MuseWire COLUMN: Part of a continuing series on the history of Capitol-EMI Music. One of the themes I pursued with Bhaskar Menon (then head of EMI Music) in the early 1980s was the logic of forming a separate distribution company that would operate autonomously (but in close coordination with) Capitol-EMI’s labels. “It makes complete sense to have separate repertoire centers,” I told him. “With different label identities we can pursue different artist opportunities. Each label would have its own promotional staff so it could compete better at radio, and its own marketing capability to keep it in closer touch with the consumers who buy records by the artists on its roster. Distribution, however, should transition to a separate company.” Others were saying the same thing.

The need for this had become dramatically apparent with the growth of EMI America Records, successor to the old United Artists Records. At the time, Don Zimmermann was President of the Capitol label and Jim Mazza was President of the EMI America label. All of Capitol-EMI’s record manufacturing activities reported to long-time Menon executive David Lawhon. All of its distribution activities reported to Zimmermann. This later aspect of the equation was (rightfully) concernful to Mazza, and there was constant infighting about whose records should have priority in the marketplace.

A. Record Labels versus Record Distributors
What is meant by “distribution” and exactly what does a “distribution company” do? How is it different from a “record label?” To answer these questions one must distinguish between their respective activities, in the context of how the U.S. record business was constituted in the 1980s – early 1990s. [Even though it no longer exists in that format, I will refer to it in the present tense; not so much out of nostalgia, but rather for ease of exposition.]

From an economic standpoint, record labels function optimally when they focus their attention on “creative” functions (which does not necessarily mean they perform them creatively). This includes originating new artists (“A&R”, which stands for “artists and repertoire”), and developing existing artists. In addition to A&R, other label cost centers include promotion to radio, and retail marketing to consumers. Both of these are idiosyncratic tasks, best performed at the lowest possible level of corporate bureaucratization. They are non-delegable and not amenable to economies of scale. They require specialized knowledge and expertise and benefit from the record label’s enthusiasm for its own artists. Radio promotion, for example, is (to borrow a term from economic theory) a zero-sum game; the “top 40” isn’t the “top 41.” Every time one record label gets a record in the top 40, it means some other label can’t. It takes a dedicated squadron of promotion executives to capture and retain position. The same is true of marketing, which is intimately linked with A&R. Marketing must be highly attuned to the artists and promotion dynamics of the label.

Record distribution, on the other hand, can take advantage of critical mass. This includes mundane tasks such as picking, packing and shipping records from distribution centers, and credit and collections. It also includes the all-important activity of actually selling and marketing records to the record distributor’s customer base of wholesalers and retailers. At the time, these included large “rack jobbers” such as Handleman Co. and Lieberman Co., which serviced the record aisle of department stores such as Sears and K-Mart; large “central warehouse retailers” or record chain stores, such as Musicland, TransWorld and Wherehouse Entertainment; large “category-killer” stores, such as Tower Records; one-stops, which serviced small retailers; and even key individual retail stores. [For operationalized definitions of each of these customer classifications, see this post.]

Large wholesalers and retailers in turn prefer dealing with large distribution companies. It simplifies inventory and accounting issues. From their standpoint, returns credits also are cross-collateralizable. This means that if one label’s records aren’t selling for whatever reason, then the retailer can return them, and receive full credit against its applicable price. That returns credit in turn can be used to purchase records from another label, distributed by the same distribution company. While the retailer’s risk in taking on records by a speculative new artist already is low (because the retailer has the prerogative to make virtually unlimited returns), this spread across labels reduces the retailer’s risk even further.

There are a variety of subtle but significant ways in which a distribution company might favor one label’s records over another. At a minimum, this includes allocating scarce economic resources such as customer (so-called “co-op”) advertising; promotional discounts; free goods; different returns policies; and retail marketing opportunities (such as end caps, “buy it and try it” or “test spin” programs). Many large retailers, such as Tower Records (back when it still was around) actually empower each distribution company’s sales rep order to records on its behalf (or strongly recommend which records should be ordered), based on its inventory availability funding, the distribution company’s market share, and the sales rep’s knowledge of its product spread, marketing capacities and demographics. This permits considerable administrative discretion by the distribution company, as to which records will get sold (i.e., become available at retail for sale to consumers).

In response, most distribution companies will categorically deny discriminating against any of its labels’ records. “We treat each label equally,” they will say. “We allocate priorities strictly in accordance with demand for each record, considered solely on its merits. It’s the label’s responsibility to pull records through the system, by effectively promoting them and marketing them to consumers.”

