MuseWire COLUMN: By 1984 I had become gravely concerned (of course along with other key executives) about the profitability of Capitol-EMI’s U.S. labels. I met with Bhaskar Menon, then Chairman of EMI Music, and told him we needed to re-start a distributed labels program. The concept of distributed labels, of course, was not new; indeed, that was the initial relationship between Capitol and United Artists Records.

It was, however, time to re-implement it. This discussion occurred around the same time as the decision to create CEMA Distribution as a stand-alone division within Capitol-EMI (see this post); looking back, it all may have been part of the same conversation. The two concepts were closely interrelated because, with its new status as a separate business, CEMA would be free to exercise its own prerogatives, enter into its own contractual relationships, and (hopefully) become a contributor to Capitol-EMI’s bottom line. In any event, Menon gave me a green light to proceed, which resulted in a distributed label program lasting from approximately 1985 to approximately 1993. One of my primary responsibilities at the company came to be devising, implementing and maintaining the relationships Capitol-EMI had with these labels.

A. What is a Distributed Label?

To start with, it’s important to understand the economic logic behind them. Although I am most familiar with their structure and performance in the context of the record business from the early 1980s through the early 2000s, it basically remains unchanged, with the exception that record companies now manage digital rights in addition to physical finished goods. To try and avoid confusion, I will use the term “record company” in its corporate sense, even though a separate division within the record company, such as WEA or CEMA, undertakes distribution. I will refer to the record company’s counterpart as a “distributed label.”

A distributed label is one the record company does not own. The record company treats the distributed label as a stand-alone, independently viable, third-party business entity. The record company agrees to manufacture and distribute the distributed label’s records, for a fee. The record company typically charges a modest mark-up on manufacturing costs, in the range of 5% – 10%. The distribution fee, payable on net sales, typically ranges from 15% – 25%. This relationship often is characterized as a “P&D” deal, which stands for “pressing and distribution” (the term “pressing” being a generic term for manufacturing records, including not only vinyl but also cassettes, CDs, etc.). The distributed label originates and develops its own artists, promotes them at radio, and markets them to consumers. The record company manufactures and physically distributes records (by picking, packing and shipping them). It also undertakes the all-important task of selling them to its customers (wholesalers and retailers). It also administers promotional and marketing incentives, such as free goods and invoice discounts, and deals with related tasks such as credit and collections. It indemnifies the distributed label against bad debt risk. These latter functions became particularly important as record wholesalers and retailers consolidated in the early 1990s. For example, in 1989, the top 50 accounts typically comprised approximately 80% of a record company’s sales; this increased to approximately 85% by 1993. The top 25 accounts increased from approximately 65% to approximately 75%; and the top 10 accounts increased from approximately 50% to approximately 55%. Large record wholesalers and retailers prefer to deal with large counterpart record companies, which market a broader and more diversified catalog and have greater financial resources to devote to artist development. Here is a typical set of agreements comprising a P&D deal.

B. What Are the Advantages of a P&D Deal?

1. For the Record Company.

There are several advantages to the record company of having distributed labels. The main one has to do with fixed costs and system capacity. Record companies incur a variety of fixed costs, such as manufacturing plants, branch offices, personnel and the like – what typically are referred to in an income statement as “selling, general and administrative” (“SG&A”) costs. These fixed costs must be amortized over however many records actually are sold. If fewer records are sold, then fixed costs will comprise a greater percentage of overall sales. Marginal costs, on the other hand, are incurred on a per-unit basis. Examples are artist royalties and the cost to manufacture an individual record. Having more labels potentially gives the record company more records to sell. It therefore is able to amortize its fixed costs more efficiently, and utilize system capacity that otherwise would lie fallow. More records being sold, without an increase in fixed costs, yields additional marginal revenue. In principle, this increase in marginal revenue flows straight to the record company’s bottom line profitability. Furthermore, the record company is not financially responsible for any marginal costs, all of which are on the distributed label’s account.

Although the difference between fixed costs and marginal costs is easy to see in theory, in practice it is a little trickier. For example, the amount of an artist advance is more in the nature of a fixed cost, until it becomes recouped, if it does. And the cost to manufacture records also must take into account factors such as records that are returned but can’t be resold, together with an allowance for obsolescence, because the record company has manufactured more records than it can sell. In a P&D relationship, all of these ambiguities are transferred from the record company back to the distributed label, because the distributed label is responsible for its own marginal costs – not the record company.

