure to deliver quarter by quarter that some even admit they have offered top artists financial incentives to release records prematurely--knowing it’s going to be a compromised work that could damage the artist’s long-range reputation.

“It’s a far cry from the days when record labels were controlled by independent entrepreneurs who took an active hand in helping nurture the careers of untested recording acts,” said Harold Vogel, managing director of Cowen & Co., a New York-based investment banking and institutional research firm.

“Now, there is intense pressure to churn out blockbuster albums to boost quarterly numbers and stock performance.

“It’s a very shortsighted approach though, because if you don’t develop artists, you can’t expand catalog,” Vogel continues, referring to a label’s library of older albums. “And without catalog growth, business will suffer.”

This turmoil in the industry comes at a time when there is a growing possibility that the traditional record business may become obsolete.

Advanced electronic delivery systems have already begun allowing consumers to download albums in their homes via interactive computer services, raising the possibility that musicians and fans can exist outside the major record label marketing and distribution structure.

Industry observers scoff at the notion, but they shouldn’t be so sure. Alternative distribution routes already exist: Singer Ani DiFranco has been cheered by the media and her cult audience for thumbing her nose at the big boys and selling more than 100,000 copies of her latest album on her own Righteous Babe label--a move that enables her to pocket twice the $2 per album that superstars receive from major labels.

What if a superstar decided to follow her lead--say Garth Brooks, the country maverick who has refused to turn over his latest album to EMI because he’s unhappy with corporate infighting at the label.

What would happen to stock prices of the entertainment conglomerates the day he put out an album himself and it entered the charts at No. 1?

Here are some of the sour notes that are shattering the sweet sound of success in the pop world.

SHORTSIGHTEDNESS

It’s easy to see why record executives are nervous about the state of the business, but why should the rest of us care?

The danger is that the quality of the music reaching the mainstream will decline because the priority at many labels has shifted from building long-term artistic careers to manufacturing quick, often novelty hits.

The overwhelming majority of label chiefs questioned agreed that the emphasis on immediate results is making it increasingly difficult to build career artists--the kind of challenging acts that often don’t connect with the public until their second, third or even fourth album.

When major labels typically invest between $500,000 and $1 million in an act before the first album even hits the streets, the pressure on the artists is immense. Chances are that some of modern pop’s most influential figures would have been dropped before they ever delivered their best-selling albums if they’d come up during the current climate.

Among the platinum artists who didn’t break into the Top 50 until their third album or later--and might have fallen victim to this thinking--are such current and/or future Rock and Roll Hall of Fame members as David Bowie, the Clash, Aretha Franklin, the Grateful Dead, Bob Marley, Otis Redding, Sly & the Family Stone and Bruce Springsteen.

TOO MANY ALBUMS

The most important thing that corporations need to understand is that two plus two doesn’t always equal four when it comes to the record industry.

Just because you can sell 10 million albums with 20 bands doesn’t mean you can sell 20 million albums with 40.

Last year alone, nearly 30,000 albums were released by major labels and independents--of which fewer than 2% sold more than 50,000 copies. Even discounting the thousands of albums that were released by the small, independent labels, this avalanche of product left major label rosters bloated--and that’s bad. There is a strong chance the best talent gets lost in the process. According to Pollstar magazine’s 1997 list of record company rosters, Warner Bros. Records alone has more than 150 acts.

Labels think they are increasing their odds of finding a hit every time they sign another act. In truth, they’d be better off being more selective. The money written off each year on lost-cause bands runs into hundreds of millions of dollars, industry sources say.

“My guess is the next great act, . . . someone who could turn the business around, . . . is just wasting away on a label somewhere,” says Benny Medina, a top executive at Warner Bros. Records for years before starting a management company that handles such artists as Babyface and Meshell Ndegeocello. “Everyone is too busy with other acts to notice.”

BIDDING WARS

Besides signing too many insubstantial acts, the industry has a notorious habit of paying too much for them. Millions of dollars are routinely thrown at mediocre acts in a prime example of the lemming principle: Insecure executives see others going after an act, so they think it must be valuable. Usually, these are conventional acts who are just copies of what is already popular. That’s why executives feel safe bidding for them.