B. CEMA Is Formed
I think this essentially is true. However, the optics of the situation left a lot to be desired, particularly at Capitol-EMI. As far back as 1950 Capitol had a subsidiary called Capitol Records Distributing Corp. Who reported to whom was firmly ingrained within the system, together with issues such as budgeting and who made how much salary and bonuses. Without pointing the finger at anyone in particular, a certain degree of bias had been established and generally prevailed, if only because of the constraints imposed by the nature of the institution itself.

The idea of having a separate distribution company was nothing new. It was pioneered by the Warner Music Group, which had established WEA Distribution (“WEA” stands for Warner-Electric-Atlantic, the original WMG labels) in January 1971. Joel Friedman was WEA’s first President. Henry Droz succeeded him in 1977. Droz was fired in November 1993 and was succeeded by Dave Mount, formerly of the video distributor LIVE Entertainment. WEA had two notable attributes: it was tremendously successful, and it also was tremendously stable. WMG luxuriated in an atmosphere of tranquil equanimity, in large part due to WEA’s perceived non-discrimination among the WMG labels. In addition to hit records of course, this was a significant contributor to WMG’s success.

Menon agreed with all of this, and in 1986 established a new division of Capitol-EMI called “CEMA”. CEMA originally stood for “Capitol – EMI America – Manhattan – Angel” which were Capitol-EMI’s labels at the time. As labels were shuffled around, it came to be thought of as “Capitol EMI and Associated Labels.” CEMA established an internal distribution fee for Capitol-EMI’s proprietary labels equal to 11% of net sales. Originally, CEMA was designed not as a profit center, but rather as a service company. Its income statement was calibrated to zero out at the end of each fiscal year, or to show only a modest profit, as all earnings were repatriated to the labels it represented.

I transferred to CEMA from Capitol-EMI’s corporate staff, and I’m glad I did, as shortly thereafter Menon drastically reduced it. As a matter of business strategy I supported this. Accountants, lawyers, strategic planners, management consultants and other corporate personnel are more redundant than useful. Capitol-EMI even had established a corporate “marketing staff,” which struck me as being especially perilous. There are few things more amusing in the record business than the concept of “corporate” marketing directors, wholly out-of-touch with the malleable forces and systems in play at the label level on any given day. “We’re from headquarters and we’re here to help you” should be a clarion call to deploy as many counter-measures as one possibly might envision, in order to ward off the barbarians.

It is to corporate groups we owe such innovations as earnings management through reserve manipulation, accelerated (or deferred) amortization, and notional interest. “Notional interest” is a measure of the working capital deployed in the business, and theoretically serves as an incentive to keep it as low as possible. It’s based on the premise that a company doesn’t “invest” in the activities of its divisions. Rather, it lends them money like a bank, and then charges them interest for the privilege of utilizing corporate funds. Although my colleagues from the finance world probably will disagree with me, in my view, this latter concept is particularly insidious. Rather than disincentivize use of corporate resources, the task of a corporate finance group is to maintain commensurate levels of investment. Notional interest is an illustration of the broader principle that, again in my experience, nothing that comes from a corporate group has much to do with the fundamental reality of running a business in an operating division – its nuances, quirks, and the body of knowledge about how to run it successfully. Its orientation is completely different – most often, towards minimizing risk, not accepting it as part of the challenge in confronting a dynamic marketplace. The proliferation of corporate staff, and their various proclivities to interfere with the company’s constituent parts, was particularly disastrous for EMI; over time, its shareholders would have done far better simply to invest their money in government securities.

C. Dennis White, Russ Bach
Dennis White had been Capitol’s head of sales since around 1975, reporting to Zimmermann. He became CEMA’s first president. Joe Smith became head of Capitol-EMI in August 1987. I guess he didn’t get along with White, because he fired him shortly thereafter. I thought White was a great, old-school record executive, and I was sorry to see him go. By the same token, I was a big fan of Smith, so I stayed as far away from the controversy as I could.

