Great Expectations

Jun 22 2010

It seems almost cruel to kick a company when they’re down and gasping for a final breath, but the news from EMI Music just keeps getting more and more bizarre. Only 10 weeks after naming Charles Allen the executive chairman of EMI Music (he replaced Elio Leoni-Scelti, who himself lasted only 18 months), Terra Firma announced that the head of EMI Music Publishing, Roger Faxon, would be replacing Allen, taking over the helm at EMI Music (the record division) as well. Even by music industry standards, that’s an amazing bit of turnover– Allen has gone from executive chairman to a vaguely defined “adviser” role in less than one financial quarter. It’s like watching a bit of time-lapse photography, where a process of destruction that usually takes a year and a half has been condensed into 10 weeks.

And all of this is meant to reassure the investors.

Roger Faxon, Chief Executive EMI Group

The real irony is that after three years of completely inept decision-making, Terra Firma is actually making a pretty good call on this one. At least Faxon has a genuine understanding of the business. While he didn’t build EMI into an industry-leading publisher (that was the work of Marty Bandier, who is now at Sony ATV), he has maintained the company’s status despite the ever-present rumors of the corporate parent’s financial demise. EMI Music Publishing still has one of the strongest executive teams in the business, a catalog full of classic songs, and a current writer roster that made it the Publisher of the Year once again at this year’s ASCAP Pop Awards. The obvious strategy here is to try to use the strength of the publishing company to shore up the weakness of the recorded music division. It makes pretty good sense… on paper.

For reasons that are fathomable only to the executives that run major media companies like Universal, Warner, Sony and EMI, none of the major music companies have ever managed to create any relationship between their record companies and their associated publishing companies. There are remarkably few acts that are signed both to Warner Bros. Records and Warner Chappell, or to Sony ATV and Columbia Records. In fact, the relationship between many of these publishing companies and their affiliated labels is downright hostile. At Sony ATV, I was well-aware that many top-level A&R people at Columbia and Epic were steering their new acts to EMI Music Publishing, convinced that the artist would get more money and promotional support at that company than at Sony ATV. Likewise, EMI Music Publishing has made no secret over the years of their disdain for the hapless label that shares their name.

Some of the hostility can be attributed to executive envy, political gamesmanship, and the general corporate tendency to put one’s personal bonus ahead of the interest of the company itself. Some of it comes from the fact that many of the publishing companies and their associated labels have very different histories, areas of specialization, and financial means. To call the relationships “dysfunctional” would be something of an understatement.

Not too surprisingly, in the world of independent music companies, the idea of having a label and publishing company cooperate for the greater good has been far less elusive. In fact, many of the great success stories among independent labels have been built around the idea of record company and publishing company working together– from Motown Records and Jobete Music, to A&M Records and Almo-Irving Music, to Jive Records and Zomba Music, to Disney Records and publishing. It’s not terribly tricky. It simply means that the record label either strongly encourages or demands that their artists make a publishing deal with the related company, and likewise, the publishing company tries to keep any new talent they discover or hit songs generated by their writers “in house”, by bringing them to the associated record company.

So the idea now being put forward by Roger Faxon and the string-pullers at Terra Firma, to use EMI Music Publishing to bolster the fortunes of EMI Records, is not a crazy one, even if it’s relatively untried at a major music company level. I can almost understand how the non-music business weasels within Terra Firma could see this as the last best hope– and could have great expectations for the power of the two companies when finally brought together. It certainly won’t be the first time during their grand experiment in the music industry that Terra Firma has had their hopes dashed, though it may be the last time.

As obvious as the idea to unite the two companies sounds, it’s about ten or fifteen years too late. At this point, with EMI in such precarious condition, it’s almost impossible to see how this plays out. Most top artists with any other options would be understandably hesitant to sign to EMI Records right now, and quite frankly, it is probably not the first place that anyone from EMI Music Publishing would recommend for their artists. The publishing company needs its top writers, artists and producers to focus on creating the biggest hits possible, regardless of which label they happen to be released on.

Even if EMI Music Publishing were to encourage their top new artists to consider going to EMI Records, many are under contract with other labels for years to come, or are signed to production companies with ties to other companies, or have managers with relationships at other organizations. To create any real synergy between the two divisions is probably a five-year program, even in a best-case scenario.