Few of these deals ever deliver. Among the recent high-profile signings that bombed in recent months: Radish, Built to Spill, Hayden and Boss Hog. Who knows how many will be on the rosters a year from now? Sometimes a hit act does emerge from a bidding war--such as Prodigy this year. But the bidding has made the terms of that deal so enormous that rivals question Maverick Records’ claim that the label can profit under the arrangement.

“Ninety percent of the bands who get into bidding wars never [succeed],” says one West Coast label executive. “The price isn’t driven up because of the talent involved or any evidence that the act is going to sell, but because of the lemmings attitude. One label sees someone else going after a band so they figure the other company must know what they are doing, so they start racing after it, too. It happens every week in this town.”

An influential Nashville record executive even jokes about the time he staged a showcase for an artist he had no interest in--just to start a buzz around town as a favor to the artist’s manager.

The irony is that while labels are wasting millions of dollars in bidding wars, the real phenomenons go virtually unnoticed.

The acts that make the biggest creative and commercial impact are usually longshots--acts that are so far ahead of their time that it takes someone with daring and foresight to recognize the potential.

Sun Records’ Sam Phillips signed Elvis Presley when no other label would touch the former truck driver who was trying to mix country music and R&B.; Island Records was the last chance for U2. Capitol gambled on Garth Brooks after all the other Nashville power brokers had passed on him numerous times.

And the beat goes on. Virtually every label in America turned down last year’s biggest-selling artist: Alanis Morissette.

SUPERSTAR DEALS

Figure on it: Anything that can go wrong in a big-bucks superstar deal will usually go wrong. For every Janet Jackson who pays off big after signing a massive pact, there’s a ZZ Top or the Artist Formerly Known as Prince.

The Artist--whose “Purple Rain” album in 1984 sold an estimated 13 million copies--signed a $100-million pact with Warner Bros. in 1992, then eventually left the label after a series of albums failed to break the 2-million mark--some even falling short of 500,000 sales. Since signing a $32-million-plus deal with RCA in 1992, ZZ Top has seemed to all but disappear from the pop scene. The group’s last two albums failed to break the Top 10.

Superstar contracts always seem a safe bet, but it’s fool’s gold. In most cases, labels would be better off using the millions to sign promising new acts.

THE WRONG LEADERSHIP

You can theorize all day about what makes the record business run, but it really comes down to finding and believing in the talent.

Sure, you can sell millions of albums through imaginative marketing and endless promotion, but the records that kick off new waves of fan interest and allegiance are rooted in something that touches a generation musically.

So it makes sense to put someone in charge who has a proven history as a music person--say a producer, such as Jimmy Iovine, whose credits range from Tom Petty to U2 and who has helped make his Interscope Records into the most coveted label of the ‘90s.

All too often, however, conglomerates feel safer with executives who have proven business skills, even if their success was in promotion or legal affairs. This not only sends the wrong signal to artists, but also leaves a label vulnerable when it’s time to make crucial decisions on which artists to invest in.

And while corporate intrusion may be stifling creativity, it certainly hasn’t put a damper on the gargantuan salaries paid to the increasing number of top executives using company jets and limousines. It is hard to understand how the same conglomerates that complain about overspending on artists have no qualms about approving lucrative severance packages for executives who have failed or fallen out of favor.

How does the industry justify spending hundreds of millions of dollars over the past three years to quell executive infighting? Was what happened in the virtual destruction of Time Warner’s music division three years ago anything short of a scandal? By the time the dust cleared, most of the men who had steered the company’s labels to huge profits had been fired by a team of corporate players that itself was soon given the pink slip--with severance pay exceeding an estimated $100 million.

That’s more collectively than it cost to launch Interscope, the hot label that has repeatedly been criticized for wasting too much money on artists.

Examining the magnitude of money squandered on buyouts, it appears that corporations place a much higher premium on nurturing executives who fail than artists who succeed.

If corporate titans think this criticism is unduly harsh, they ought to review the findings of a survey conducted in part by the trade agency they underwrite.

In the survey by the Recording Industry Assn. of America and the National Assn. of Recording Merchandisers, consumers ages 14 to 45 were critical of the record business on several levels. They feel radio playlists are narrow and repetitive, record stores are sterile and inhospitable--and, crucially, record labels release too much weak, sound-alike product.