Another advantage to the record company of having distributed labels is that they have different artistic tastes and proclivities, and thus have the potential to diversify the record company’s repertoire. There is no rule saying that large record companies are the only ones capable of originating unique and creative repertoire. In fact, frequently they are the last ones to recognize developing tendencies in the marketplace. Smaller labels, on the other hand, frequently have their “ear closer to the ground,” and are able to spot these trends before and as they occur. If the distributed label becomes successful, it presents a natural acquisition opportunity for the record company. The record company has an opportunity to see the distributed label in action, evaluate its repertoire and (even more importantly) its management’s potential to deliver results.

2. For the Distributed Label.

Reciprocally, significant advantages accrue to the distributed label from a P&D-type relationship. The main one is stature within the artist community. Rather than relying on a patch-work quilt of independent record distributors – those not affiliated with a major label – it honestly can tell its artists they will achieve national distribution of their work. Since the distributed label only contracts for domestic (U.S.) distribution rights, the distributed label is free to enter into its own foreign distribution or licensing relationships. The fact the record label has a U.S. P&D deal can be a significant inducement to foreign distributors or licensees to enter into some kind of relationship with it, because the foreign company knows there will be at least some level of visibility and exposure to the distributed label’s U.S. releases, which is an important component in driving international sales.

Large record companies always distributed their own records. They amalgamated into branch distributors, such as WEA. This left smaller labels in a quandary, because they lacked sufficient economic scale to distribute their own records. Prior to their acquisition by large international multi-media conglomerates, even mid-sized labels such as A&M and Motown were independently distributed. In the early 1980s A&M attempted to form its own distribution company, but was unsuccessful. When the U.S. Federal Trade Commission investigated the proposed Warner-PolyGram merger in 1984, A&M testified to the effect that a record company would need turnover of at least $100 million/year in order to make distributing its own records a viable business proposition.

The most credible attempt to establish a viable independent record distribution company in the late 1980s – early 1990s was INDI Records (Independent National Distributors, Inc.). It was formed by an amalgamation of several regional independent distributors, including California Record Distribution (CRD), owned by George Hocutt; Malverne, located in New York; Schwartz Brothers, located in Baltimore; and Big State Distributing, located in Dallas. Another independent distributor was MS Distributing, based out of Chicago; and Navarre Corp., owned by Eric Paulson, based out of Minneapolis. Towards the mid-1990s several other companies were formed as pseudo-independent distributors, which actually were owned by major record companies. These included Relativity Entertainment Distribution (owned by Sony); Alternative Distribution Alliance (owned by WMG); and Caroline Records (which EMI acquired through its acquisition of Virgin Records).

The pervasiveness of digital recording technology has made many independent record companies obsolete, as the focus of distribution has changed from bringing physical goods to the marketplace, to making .mp3 audio files available for direct download by consumers on Internet sites such as iTunes. The market has split into three tiers: major artists on major labels; mid-sized artists on independent labels; and individual artists. The independent label is the most challenged of these three. It cannot afford, nor does it want to sign, major artists. It does not want to sign individual artists, who never will be able to accumulate sufficient consumer marketing impressions to drive profitable sales of records (downloads). This leaves a large zone somewhere in between. The major label does not want to sign the medium-sized artist, because it consumes economic resources, isn’t scalable, and diverts management attention from other projects with greater remunerative potential. The tranche where the major label is effective has contracted in pace with the record business itself. Reciprocally, in order to sustain a viable career, the medium-sized artist must do something more than post songs on Internet sites such as MySpace and videos on YouTube. Unlike the individual artist, the medium-sized artist actually aspires to sell records (downloads), rather than using music websites simply as promotional tools. It requires an independent label, and must attract one, in order to do so. The independent label, on the other hand, must vet the medium-sized artist carefully, for the same reasons why a major label must do so for its artists. Simultaneously, though, it must make a case to the medium-sized artist that it will be able to provide value-added services, typically by generating consumer marketing impressions, which the medium-sized artist never would be able to develop on its own. One of the main functions today’s independent label performs for its artists is syndicating digital distribution rights to sites such as iTunes and Pandora Radio, which may be more important for many artists than distribution of physical finished goods. This dynamic has lead to the rise of “content aggregators” such as CD Baby, TuneCore and ISIS Distribution.