Best-case scenarios have not served Terra Firma well. Indeed, the real problem with its buyout of EMI and the subsequent meltdown that followed has been a simple case of unrealistic expectations, which when unrealized, only increased the need for greater miracles in the next financial quarter. The ultimate result of this is the kind of ridiculous game of CEO musical chairs that we see now, where each new person is brought in with high hopes and a touted “turn-around” plan, only to find themselves doing a disappearing act as soon as the “turn-around” doesn’t turn out as planned. Every business should challenge its leaders to do the very best they can do. But if you challenge people to do the impossible, you will inevitably be disappointed. If you bet on them doing the impossible, you will not only be disappointed– you’ll be broke.

Terra Firma CEO Guy Hands

From the moment that Terra Firma purchased EMI in 2007 for the wildly inflated price of $4.7 billion dollars, they put themselves in a corner from which they can never escape. The loans that made that purchase possible were made on earnings expectations that were unrealistic for any music company in the present business climate, especially a company that was hardly a market leader even three years ago. In order to make the interest payments on those loans, Terra Firma now needs EMI to generate income at a level that is simply not possible for a music company in this environment.

If you try to drive a Volkswagen in the Indy 500, it won’t win the race– even if you press the gas pedal to the floor and keep it there. It’s not that it’s a bad car. It was never built to run that way. Further, if you insist on trying to do it, you’ll eventually ruin the engine– all because your expectations were not remotely in keeping with what the automobile was designed to do. EMI has plenty of talented, dedicated people in its offices around the world. It’s not inherently a bad organization. But music companies are not investment banks or oil companies. They don’t generate that level of cash. If you try to force them to do it, you’ll wind up cutting the creative experimentation you need, taking dangerous chances on high-priced “sure things”, demoralizing your staff, and draining your most productive assets to pay for your least-productive ones.

As remote as the problems of EMI might seem, the lesson of unrealistic expectations is one worth keeping in mind, even for individual songwriters and entrepreneurs entering the publishing game. As Andre de Raaff, the CEO of Imagem Music once sagely pointed out to me in a discussion about the disappointment of many investment firms who recently acquired publishing catalogs– music publishing is indeed a relatively steady business, but only over the course of about ten years.

When looked at over a decade, most established music publishing catalogs tend to hold their value and provide a relatively predictable rate of return. But within that ten year period, there can be wild swings in income from one year to the next. Currency fluctuations, copyright lawsuits, split disputes, hit songs or big flops can cause unexpected spikes or dips in the financial picture. Should you happen to buy into a catalog during the wrong three or four year period, you could easily panic when you don’t see the results you expected. If you can’t afford to wait it out for ten years, at which point the good and bad times will probably even each other out, you risk taking a sizable loss on your investment.

For those starting up a company, that means that you need to have a clear, level-headed understanding of the risks involved, the potential profits, and the time-frame in which you expect to see some action. Here are three rules to keep in mind that should help you avoid the dangers of great expectations:

1. Don’t buy anything based on what it could be.

The music business is built on dreams of endless potential. Every catalog you will ever be offered for purchase will be “full of undiscovered hits that have never been recorded!”. Every songwriter you consider signing will be on the verge of becoming the next big thing. Every cut you get will be under consideration to be the next single. None of it means anything.

Of course, all of it is possible–and hopefully one of the acts or songs you sign will turn out to be wildly successful. But you don’t do the deal based on that expectation. You negotiate the price based on what something is earning now (if it’s an established artist or catalog) or on a very conservative estimate of what it could do (for new artists or songs). You don’t plan for success. Plan for slow and steady growth, and make your financial decisions based on those plans. Then be surprised by success.

2. Don’t look for a quick money.

There isn’t any. All money in music publishing comes through the proverbial pipeline– a CD is sold at a retailer, who pays the distribution company which then pays the label which then pays Harry Fox or the equivalent which then pays the music publisher. Most of the time, that process takes somewhere between a year and a year and a half– longer than that for international royalties. Performance money is somewhat quicker, but still at least 9 months from when a song is on the radio. This is why songwriters want advances from publishers– because it’s very easy to find yourself starving, even while you’re hearing your song on the Top Forty countdown.

If you sign a new writer with an advance, no matter how minimal, it’s very unlikely that you will recoup that advance within the first year. Even if the songwriter is able to write a song in the first week of the deal, and you’re able to get the song picked up by an A&R person in the first month, it will still take three to six months for the artist to record it and release it, and another month and a half before it starts to impact at radio. It’s almost impossible that the money for that airplay or sales will show up in your coffers before the end of the first contract period. When it comes to signing and developing songwriters, you have to be willing to stay in the deal for at least a couple of years in order to get your money back.

3. Desperation is dangerous.

Decisions only get harder when you’re desperate. If you need to show results quickly, you will take foolish chances, be too aggressive, overpay for deals, or put too much pressure on the songwriters signed to you.
If you’re trying to stave off financial disaster, you’ll make budget cuts that will impair your ability to find new acts, drop unrecouped songwriters too soon, and sell off songs or catalogs at a fraction of their real value.