The debt-ravaged retail community is in trouble too. Wherehouse, Strawberries, Camelot and Peppermint/Starship all filed for bankruptcy protection, and Blockbuster and Musicland, the nation’s biggest record retail chains, are struggling.

Because of the cut-throat competition from such mass merchandisers as Best Buy, the profit level among record retailers has shrunk so alarmingly (to as low as 50 cents per CD on some hit product) that retailers have cut back sharply on the amount of inventory to save money. This means record labels are having an increasingly difficult time getting shelf space for new acts they are hoping will become future best sellers.

Retailers are in such dire straits that many store owners make more money collecting advertising and product placement subsidies from record companies than they do by selling albums. That’s money that could better be spent on artist development, but the labels can’t afford to let the retailers close. Until the Internet develops as a sales force, there’s no other practical way to reach consumers.

At the same time, music on radio and television--which have previously been allies of the record industry in attracting pop buyers--is in a discouraging state.

Radio once was the heartbeat of pop music, but it has largely degenerated into a fragmented wasteland dominated by debt-crippled conglomerates. Recent changes in federal rules allow corporations to own more stations per city than ever before, reducing competition and encouraging radio programmers to take fewer and fewer chances on daring new artists.

The days of blatant payola may be gone--record companies no longer trade drugs and prostitutes for airplay. But corporations, in an effort to influence which songs get played on the radio and which records get the best placement in stores, still waste almost as much each year as Rupert Murdoch is expected to pay for the Dodgers.

What excuse is there for continuing to pay millions of dollars each year to a tiny clique of independent promoters and tip sheet operators who do little but prey on the insecurities of record chiefs who think that they won’t be able to compete for airplay without their support?

And why do record companies that spend millions of dollars each year to obtain accurate sales data from the independent research firm SoundScan continue to give away truckloads of singles to retailers who then pass them on at budget prices--all in hopes of obtaining inflated rankings for the singles on the nation’s pop chart?

The situation at MTV doesn’t look much better. This once-enticing forum for the exposure of adventurous new acts still can exercise enormous power in the pop world, but it is chiefly now home to a plethora of mindless game shows and lifestyle documentaries. Videos have become the bottom priority. It’s no wonder ratings are down.

Much of the problem can be attributed to the fact that MTV is owned by Viacom, an EBITDA-driven giant corporation whose Blockbuster division is drowning in red ink.

The good news is that MTV’s sister channel, M2, is nonstop video, drawn from a wide array of styles. The bad news: Most people can’t see it because virtually none of the major cable companies carry the channel.

There are still random success stories in the industry, from the Wallflowers to Jewel--instances where labels continued to push an act even though the artist didn’t show immediate commercial impact.

In most cases, however, the outlook is grim because the problems are so varied and so deeply entrenched. Its hard to believe the next generation will find cultural heroes in such late-’90s bestsellers as the Spice Girls, the Backstreet Boys, the Mighty Mighty Bosstones, Reel Big Fish, Sugar Ray and the Squirrel Nut Zippers, and they may just look elsewhere for stimulation. In fact, many fear that the process has already begun, with surveys showing that young record buyers are spending more and more money on video games, movies and cyberspace.

On Oct. 23 in Palm Beach, Fla., a panel of top record company executives will face off for the first time against hundreds of Wall Street analysts to address some of the the industry’s most pressing problems. The unprecedented event, part of an entertainment media conference staged by New York investment banking firm Bear Stearns, is scheduled to feature commentary from Interscope’s Iovine, Mercury’s Danny Goldberg, Bertelsmann’s Strauss Zelnich, EMI Music chief James Fifield and former Sony Music chief Michael Schulhof.

“I think the heads of the mother corporations need to put bold managers in charge to run their record labels, rather than continue to follow what their instinct has been to date,” Iovine says. “If they don’t, the music industry will find itself in the same kind of trouble that the American car industry ended up in 20 years ago, when the Japanese came up with a more attractive, more efficient form of transportation. In terms of entertainment, I think that video games and the Internet pose the same threat to the record business. These corporate suits better wake up and face the music before it’s too late.”