To replace White, Smith hired Russ Bach. For a number of years Bach had been in the upper management hierarchy at WEA. My policy always has been to try and make friends fast, so I made a point of hitting it off with Bach as soon as he arrived. There was an incredible press of business. The record industry was consolidating dramatically. In the late 1970s, record distributors had upwards of several thousand customer accounts. By the mid 1980s, the top 15 or so accounted for some 65% of each distribution company’s business. There were huge issues with obsolescence and returns as the dominant configuration shifted from LP and cassette to CD, resulting in the elimination of Capitol’s Los Angeles manufacturing plant and its distribution facilities in Los Angeles and Greensboro, North Carolina, and their consolidation in Jacksonville, Illinois. Some years earlier, Capitol-EMI had entered into an agreement with the Warner Music Group to manufacture much its product requirements; this agreement expired, resulting in supply chain distortions. A large record company owns hundreds of thousands of master sound recordings. At any time, only a small fraction of these are commercially viable; the rest must be triaged. Capitol-EMI was involved in various antitrust actions, such as alleged conspiracies to fix prices and discriminate against customers, primarily arising out of its distribution activities (see this post). There were constant issues involving discounts, free goods, advertising, records mysteriously disappearing from manufacturing plants, customers making returns mysteriously in excess of the quantities they had purchased (for an amusing tale on these two topics, see this post), various dubious promotional activities, and CEMA’s non-proprietary, third-party distributed labels (more on them later). Here is a copy of CEMA’s Sales Policy manual, which gives one a flavor of some of the issues. For some personal reflections re: working with Bach, see this post.

I left CEMA in March 1993. I think it fair to say that the period during which I was there was the high water mark for Capitol-EMI – before the chaos created by the amalgamation and then disintegration of its New York labels, ineffective and indecisive management (both as detailed in this post), not to mention the advent of a curious new technology called the “internet.” The phenomenon of consumers replenishing their vinyl catalogs with CDs pretty much had worked its way through the system; any back catalog items that were worth releasing on CD, already had been released. Once again, it now was up to the record business to live by its wits, by signing and developing commercially-demanded artists that somebody actually might like. For these and other reasons, the record business as I knew it started to spin around on its axis, beginning its inexorable decline, until here it is today, a desiccated shadow of its former self.

Record distribution companies formerly had what were referred to as “branches.” Located in major cities, the primary function of each branch was to service customers (wholesalers and retailers) in its respective territory. Each branch had a manager, who was responsible for establishing and meeting sales quotas, frequently on a title-by-title basis (especially for new releases), in that district, and coordinating marketing support. The branch housed not only sales reps, but also customer service representatives (“CSRs”), later to become field marketing representatives (“FMRs”), together with assorted label personnel. The branch directors all reported to the Vice President for National Sales. The VP National Sales also was responsible for liaison with the Vice Presidents for Sales of each of the record labels, which CEMA distributed.

I would like to give a shout out to CEMA’s branch managers and others during the late 1980s – early 1990s, all of who were stone-cold pros. The branches kept changing locations, territories and amalgamating, so this is a reconstruction; my sincerest apologies for any factual errors and to anyone left off this list, I will be glad to correct it.

The last Dennis White lineup:

Atlanta: Jerry Brackenridge
Chicago: Terry Sautter
Cleveland: Rich Hathorne
Dallas: Tom Tilton
Los Angeles: Larry Hathaway
Minneapolis: Dave Witzig
New York: Ira Derfler
San Francisco: Vyto Lazauskas
Washington, DC: Ron Hughbanks

The classic Russ Bach lineup from late 1987 until early 1993:

Atlanta: Jerry Brackenridge
Chicago: Dave Witzig
Cleveland: Keith Spitler (RIP)
Dallas: Tom Tilton
Los Angeles: Vyto Lazauskas
New York: Gene Rumsey
San Francisco: Terry Sautter
Washington, DC: Kathy Ganser Packard

After the take-over by the Koppelman regime:

Atlanta: Jerry Brackenridge (RIP)
Chicago: Dave Witzig
New York: Kathy Ganser Packard
San Francisco: Terry Sautter

And in Los Angeles, also props to:

Barbara Bolan (with IRS Records)
Bob Cahill (with the EMI Records Group in New York)
Kathy Callahan
Del Costello (with the DCC/Sandstone label)
Phil Fox
Bob Freese (with Liberty Records)
Mark Jackson
Laura Jones Brackenridge
Lou Mann (with the Capitol label)
Joe Mansfield
Joe McFadden
George Nunes (with the Capitol label)
Bud O’Shea
Dave Palacio (with the Capitol-EMI Latin label)
Paul Reese
Michael Roden
Steve Rosenblatt
George Saadi
Bob Singer
Sue Snyder

Thanks to Dennis White, Joe Smith and Russ Bach for their inspired leadership of CEMA during this critical period.

NEXT: Capitol-EMI’s distributed labels.

Article is Copr. © 2011 by David Kronemyer.