C. How Does a P&D Deal Differ from a Production Deal?

A P&D deal must be distinguished from other similar-looking arrangements between a record company and a third-party business entity the record company doesn’t own, such as a so-called “production deal.” Like a distributed label, the production company has its own artists, and then in turn has a contract with the record company. Unlike the P&D deal, though, the record company is responsible for every aspect of marketing, promoting and selling the production company’s records. Typically, all the production company does is originate the artist, own its masters, and has the right to its future performance. It also makes less money. From an economic standpoint, instead of “getting everything remaining after certain cost centers were assessed,” the production company only receives an override on net sales. Calculated like an artist royalty, this override typically is in the range of 2% – 5%, and is subject to recoupment of any advances the record company has made.

It is easy to see how this creates a significant problem. The artist signed to a production company typically earns a royalty that is lower than the royalty it would receive had it been signed directly to the record company. There is an intermediate zone, which the production company captures and retains for its own account, regardless of how much effort it expends (or doesn’t) into marketing and promoting the artist. For example, if the production company royalty is 15% of net sales, it might pay the artist only 10% – 12% of net sales (i.e., 65% to 80% of this amount). As an artist becomes more popular and sells more records, this understandably has the potential to create friction between the production company and the artist. “What have you done for me lately” is a common refrain among artists signed to production companies – a valid complaint, given that the record company (not the production company) is responsible for virtually every aspect of the artist’s recording career. Then again, the artist might never have been signed to the record company, directly, to begin with. The production company’s best argument, from an economic standpoint, is that it is a necessary conduit for the artist in order for the artist’s work to reach the marketplace.

The situation with production companies becomes even more complicated when there is more than one of them, a condition (strangely) most prevalent in the rap and hip-hop genres. It is not unusual for multiple layers of production companies to be involved with a single artist: company A signs the artist, contracts with company B, which contracts with company C, which contracts with the record label (if the record label is a “distributed label,” then there is yet another tranche). Margin disappears at each step along the way, further reducing the amount potentially payable to the artist.

Production deals are advantageous to record companies because they enable the record company to diversify into specialized repertoire centers, or even to sign particular artists. A small production company might be particularly entrepreneurial and have access to key artists in a certain style or genre of music, for example, country or rap. In some cases a production company is formed after-the-fact, as an outgrowth of the record label’s relationship with a key artist; at Capitol, for example, this initially was the case with the Beach Boys and their label Brother Records. While these relationships often are merely cosmetic, at least they create the illusion the artist is in more control of its repertoire. The record company is not necessarily committed to all of a production company’s artists; it can pick and choose those it wants, often with first refusal rights. And, it can treat the production company as a single, integrated, cross-collateralized accounting unit, meaning that sales of one artist can be set off against returns from another. It is up to the production company to resolve these issues, at its own accounting level.

There are several permutations to these relationships. The production company may be nothing more than an incorporated mop-and-broom closet the artist has formed for tax reasons. In a hybrid relationship, the record company may undertake various marketing and promotion tasks for the independent label. At the other side of the complexity spectrum, the record company and the independent label actually might enter into a joint venture type of arrangement. The parties form a new special-purpose entity, such as a limited liability company. An operating agreement allocates capital contributions, management responsibility, accountability for losses and entitlement to profits. Because this type of transaction creates a new legal entity, record companies typically use it only in special situations thought to have unique potential. An example was Capitol-EMI’s early-1990s deal with M.C. Hammer’s Bust It Records. Even then, after an investment of more than $10 million, the venture failed.

These contracts always are negotiated. The record company makes various concessions, depending on the stature of the artist. It is beyond the scope of this note to evaluate the nuances and intricacies of this dynamic in detail. A manual setting forth typical issues is Donald Passman’s book “All You Need to Know About the Music Business”, now in its 7th edition (2009, Free Press). Here are copies of a typical artist royalty contract used by Capitol in the mid-1980s, and a typical production agreement, together with some from other record companies. From time to time I will post additional materials regarding P&D agreements, artist agreements and production company agreements at this link.

D. What Are the Disadvantages of a P&D Deal?

Not all is rosy with P&D deals, however, and they are subject to a variety of conditions and circumstances, which cause them to underperform, or even create losses for both the record company and the distributed label.