The music biz is a risk-taking business– but in order to take risks intelligently, you need a solid, supportive environment in which to work. That means enough capital in the business to survive while you’re waiting for your pipeline to come in, low overheads that can be covered by slow and steady growth, and enough patience and belief from your partners or investors that you are able to follow your instincts, and even make a few mistakes along the way.

A little more than a month ago, when Terra Firma was desperately trying to raise funds from its investors to stave off a Citibank takeover of EMI, they trotted out the new CEO at the time, Charles Allen, and announced that Allen would be unveiling “the new plan” to turn EMI from investment bust to boom. It was hard not to feel badly for the new leader, who was essentially being asked to create a fantasy picture in which everyone’s expectations would eventually be met, even as everyone knew that this was a completely unlikely scenario. As it turns out, he didn’t stick around long enough to even initiate the plan. And now there’s a new dream on the table.

As my father in law likes to say, you can’t teach a pig to fly. Trying will only frustrate you, and annoy the pig. Keep your expectations in line with reality, and you’ll have a far greater chance at not only meeting them, but maybe even exceeding them.

A Sweet Slice of Pie

Jan 21 2010

Alright—mark it down in the “Believe It Or Not” column. This interesting newsflash first appeared in one of my favorite industry newsletters, A&R Worldwide:

Fan-Financed UK Band Lands Multi-Album US Record Deal

Leaving aside one obvious question (isn’t every band essentially “fan-financed” to whatever degree?), the following story stood out like a flower in a mineshaft, sprouting up in the middle of news about more corporate layoffs and the ever-falling fortunes of the music industry. You don’t hear many stories like this one:

Scars on 45, a UK based band began making waves on the website Slicethepie back in 2008. The site provides an opportunity for music fans to provide ratings and reviews for unknown bands that they are passionate about, and then to take it one step further by actually getting involved. With enough positive response, a band can reach the “funding” stage, at which point they can raise funds directly from their fanbase to record an album. In return, the fans who choose to invest receive shares in the commercial success of the record. Fans can invest anything from 1 pound (GBP) on upward. Through Slicethepie, Scars on 45 managed to raise 15,000 pounds (GBP) to help record their debut album.

As it turns out, “Beauty’s Running Wild”, the fan-funded track on the album was subsequently featured on “CSI-NY”, and attracted more than 50,000 website hits within days of airing. This in turn attracted the attention of Alexandra Patsavas, a leading music supervisor best known for her work on “Twilight: New Moon”, “Gossip Girl”, and “The O.C.”. Patsavas brought the act to her label imprint, Chop Shop, which is distributed by Atlantic Records.

Great news for the band of course. But if you think this is a success story for Scars on 45, check out the even better ending to the tale:

Those who invested in the band through Slicethepie back in 2008 hit the jackpot. When the band was signed, a buyout clause was triggered and shareholders were bought out at a 50% premium to the then market-price—representing a whopping 800 percent return on their investment!!

Not too many people had investment returns like that in 2009. What’s most interesting though is that not many music companies, big or small, had returns like that. While “professional investors” like Guy Hands are going bankrupt after sinking billions of dollars into EMI; while investment bank-backed publishing companies are struggling just to stem losses, this group of music fans managed to turn a 1 pound investment into 800 pounds—without having to do any work! Slicethepie CEO David Courtier-Dutton was quoted saying, “We are delighted for both the band and their fans which, in this case, have truly been instrumental in their success. We believe that consumer-driven filtering has an increasingly influential role to play in the face of the music industry…” With an 800 percent return on investment, it certainly does. Count me in.

What’s interesting is that the success of this Slicethepie venture highlights several very useful concepts when it comes to investing in the music business—ones that seem to often slip by the more high-rolling music execs and investment bankers. If you’re looking to acquire music for your publishing company or record label, here’s a few principles to keep in mind:

1. Buy low. Sell high.

The problem with most big-bucks investors in the music industry is that all of them are looking for the same thing: hits. They want big-name artists, well-known catalogs, songs that are on the charts. In fact, most of the investment-backed publishing companies have avoided new artists all together. They focus solely on catalog purchases.

The problem is, when you’re buying hits, you’re paying the top price for something that in most cases, has only one direction to go. Established superstar artists can’t usually get much more super—they can only fade. Songs at #1 today can’t go any higher. What seems safe is actually the most risky investment you can make—you’re paying top dollar for something that is already at its peak. Whoever found Scars on 45 in 2008 was buying at a fire-sale price. That’s where you get a bargain, and it’s also where you find the big pay-off.

