Labels Singing the Blues Over Expensive Failures

Pop diva Mariah Carey was the biggest free agent in the music business when she signed a four-album, $80-million deal last spring with British music giant EMI Group. Carey’s albums had sold more than 100 million copies, and EMI figured she would add luster to its music lineup and trigger plenty of cash flow along the way.

But the September release “Glitter,” Carey’s first album under the EMI deal, has been a dud. Only about 2 million copies have been sold worldwide, leaving the company with an estimated $10-million loss on the album, including marketing costs. The conglomerate now is in talks to pay a settlement to Carey and bail out of the rest of the contract, sources said.

The poor showing exemplifies the stretch of costly failures this year in the $40-billion record industry. Record companies are expected to sell about 20 million fewer albums this year in the U.S., the world’s biggest market, and the 2% drop would be the first year-to-year decline since SoundScan began tabulating sales data a decade ago. Worldwide, the record business has been declining at the same rate.

Onetime hot sellers such as Carey, R.E.M. and Macy Gray are delivering lackluster album sales, adding to the problems at major music companies already suffering from Internet piracy in the Napster era, eroding profit margins and skyrocketing marketing expenses and executive salaries.

“I’ve never seen this kind of damage,” said Michael Nathanson, a media analyst at Sanford C. Bernstein & Co. “You had these tent-pole releases that didn’t carry their weight this year. And it’s going to get worse.”

The major music companies report financial results differently, but most of the labels are struggling.

EMI posted a loss of $77.6million for the first half of its fiscal year--the worst first-half results in at least five years. Bertelsmann’s BMG Entertainment reportedly had a loss of more than $70 million this year.

Warner Music, once the industry leader, has been posting lower pretax earnings for three consecutive quarters, and Sony Music reported operating losses of $91 million for the last two quarters. Universal Music is the only one of the Big Five record conglomerates to post gains this year.

Record executives say the fickle marketplace is making established performers seem a liability. Much like Hollywood’s movie studios, the major record companies find themselves forced to pay stratospheric sums--even at the risk of losing money on the deals--for the industry’s top stars.

Swept up in a free-agency frenzy, record labels during the last decade spent hundreds of millions of dollars to sign such acts as Carey, R.E.M., Bruce Springsteen, Janet Jackson, Prince and ZZ Top.

Record labels sign blockbuster pacts with hopes that mega-stars will at least pay for themselves and provide momentum for the company to sign new talent. In a business in which some 90% of the 6,000 CDs released domestically each year are unprofitable, according to major-label executives, stars are seen as safe bets--particularly when corporate parents are pressuring music labels to hit quarterly earnings targets.

A Year Marked by Surprising Flops

Although few record executives were surprised this year by the weak sales of new albums by aging icons such as Mick Jagger and Rod Stewart, there still are grumbles about flops delivered by such touted younger acts as Adema, the Strokes and Shelby Lynne. Retailers note that new albums by such acts as Nickelback and Shakira have been selling briskly. But executives say they have been discouraged after poor debuts of anticipated blockbusters by Lenny Kravitz and Kid Rock.

When such acts are signed to fat contracts, the financial blow to the record companies can be severe.

In Carey’s case, EMI agreed to provide her a $20-million advance per album, a $6-million music-video production fund and about $1.5 million to promote four singles. Sources estimate the company has spent more than $10 million to market and promote Carey’s first album and the soundtrack to the film “Glitter.” But the album has sold only 2 million copies so far domestically and overseas. In contrast, Carey’s 1993 album “Music Box,” released by Sony, sold more than 20 million copies worldwide.

The Carey deal has turned out so badly that EMI music chief Alain Levy, hired after the album was released, has initiated an unusual attempt to cut the company’s losses. Representatives for EMI and Carey declined to comment. But several sources close to the talks say EMI is pushing for a settlement with Carey under which the singer would receive a multimillion-dollar lump sum in exchange for agreeing to exit EMI’s Virgin Records label.

“The cost of doing business is out of control,” said one label chief who spoke on condition of anonymity. “We’re the ones that say yes to the pricey deal, we’re the ones that say yes to independent [radio] promotion, we’re the ones that say yes to the cost of making videos. We all got cold water thrown in our faces this year. And everyone’s feeling vulnerable.”

Larry Gaines, chief operating officer of music retail giant Wherehouse Entertainment, said, “This is an industry that’s in search of direction. We need to start figuring out how we’re going to get young people into the stores again.” The labels’ accelerating cycle of releases, coupled with the fading appeal of many pop icons, he said, “is a recipe for disaster.”

Record industry insiders also point to the underwhelming performance of rock band R.E.M., which signed an $80-million deal with Warner Bros. in 1996. Warner sources estimate the label spent about $3 million on the campaign behind the band’s latest album, “Reveal,” including $400,000 on radio promotion and about $1 million for two music videos.

“Reveal,” released in May, has sold only 400,000 copies in the U.S. and an additional 2.5million or so internationally. Although Warner may break even on R.E.M.’s latest release, that’s still far less than the band’s big sellers, such as 1992’s “Automatic for the People,” which alone has sold more than 10 million copies, according to industry estimates.

After Smash Debut, a Disappointment

The heavily anticipated new album by Macy Gray, the Grammy-winning neo-soul singer, also missed expectations. Sony’s Epic Records label allowed Gray to renegotiate her contract following her smash debut, which sold an estimated 7 million copies worldwide.

Before the release of her new album “The Id” in September, Epic paid the singer an advance of about $8 million and spent more than $5 million for a worldwide marketing campaign, sources said. The expenses included production of two videos, an estimated $400,000 paid to independent promoters to pitch the album’s songs to radio programmers and several hundred thousand dollars for promotional appearances by the singer and her ensemble band, sources said.

“The Id” has sold only about 800,000 copies worldwide, less than half what the label projected.

The concept behind many of these deals is that big-name acts create a body of work that will sell long into the future. Record labels turn much higher profits selling older albums because of the low cost associated with repackaging old recordings. That’s why labels are so adamant about owning the master recordings of the acts they sign to long-term deals.

Artists’ Longevity Harder to Predict

But few of the big deals have delivered the profits music executives hoped for. Looking back, analysts suggest the labels gambled on the acts’ longevity at the same time consumers were growing more fickle.

“The climate has changed over the last couple of years, and it’s harder to project artists’ success and longevity into the future,” said John Branca, a veteran music attorney who has negotiated deals for such acts as Michael Jackson and Aerosmith.

In some ways, analysts say, the music business appears to be reverting to the practices of the 1950s, when pop music’s early stars rocketed to fame on the popularity of a single track, then faded into obscurity, in a rapid cycle of disposable pop music.

But even as they express caution about the economics of artists’ blockbuster contracts, many music executives concede privately that they would leap at the chance to bid on the next superstar whose deal expires.

“This year was a terrible year in the record business,” said Irving Azoff, a former president of MCA Records who handles such acts as the Eagles. “There’s a single-song mentality that’s going to force redefining of what the record business is, and that’s got everybody petrified. The labels claim they’re going to be more risk-averse. But if you’ve got something they want, it’s the same old feeding frenzy.”