1. For the Distributed Label.

From the distributed label’s perspective, the economics potentially are adverse. As with any other industry, the record business presents a relatively straightforward relationship between costs and revenue. If one cost center becomes disproportionately large, then it consumes all of the revenue it generates. It also creates pressure on other revenue centers by consuming the revenue they generate, too. As a result, these other revenue centers become forced to contribute to the expanded cost center, rather than attending simply to their own associated costs.

The main way this impacts distributed labels is in the amount of the distribution fee. It is difficult to sustain a record company’s business and operations when it is paying anything more than approximately 11% – 15% of its net sales to sell and distribute its records. A distribution fee of 20% to 25% of net sales is ruinous. While it might be argued that on margin the distributed labels’ net sales increase as a result of having the P&D relationship with the record company, in practice, this rarely achieves equilibrium. As a result, the distributed label must scrimp on other cost centers to pay for its increased distribution costs – most likely, artist royalties, or the very marketing and promotional funds necessary to drive records through the record company’s distribution system, which ostensibly is the reason why the distributed label entered into the distribution deal with the record company, to begin with. Here is a typical record company P&L, illustrating these discrepancies.

These relative economic disadvantages are exacerbated by the concept of “reserves.” In most P&D deals, the record company typically accounts to the distributed label on a monthly basis, typically with a 60-day lag following the month during which sales and returns activity actually occurred. This matches the record company’s average accounts receivable profile, which typically is within the same range (more, if the record company used delayed invoice dating as a sales inducement). The record company also typically holds a reserve against future anticipated returns, which typically is released on a monthly schedule some time after the sale (potentially giving rise to the return) has occurred. The amount of this reserve varies, but typically is in the range of 15% – 25% of net sales. If a record doesn’t result in returns of at least 15%, then a good argument can be made that there is an insufficient quantity in the marketplace, to respond to potential consumer demand when (and if) it materializes. On the other hand, if a record returns in excess of 25%, then a good argument can be made that it is over-distributed, in anticipation of consumer demand that didn’t materialize. The reserve typically is liquidated on a rolling schedule; for example, a reserve taken in month 1 is liquidated 1/6th in month 7, 1/6th in month 8, and so forth, until month 12.

Unless the distributed label is extraordinarily well funded (and most of them aren’t), this receivables lag is untenable. It needs money sooner than it is contractually entitled to receive it, not only to fund its own fixed and marginal costs, but also to market and promote records (which, as with the amount of the distribution fee, is one of the main reasons why it enters into the distribution deal with the record company, to begin with). It is deprived of marginal revenue at precisely the moment it is most required, in order to market and promote the record effectively in the marketplace. As a result, the distributed label finds itself in a subservient relationship to the record company, and constantly must imprecate the record company for more cash. These appeals typically focus on accounting schedules and reserves. Examples: “The accounting schedule is too delayed.” “Our returns profile is not as adverse as you anticipate, so you are holding too much reserve, or it should be liquidated sooner.” What it basically comes down to is: “We need more money, and we need it, now. At the very least you should advance us some amount equal to a percentage of our future anticipated revenue, or reserves yet to be released.” Accommodating these requests – frequently legitimate – is more of a subjective art form than a science. It requires detailed knowledge of the distributed label’s artists, release schedule, sales forecast, and close liaison with its management. It frequently is in the record company’s interest to make such an advance, as it enables the distributed label to continue to thrive and sell records – the reason why the record company signed the distributed label, in the first place. A philosophy to the effect that “we get things (achieve economic concessions or accrue economic advantage) without having to pay for it,” rarely is successful.

The distributed label is vulnerable to discrimination in favor of the record company’s own proprietary labels. Sometimes this is overt; more frequently, when it occurs, it is tacit. In order to succeed within a large system of branch distribution, the distributed label must have the capacity to make a record happen everywhere at once. It must have sufficient financial resources to compete with its counterparts. If it neglects certain geographical regions of the country, then per se it will not have any sales or marketing presence within that territory. Another requisite for success is a consistent release schedule. Because it has fewer artists, the distributed label particularly is vulnerable to artist delays in delivering masters, and other timing issues. If the distributed label only releases records erratically, then its identity necessarily will be diluted in the marketplace. Both of these factors potentially cause the distributed label to lose visibility, thus priority, with the branch distribution staff.