2. Bet what you can afford to lose.

One has to assume that no one who made the initial investment on Slicethepie.com was betting his or her grocery money on a new, unknown band. I’m confident that no one was taking out a loan just so they could buy a piece of Scars on 45. The problem with most large-scale investing in the music industry over the past five years is that the investors have taken out massive loans (and hence, have massive interest payments) or they’ve invested other people’s money, people who quickly grow impatient if the ink starts to turn red.

The sad, ironic and inescapable truth of the speculative bets made in the music business every day is that the worse you need the gamble to work out, the more likely it is to fail. Maybe it’s because investors who can’t afford to lose tend to over-think, throw good money after bad, or chase the popular trend a little too late. Maybe it’s just the way the world works. But don’t put your money in the game if you can’t afford to lose it. Better to bet one pound if that’s all you can afford, than to take out loans to bet a hundred thousand pounds. Ask the guys at Terra Firma.

3. Bet on things that people like.

This has always been a pretty good formula for success in the music industry. It’s amazing how few people do it. Clever as it is, the concept of Slicethepie and “fan filtering” is really not that much different than old-school music entrepreneurs who would check out their songs with local audiences, get a DJ to spin their records in the clubs, ask the local retailer what people were buying, or see who was getting the most applause at the talent show. In my book, “The Billboard Guide To Writing and Producing Songs that Sell”, Daniel Glass, the president of Glassnote Records talks about being a young DJ, and seeing Prince, Barry White and others in the DJ booth, watching the dance-floor reaction as they tried out new mixes they were still working on in the studio. Daniel himself uses web activity as a major gauge for his own signings at Glassnote, which led him to artists like Secondhand Serenade.

It’s always easier and safer to give the audience what they want than to create something and then convince the audience that they should give it a chance. Certainly, great art has been created with either approach. But the average hit rate is a lot higher with an approach that watches what audiences are responding to, and then puts money into giving those audiences what they like.

4. Bet with your ears.

Most professional investors in entertainment, and even a lot of music executives, bet more with their eyes than with their ears. They watch sales chart action, or look at past financial records, or watch what others in the industry are doing, but they never really listen to the music. Clearly, part of knowing what the audience wants (concept #3) is watching reactions and tracking audience response. But once you see what’s happening, you still have to listen.

Some things look good on paper for reasons that have nothing to do with the music itself. Perhaps the appeal of an act is not really rooted in their music, but in some other social phenomenon. That’s okay if you’re the record label, but you wouldn’t want to buy that song catalog. Maybe something is flying up the charts because a savvy manager is spending a fortune on radio promotion to make a stiff look like a hit. It’s been done. You can use your eyes to do initial research. But if your ears tell you differently, trust ‘em. In this business, they’re the only real friends you have.

5. Don’t be afraid to cash out.

As every gambler knows, there is a time to hold ‘em’ and a time to fold ‘em. The great thing about the Slicethepie venture is that if a band is signed, the initial investors are in a sense, forced to fold up and cash out. It’s likely the biggest favor they’ve ever received. The truth is, the odds are stacked against a band like Scars on 45, as talented as they are. It is entirely within the realm of possibility that Atlantic will never make money on the band—it happens with alarming frequency. But for the initial investors, the game is over, and they’ve won.

If you’re running a small publishing company, there will be instances where you will build a writer up from nothing, only to see a larger company swoop in and woo him or her away with the promise of untold riches, the moment that writer has his or her first big record.

Most of the time, that’s just fine. You will have that writer’s first big record, for which you probably paid relatively little. On the other hand, the big company will have spent far more than they should, and will usually wind up with a songwriter who never has another song as big as that first hit. In many cases, you’ll get a call a few years later from that same writer, now dropped from his or her big publishing company, and eager to come back to where his or her first success originated. When you’re a small player, you play for small victories. When you get one, take it and don’t look back. Put your energy into finding the next undiscovered jewel.

And somebody, pass that pie!

Living On The Edge

Oct 09 2009

EXT. A MOUNTAIN CLIFF DAY

OUR HERO hangs on the precipice, clutching at the rocky ground.