2. For the Record Company.

P&D deals also present correlative risks to the record company. Because they are not major record companies, most distributed labels release records sporadically. They typically do not have a large back catalog, to provide at least some semblance of a consistent revenue stream. One might release a record, which sells in large quantities, but is not followed by subsequent records with similar sales volume. This results in significant revenue distortions. The record company runs the risk it will release funds to the distributed label, only to discover that subsequent returns exceed the amount of its reserve. In a way, having a hit record is the distributed label’s worst nightmare. After playing a role in creating it, the record company’s next reaction is entirely defensive: to protect itself against anticipated future returns, on the premise the distributed label might be unable to maintain it in the marketplace, by increasing reserves.

The record company’s fee is payable on net sales. If a record ships large quantities (high gross sales) but then also experiences large returns (low net sales), then the record company makes little margin, even though (arguably) it performs twice as much work.

Unlike a production deal, the record company does not enjoy the prerogative to pick and choose among the distributed label’s artists. It typically is committed to release all of them, regardless of its view of their respective artistic merits. This is more than merely a problem of aesthetics. Effective distribution can make a difference of upwards of 25% of sales of a record, but it requires the distributed label to be able to pull the record through the marketplace, and induce consumers to buy it. If the distributed label is unable to engender consumer demand for its records, then all the distribution in the world won’t make a difference. Hit records rarely materialize out of nowhere.

There are significant legal liabilities. For example, under U.S. copyright law, the record company is financially responsible for all mechanical (copyright) royalties, including those of any label it distributes – regardless of whether the distributed label pays them, or has the financial capacity to do so. As per the above, this frequently is one of the first costs the distributed label neglects, as distribution costs consume a disproportionate percentage of its revenue.

The most important problem for the record company, though, is return on time. Every minute a sales rep spends thinking about a distributed label is one not spent marketing, promoting and selling one of the record company’s own proprietary labels. When scarce marketing resources are deployed on a distributed label’s behalf – such as customer advertising, or retail priority campaigns, or even allocation of retail inventory open-to-buy funding – it reduces the amount of that resource available to a proprietary label. Unless the record company’s market share expands dramatically, to a large extent allocating these opportunities is a zero-sum game.

The record company’s proprietary labels always will result in greater economic impact than a distributed label. If a proprietary label is successful, it will present greater economic return; if unsuccessful, then it will incur greater economic loss. There is an exact point where turnover from the proprietary label reaches a crossover point on the fixed cost curve, after which distributed labels actually might interfere with the company’s over-all performance. The proprietary label always will be interested, then, in the distribution company focusing on its records, to maximize (on margin) the likelihood of the former alternative, as opposed to the latter. If, on the other hand, the proprietary label’s records are less successful, and the distributed label’s records are more demanded, then (on margin) time invested by the distribution company on the distributed label is well spent. For these reasons, the distributed label is like a narcotic: it must be used and administered carefully.

There are several counter-measures a record company can deploy to mitigate against at least some of the economic consequences of adverse distributed label performance, such as high unanticipated returns liability or a scenario where it appears unlikely any advances made by the record company to the distributed label will be recouped. It can characterize “advances” to the distributed label as “loans,” thus making them unconditionally repayable, rather than dependent on sales. It can require the distributed label to post a standby letter of credit (if it can obtain one). It can take a legal security interest or lien on all of the distributed label’s assets, including its artist contracts. While this might tend to further insulate the record company from financial risk, it also has the potential to create its own set of problems. What if, for example, the distributed label goes into default? How would artist contracts actually get assigned from the distributed label to the record company, short of bankruptcy court intervention? What is the effect of competing liens, for example, those previously granted by the distributed label to its own bank – which, of course, is not in the record distribution business? Does the record company have to pay them off, or take the assets subject to them? Will the artists on the distributed label actually like getting assigned around, like some kind of pro athlete being transferred to another team? There are legal answers to these questions, but they are complicated and, generally speaking, not conducive to profitability (or good artist relations).

Another thing the record company can do is to experiment with different contractual variations. For example, it might reduce the distribution fee paid by the distributed label, as sales increase (though in economic theory, this should be reversed, as the first sales of any record are the hardest to make; and the last sales are the riskiest, because of the possibility the market has become oversaturated as further anticipated consumer demand that doesn’t materialize). The record company can implement a “pull-up” mechanism to transfer artists from the distributed label’s roster to its own roster if certain sales totals are achieved, leaving the distributed label with a royalty spread, much like a production deal. The record company might take warrants for stock in the distributed label, exercisable if certain sales totals are achieved. It might enter into a buy-sell relationship, such as: at the end of a term (say, three to five years) the distributed label proposes a price; whereupon the record company can opt either to be a buyer or a seller, at that price. We experimented with all of these at CEMA.