PULL BACK TO REVEAL:

It’s worse than we thought. OUR HERO is dangling from the edge of a cliff—
—- twisting in the air, arms extended, hands clawing at the ground to keep his grip. HE looks down to see:

A RUSHING RIVER, hundreds of feet below…

CLOSE ON:

OUR HERO’S HANDS, covered with dust. His fingers are slipping off the rocky edge, as his hold starts to give way…

HIS RIGHT HAND pulls off as the rocks and ground begin to crumble. Now it’s only the LEFT HAND still hanging on… but his strength is fading… one finger slips off the ledge… then another…

CUT TO:

EXT. THE MUSIC BUSINESS TODAY

We’ve all seen that scene in the movie– now we get to live it in real life. You know, the inevitable scene where the action hero is hanging on the ledge, fighting for his life. Unfortunately, there are no stunt-men to call in this time around, as we prepare to take a very big plunge. These next several months in the music biz look to be a moment of reckoning, when the illusion of business as usual can no longer be sustained.

What’s got everyone in the industry on the edge of their seats, quite literally, is the imploding debt situation with EMI Music, one of the four major multi-national corporations in the business. EMI, which was purchased (inexplicably) by the investment firm Terra Firma for $4.7 billion dollars two years ago, is in a genuine and highly publicized liquidity crisis, from which it might not escape. And it’s primary creditor, Citibank, which financed much of the Terra Firma takeover, is in no position or mood to renegotiate the financing terms.

With a debt load of nearly $5 billion dollars, EMI has found itself repeatedly unable to make the required loan payments to Citibank, and in grave danger of defaulting. With severe cash problems of its own, Citibank has shown itself to be very unwilling these days to take the usual measures of re-negotiating the terms of such loans. Insiders are speculating that Citibank’s willingness to force Escada, the German fashion house, into bankruptcy last month, as well as its current hard line with Valentino, the Italian fashion company, indicates that Citibank may likely opt to force EMI Music into bankruptcy if the British music company can’t meet the debt payments it has missed, and the new ones looming ahead.

That’s scary stuff. In more than twenty years in the music industry, I’ve seen plenty of bankruptcies– over-extended indie labels, individual musicians or writers with life-savings that went up their nose or into the pocket of their business manager, indie record distributors who left dozens of labels and artists with no payment for records already pressed, shipped and sold. But I’ve never seen a major multi-national music company go bankrupt, or ever really contemplated it. Nor have most people in this industry. This is genuinely unchartered territory. In the worst case scenario, what happens?

If I had to guess, I would predict a marriage– of the shotgun variety. EMI Music has long been the target of Warner Music, who may finally have the old girl right where they want her– tied to the railroad tracks with the train bearing down. The question is whether another major music company, most likely Warner or Universal, would have the means to buy EMI– given that none of the music powerhouses are looking very powerful these days. It’s questionable whether someone in the industry, already struggling with their own business, seeing clearly the structural problems that will continue to drag down earnings, and being of somewhat sound mind, would want to acquire another record company. Almost certainly, anyone who did buy the company would shutter the label, save the valuable catalog of masters, and focus on the music publishing division, which is the only thing still making money.

More frightening than that, it is possible that EMI could simply go bankrupt. If that were to happen, it would not only spell the end of one of the most important historical legacies in the music industry (particularly for the United Kingdom), but it would drag the lives and finances of hundreds of artists, producers, publishers, independent labels, recording studios, and songwriters right off the cliff. Anyone who was owed royalties or production fees, anyone who had distribution arrangements with Caroline, anyone who had outstanding invoices could find themselves in a very long line, somewhere behind the Beatles, Coldplay, Robbie Williams and of course, good old Citibank. In such a situation, it’s hard to know if the small players, like songwriters, producers and publishers, would ever get paid. It certainly would be a disaster that would take years to resolve.

This is not a situation for which I can offer up much brilliant advice. It’s not something for which there’s much precedent, nor are there any sure-fire solutions. But given that this is the way our world looks in the music business of 2009, with once-invincible companies sliding quickly into oblivion, I will offer up a few lessons that can be learned from our predicament:

1. Patience is not always a virtue. This is not a time to let things linger. If you are owed money by any label, distribution company, publisher, production company, etc., go out and get it. Fast. A bankruptcy by a company like EMI will have massive repercussions for everyone in the music industry, from Harry Fox Agency to small independent labels to individual session musicians. If you’ve ever tried to collect a debt in the music business, even if it was only a simple studio invoice, you know that it can mean months of collection efforts. You’ve also probably learned that whoever screams loudest (particularly if the words being screamed include “lawyer”, “lawsuit”, or “Suge Knight”), usually gets paid first. Make sure your paperwork (song registrations, billing info, payment addresses, etc.) is in order, then start calling and don’t let up until you get a check. Don’t let anyone hold onto your money for any longer than a contract allows.

2. Don’t talk to strangers. Make sure you know who you’re doing business with. If you’ve got a contract on the table, or a distribution offer, or any kind of long-term agreement in front of you, you need to do your homework–not only on the individuals with whom you’ll be working, but on the company that will be paying the bill. EMI’s problems have been well-publicized since the Terra Firma purchase, as were BMG’s, prior to their exit of the music industry a year ago. Ignorance is not bliss in times like these. You need to be reading Billboard, Variety, and watching the financial pages of the newspaper, and thinking through the implications of today’s news on those with whom you’re doing business.

3. When cash is king, sometimes it makes cents to take the money and run. It’s always been a maxim of the major players in the music business that you don’t sell copyrights. Publishers and labels have always resisted the idea of selling catalogs, even in the toughest economic situations, believing that the business was built on acquisition and ownership of more and more copyrights. For many years it’s proved a profitable philosophy, as the value of most hit songs or master recordings continued to climb. Until now.

The lesson of the past five years is that there is a time for buying, and also a time for taking your profits. The songwriters and publishers (and there were many of them) who sold their catalogs three years ago, at the height of the flood of investment money into the music publishing industry, made a killing.Those prices would be far lower today, and probably will remain so for at least the next five years. If corporations like Sony or EMI had sold off their recorded music divisions five or six years ago, they could have still received a reasonably favorable price. Today, they would have a hard time finding any takers at all.

As Kenny Rogers put it, you have to know when to hold ‘em, and know when to fold ‘em. If you think your songs, recordings, studio, music publishing business, or independent label is at the top of its value in the market, that’s usually a good time to make an exit, smiling all the way.

4. Don’t mistake size for security. It’s always easy to feel safer when you’re dealing with a company that everyone knows, with a big office building and a CEO who shows up on the front page of Billboard. It’s all a sham. These days, there are small, lean, smart independent labels who are far more secure than any of the Big Four. In fact, if you’ve set up an effective business model for yourself, you may be better off putting out your own recordings, managing your own publishing and booking a steady calendar of live dates than being signed to a major label. Better to collect your own money and manage your own affairs than to find yourself a pawn in a game that is out of your control.

Don’t be fooled by music industry glitz. If the EMI death-watch teaches us anything, it should be that the bigger they are, the harder they fall, and the more people they take with them. Clearly, Terra Firma, despite the reassuring name, is on very shaky ground. Don’t stand too close to the edge…

Hands Off

Mar 25 2009

In case, you haven’t heard, the grand new era of Guy Hands at EMI officially ended this week– not simply with the British financier bowing out of EMI, which he’d already done some time ago, but by Hands actually resigning the CEO position at Terra Firma Capital Partners, the firm he created. It doesn’t take a great deal of investigative reporting to get to the real story behind the press release It’s pretty clear that (a) no one gives up control of their own firm happily (b) despite the numerous problems for any financial firm these days, the EMI acquisition was clearly the straw that broke the backers’ back, and knocked Mr. Hands off his feet. And all this after only 2 years…

It’s hard to believe that it was only two years ago that Hands engineered the $2.5 billion dollar purchase of EMI, promising a new era of re-invention, cost-cutting, prudent, financially-savvy management, and a mission to bring a more mature, sensible approach to this business we call show. Of course, paying 2.5 billion for something worth probably half that amount was not a great start. Hands later acknowledged that Terra Firma was shocked upon acquiring EMI to learn how little of the company’s income came from current artists, as opposed to the old catalog. It seems that a financial capital firm’s due diligence does not include asking a couple of random music execs at the Soho House about the company’s prospects. After all, virtually any music weasel could have easily explained that aside from Coldplay, Radiohead and
Robbie Williams (he’s quite big in the UK)

, EMI hadn’t been able to buy a hit record since the Beatles. It was not a well-kept secret.

Nevertheless, Hands took over the teetering ship, made a number of oft-quoted and lofty announcements, took a rather quixotic approach to hiring (putting a UK A&R man in charge of the US, and a former Procter and Gamble exec in charge of him) and promptly began to feel the water rising up around his nose. Artists started lambasting him, Radiohead went off to release its album through the Internet for nothing, Robbie Williams bid adieu, and recorded music sales dropped like a brick. Earlier this year, Terra Firma disclosed a $1.78 billion dollar write-down on its investments, thanks largely to Guys’ foray into the world of rock ‘n’ roll. And now, we begin the wind-down, as second-level execs assume their positions, bow their heads, and prepare to submerge. The whole thing lasted just about as long as the equally ill-fated Sony-BMG merger. Come to think of it, that AOL-Time Warner thing didn’t do much better either.