E. What Was the Situation at Capitol-EMI?

As I presented the case to Menon, the simple fact of the matter was that Capitol-EMI needed time to develop its internal resources to the point where it had sufficient turnover from its proprietary labels to overcome its marginal costs and efficiently amortize its fixed costs. Only in this way would it acquire critical mass and develop profitability. In 1987, for example Capitol made only approximately $670 thousand profit on $156.9 million in net sales. EMIA lost $8.9 million on net sales of $75.5 million. At this rate, it soon would go out of business (EDITOR’S NOTE: as it now evidently has!).

There was no shortage of potential candidates from which to choose. CEMA ended up with about a dozen different labels, three of which I would rate as big successes. These were Priority Records, Rhino Records and Enigma Records. I would rate several others as highly successful but not on the same economic scale; these include Gold Castle Records, run by Danny Goldberg; and IRS Records, run by Jay Boberg. The rest were non-performers or under-performers. They often resulted from management pressure, for example, Dennis White, Russ Bach or Joe Smith succumbing to influence exerted by a manager, agent or attorney. There’s nothing wrong with that, it just is one of the main reasons why some of the smaller deals were not as successful. Here is a brief description of Priority, Rhino and Enigma:

Priority Records was founded by Bryan Turner and Mark Cerami, both formerly with K-Tel, best known for issuing re-recordings of masters by once-popular artists. They later were joined by Steve Drath. Priority’s business initially was “greatest hits”-type compilations. It expanded into novelty records and then into the nascent west-coast rap scene, and became highly successful. One of its relationships was with No Limit Records, which had Master P and related artists. Capitol-EMI’s deal with Priority was off-template from the outline above, in that Priority handled its own marketing and sales; all Capitol did was manufacture and distribute (pick, pack, bill and collect). As a result, Priority’s distribution fee was calibrated more closely to Capitol’s actual cost. During the period May 1989 to March 1993, Priority had net sales of approximately $140 million (accurate earlier/later sales figures not available), resulting in marginal revenue of approximately $14 million.

In November 1996, Charles Koppelman bought half of Priority for a reported $50 million. In March 1998, Ken Berry bought the other half for a reported additional $70 million, just as rap music started its steep decline. Profits quickly turned into large losses, primarily due to large multi-million dollar distribution advances from Priority to No Limit Records, which could not be recouped. In August 2001, Berry merged Priority into Capitol. As had happened with United Artists Records, Chrysalis Records, SBK Records, Virgin Records, etc., it gradually vanished, together with EMI’s investment.

Rhino Records was founded by Richard Foos and Harold Bronson. It developed an expertise in curating meticulously-researched overviews of an artist’s recording career, frequently licensing in masters from several labels at once to compile a particular album. It also signed new artists in quirky yet appealing genres. Capitol-EMI entered into a P&D deal with Rhino in October 1985. It quickly became bogged down with various issues, one of which was Rhino’s (legitimate) desire to have better access to Capitol’s catalog of old masters, for its compilation records; and various issues regarding retail priority (as set forth in this post re: the formation of CEMA).

These matters came to a head in September 1987 when Rhino wrote to Joe Smith: “It is with great regret that we are writing this letter, but we feel it is important that you know our true feelings. At this point we are unhappy with our relationship with Capitol, and we thought you should be aware of the reasons why. In general, we get the distinct impression that the chief executives of the company (yourself included) could case less about us, and that on all levels, Rhino is an extremely low, if even existent, priority. As we will detail in this letter, it seems to us that there is a total lack of desire to have any kind of meaningful relationship with Rhino, and that any attempt on our parts to rectify the situation is met with patronizing, disdain and ultimately inaction.”

Upon receipt of this letter, Smith told me: “You’ve got to get involved here and fix this,” which I assiduously attempted to do over the next several years. Rhino and Capitol amended their various agreements. The process of licensing masters was streamlined, at least somewhat. Capitol had a peculiar institutional resistance to licensing masters, which was paradoxical, seeing as how it had hundreds of thousands of them, which simply were sitting there doing nothing. There was no scenario under which it might release records of those masters, on its own; it was too expensive to do so, given Capitol’s fixed costs and its mandate to concentrate on releases by new artists. While the licensing process became somewhat more facile over time, this problem never was completely resolved.

In April 1989 Rhino renewed its agreements with CEMA for another three years, the agreements thus expiring in March 1992. Towards the end of the term, Rhino began negotiating with the Warner Music Group. WMG bought a half-interest in the company, with an option to buy the remainder in five years, which it exercised. Rhino shifted its distribution to WMG. Despite its various issues, and even though it was under no obligation to do so, Rhino presented the transaction to Capitol-EMI first (and last). I strenuously urged everybody I could think of, to acquire it, including Guy Marriott, then EMI Music’s head of business affairs worldwide; and Jim Fifield, then Chairman of EMI Music worldwide. Given the growing turmoil in the company, as set forth here and here, I was unable to develop sufficient interest. I view this as one of my greatest corporate failures in my career. For an amusing anecdote re: Rhino, see here. For a small archive of material re: Rhino, including its September 1987 letter to Smith, see here. During the period October 1985 to March 1992 Rhino had net sales of approximately $130 million (accurate earlier/later sales figures not available), resulting in marginal revenue to CEMA of approximately $20 million.

Enigma Records was founded by Bill Hein and Wesley Hein, later joined by Jim Martone. Originally an importer of European records into the U.S., Enigma had been extraordinarily successful in identifying new genres, and signed a portfolio of emerging bands. Its relationship with Capitol-EMI commenced as a production company within the EMI America label. Soon it transitioned into being a distributed label. During the period March 1986 to November 1990 it had net sales of approximately $60 million (accurate earlier/later sales figures not available), resulting in marginal revenue to CEMA of approximately $11 million. In November 1990 Capitol-EMI acquired the company for a reported $20 million.

Some of the other labels were:

16th Avenue Records, a country music label owned by OpryLand.
Allegiance Records, owned by Bill Valenziano and Marty Goldrod.
Alpha International Records based in Philadelphia, owned by Pete Pelullo and Joe Tarsia. They formerly owned the Power Station (a large New York recording studio, and, at the time, owned another large recording studio in Philadelphia, Sigma/Alpha sound.
Apache Records, owned by the artist manager Burt Stein.
Barking Pumpkin Records, which owned the Frank Zappa catalog.
Bellmark Records, owned by Al Bell, formerly President of Motown Records, and before then, President of Stax/Volt Records.
Birthright Records.
Chameleon Records, owned by Daniel Pritzker, run by Stephen Powers. Powers went on to form Drive Entertainment, in partnership with Don Grierson, former VP A&R for Capitol Records.
MTM Records, a Nashville-based label owned by Mary Tyler Moore’s production company.
Outpost Records, owned by the artist manager John Collins
Red Label Records, a one-hit wonder with “Superbowl Shuffle,” which sold in large amounts, and then was returned in seemingly larger amounts.
Solar Records, owned by Dick Griffey; see this post.

All in all, during the period October 1988 through March 1993 (accurate earlier/later sales figures not available) distributed labels had net sales of approximately $375 million, comprising over 15% of Capitol-EMI’s total net sales of approximately $2.4 billion, and marginal profit of at least approximately $45 million. The logic of distributed labels was vitiated with the ascendancy of Koppelman’s New York labels, and after I left the company in March 1993 there was less economic logic to retain them. The objective of supplying almost cost-free profitability had been met. Capitol-EMI continued to take on distributed labels from time to time thereafter, for the same rationale I articulated to Menon back in 1984, but they were much smaller than the ones I have described. A couple of months ago I reviewed a recent Capitol-EMI distributed label agreement, and was shocked to see it was in the same form, even using most of the same language (with some modifications), as I had written it over a quarter of a century ago. While of course there were numerous contributors to the success of the distributed labels program, I was and remain happy about the role I played.

Thanks to Bhaskar Menon, Joe Smith, Dennis White, Russ Bach, Bill Hein, Wesley Hein, Jim Martone, Richard Foos, Harold Bronson, Bryan Turner, Mark Cerami, Steve Drath, Danny Goldberg and Jay Boberg for their contributions to Capitol-EMI during this period.

NEXT: Special Markets.

Article is Copr. © 2011 David Kronemyer – all rights reserved.