There’s a pattern here. Show business, whether it’s the movie business or the record business, has a long and hallowed history of fleecing the money guys. Inevitably, a wealthy financier blows into town, trailing money, and expounding on his determination to “re-make” the industry, or perhaps more precisely, to hang out with rock stars, their model girlfriends, and aspiring young actresses, while re-making the industry. Of course, this impulse is understandable (not necessarily the hanging out with rockstars and actresses part, although that’s understandable too) since the world of show business is one of the most illogical, inexplicable, nonsensical, and utterly insane business environments in existence. Inevitably, people from the financial world (or even anyone who can do high-school math) take one look at a business like music and conclude that all of the current executives are idiots, and that anyone with actual business acumen could easily better their dismal performance. To be fair, a lot of musicians and songwriters look at most music executives and think pretty much the same thing.

Remember that recent movie Grizzly Man, about the guy who lived with grizzlies in the wilderness? He thought they were his friends. In fact, he was so confident of his kinship with the grizzlies that he started filming his own experiences with them. And then one day, that ate him for lunch. It’s not all that different from a night at Spago in Hollywood.

The problem with real “business” people in the music business is that they’re inevitably sure that the secret to success lies in somehow eliminating risk, cutting costs, improving marketing, reigning in the artists, and making the whole thing more like other more predictable industries. It’s a nice thought. But all of history points to the fact that show business is reliant not on efficiency or prudence or common sense, but rather the completely unpredictable science of finding hits, based on open ears, a little luck, a lot of gut instinct, and plenty of chutzpah.

Most major players in the music industry are very limited in their executive skills. Most have almost no ability to contain costs, plan for the future, or create an efficient operation. However, the ones that survive generally do know how to accomplish one all-important thing: they know how to recognize a hit song or a hit artist. Most MBA-toting, professional CEO’s can’t do it. So far, none of the “too cool for school”, zeitgeist-reading advertising gurus or new media guys have figured out how to do it. Many artists can’t do it, which is why so many artists’ label ventures fail completely. One thing you have to say about the music biz sharks– when they hear a splash, they recognize the sound of opportunity calling. And they know how to take advantage of it.

There is no greater skill than the ability to recognize a hit song. It will cover up a multitude of sins. It will sustain you despite market meltdowns and marketing mishaps. A real, genuine hit song can’t be stopped– even by all the stupidity of the record and radio industry– it has a life of its own. The ability to create, or at least to understand the principles that go into creating a hit song, is what my new book,
The Billboard Guide To Writing And Producing Songs That Sell

is all about. If you understand what makes a hit record, you’re better positioned for success than 90 percent of the people with more money, more business connections, more artistry, or more book knowledge of how to run a company. It may not be fair or just, but it’s just how show biz works.

So now that the latest savior of the music business has tossed in the towel, where do we turn? If not Hands, then who? Certainly, there’s no denying that the music business needs fixing. Here’s my idea:

Rather than turning to an outsider, whose claim to fame is turning around a gas station chain, why not look to the survivors of the industry, those who have been on the inside, and have managed to find success over and over again? On this score, my vote goes to
Barry Weiss

the President and CEO of the Zomba/RCA label group within the Sony Music hierarchy. Barry will probably never be the head of a multi-billion dollar financial capital company. I can’t see him buying gas-station chains or running Procter and Gamble. He’s not even likely to become a high-profile personality revered by the record-buying public, like Clive Davis or Simon Cowell.

But having grown up in the record business, Barry understands what actually matters. He knows the fundamentals of getting records out into the market place. He knows how to make his numbers, both on the cost side, the calendar side, and the sales side. Most of all, he knows that a company survives in this business by making hits, pure and simple. He’s not always eloquent, or politic, and he doesn’t specialize in finesse. Nevertheless, Jive Records continues to turn out hits, year after profitable year. Call me crazy, but that might be a guy we could learn from. I say, with Hands down, this year let’s Weiss-up, and look at the people that have proven they can get it right.

Radio Daze

Aug 05 2008

So you thought the record business was bad?

Turns out that the record label’s best friend/worst enemy is doing as bad or worse— these are tough times in radio-land. News came out this week that CBS, the number 2 operator in the country, is selling 50 of its mid-market radio stations. This comes on the heels of a mass of lay-offs across the radio industry and news of continuing declines in audience. If you think that this is just a natural shift from the old and stodgy commercial radio format to the more progressive, forward-thinking world of satellite and Internet radio, don’t be so sure– Sirius and XM are desperate to merge, as they’re barely surviving as well.

For record labels, songwriters, artists, producers, and others who rely on broadcasters to get their music out to the public, the decline of the radio industry brings on a strange mix of conflicting emotions: it’s hard not to enjoy seeing Clear Channel and their likes getting their comeuppance; it’s hard not to think that the rampant corruption in the radio biz has at least something to do with its current condition; it’s difficult to imagine how declining revenues and tighter budgets could do anything but squeeze playlists even tighter and make risk-taking more unlikely; and it’s unfortunately still impossible to offer up any solutions for alternative ways to expose new music that has the power to create a superstar overnight in the way that radio does. For the music industry, radio is the ally that you can’t live with or without. As frustrating as it is, nothing sells music more effectively than radio play.

The truth is, radio is not much different than any other declining industry. Whether it’s a Big Three automaker, a major record label, or a radio conglomerate, there are three inescapable observations:

1. Despite any number of outside factors affecting the business, most industries in decline have no one to blame but themselves for the bulk of their problems. Corporate arrogance, malfeasance, blindness to future trends, an unwillingness to give the consumer what he or she wants– not surprisingly, all of these factors usually lead to disaster, whether you’re in the business of making mortgage loans, recording music, or running a Top 40 station in Boise.

2. While acknowledging that most declining businesses are reaping their own just rewards, it’s impossible not to notice that a huge number of good, honest, smart, hard-working and devoted people are being dragged down in the process. In fact, those most likely to lose their job or even their career in an industry downturn are rarely those who are actually responsible for orchestrating the disaster. It seems like the guy who drives the bus off the cliff is rarely aboard when it’s going into a free-fall.

3. The way out of an industry slide is not more conservative corporate thinking, number crunching, and centralization. The only hope for reversing a business gone bad is risk-taking, creativity, and entrepreneurial spirit. Doing more of what got you into the mess in the first place is generally not a sound strategy– although it seems to be a very popular one.

When it comes to the broadcast business, it’s clear that it wasn’t the Internet, or satellite radio, or anything else that killed the radio-star. The wounds have largely been self-inflicted. The destruction of the radio business began more than a decade ago, with the move toward consolidation championed by Clear Channel and others, and signed off on by the US government, which transformed the radio business from one of small local fiefdoms controlled by small to mid-size companies, into a national media business at the mercy of a few massive corporate conglomerates. Like most of these kinds of moves, cheered on by the investment banking community, the plan looked better on paper than it played out.

If you want to understand why it didn’t work, check out Jerry Del Colliano’s blog, “Inside Music Media”, and his Friday, August 1 posting “The CBS Radio Firesale”. In it, he points out bluntly:

“Playing by Wall Street rules has nailed the coffin shut… Too much consolidation and not enough operation has led to a once vigorous industry too bloated to take advantage of opportunities in the new media. Consolidation failed for too many reasons to get into here. But can we agree on that? If it had worked, the industry would either be more vibrant now or it would be aggressively present in the world of new media. Instead, it’s MIA.”

Or if you want a more visceral explanation of what happened, just turn on the dial. If you’re hearing a lot of generic, personality-free programming that sounds like it was dreamed up by a computer in some central office, that’s because it was. Corporate consolidation has exorcised much of the regional, quirky, unpredictable charm right out of radio, and created something only a corporate control-freak could love. Radio programmers that were once crucial creative players in the music industry, willing to use their own personal taste and a knowledge of their local market to take chances on new music, have now been hamstrung by a corporate environment that relies on endless audience testing, centralized decision-making, and rigid playlists.

I was out to dinner last week with several people still alive and thriving in the radio biz, and the conversation was enough to terrify anyone who loves music or radio, or at least recognizes the vital role that radio plays in the music industry. Tales were swapped about how in today’s environment, major Top 40 channels in markets as large as Miami are actually being programmed out of Los Angeles. Lists were compiled of groundbreaking Music Directors now hunting for jobs. A dire inside news scoop was shared that Clear Channel is soon planning to eliminate Music Directors entirely, and program everything based on one national playlist– a decision that would be in direct violation of commitments made at the time that permission for consolidation was granted.

Certainly, it doesn’t take much foresight to see how the scenario of a national playlist passed down to all Clear Channel stations would limit the opportunities for new music, particularly from indie labels. But that’s not that worst part of the picture.

The worst thing is that it won’t work. Just as Guy Hands at EMI is already starting to see that creating and selling music is not the same as marketing household cleaning products, the corporate radio operators will learn (as they already should have) that creating engaging radio entertainment is not done in a rigidly controlled, number-crunching, risk-averse environment. You don’t succeed in a creative business by being un-creative. You succeed by being more creative– as messy and unruly and unpredictable as that process is. Just as with the rest of the music industry, the hope of the future lies with the little guys, not the big ones. Let’s just hope that there’s something left of the industry for those creative entrepreneurs to work with, by the time the big operators get bored enough or broke enough to finally walk away.