01 Apr 1997


Facing the Music

by Marguerite Rigoglioso

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For the $13 billion American record industry, 1996 was a bluesy kind of year. As revenues increased less than 1 percent and consumers bought 8 percent fewer CDs and cassettes compared to the previous year, the pause button, it seems, was hit on a decade of double-digit growth. Moreover, this sales slowdown occurred despite the industry's release of an unprecedented total of twenty thousand new titles.

Is there trouble brewing for the business with a beat, a virtually recession-free industry for the past fifty years? To shed some light on the situation, the Bulletin spoke with Jay R. Boberg (113th AMP), Candace A. Bond (MBA '92), Paul Knutson (HBS '98), William H. roedy, Jr. (MBA '79), and Strauss Zelnick (MBA/JD '83), industry insiders with perspectives from key vantage points in the music world. They, along with HBS associate professor John J. Sviokla, a close observer of the industry, provide insight not only about the recent slump but also about the fascinating workings of the star-maker machinery behind the music that moves America.

Strauss Zelnick, president and CEO of BMG Entertainment North America, a division of Germany's Bertelsmann AG and one of the most influential record companies in the country, blames the music industry's recent problems, perhaps ironically, on the compact disc. In the early 1980s, this little piece of hardware rescued the music business from the lethargy of the post-disco era - the industry's only other down period in recent history. With record companies' decision to switch to CD format, sales picked up considerably as customers rushed out to replace their vinyl record collections with the same music reissued on the new technology. Now, explains Zelnick, the CD boom has played itself out. "The CD market is reaching saturation," he says. "That's why we're seeing the slowdown."

Candace Bond

Candace Bond (MBA '92) recalls one of her earliest childhood memories: watching a stack of 45s spin on her parents' record player and dancing to the music of artists such as Diana Ross and the Supremes, the Jackson Five, and the Temptations. Nearly three decades later, as a Motown vice president and head of the label's $48 million catalog business, Bond is introducing the same Motown sound she enjoyed as a child to a new generation of listeners. "This music is such a big part of so many people's lives that I feel it's important to keep the artists' legacies alive," says Bond, who, prior to her Motown career, served as a financial analyst for several corporations and investment firms. "The songs are as fresh today as they were 25 years ago."

Candace Bond, vice president of catalog development and special markets for Motown Record Company, L.P., which moved from Detroit to Los Angeles in 1972, adds that the current stagnation can also be attributed to "a lack of hits" on the part of the major labels and increased competition for the consumer entertainment dollar. In 1996, efforts by big stars fizzled, and half of the ten best-selling albums of the year were actually released in 1995. The year brought no major new musical genre to generate album sales the way rap and alternative rock had in previous years.

"Product returns from financially pinched retailers were very heavy last year, affecting both major and independent labels," Bond says. "In addition, intense pricing wars by electronics chains and discount department stores destabilized account bases."

Some record executives have admitted to losing touch with their audiences and to alienating consumers by relentlessly pursuing and pushing hit singles instead of nurturing bands for long-term success. "There's some truth to that," says Jay Boberg, president of MCA Records. "In fact, part of the challenge I face at MCA is bringing more of an artist-development sensibility to the label."

Jay Boberg

When he was just 21, Jay Boberg (113th AMP) created International Record Syndicate (IRS) with Police band manager Miles Copeland. "We were just two guys in a room starving," Boberg laughs, recalling his early years with the company that by the late 1980s had become the most prominent independent music label in North America. As co-owner and president of IRS, Boberg launched influential alternative rock bands such as R.E.M., the English Beat, and the Fine Young Cannibals. Boberg signed on as president of MCA Music Publishing in 1994 and in 1995 was named president of MCA Records, a division of Universal Music Group.

Orchestrating an Industry

To understand Boberg's point, it's helpful to look at how the music industry functions. After years of consolidation, the business is now dominated by a handful of major distribution companies (often referred to simply as "the majors") that are responsible for some 80 percent of industry revenues: BMG, EMD (EMI/Capitol), PGD (Polygram), Sony Music, WEA (Warner), and UMVD (Universal). Each conglomerate owns, in part or in full, various "labels" - fully staffed companies that sign and groom artists, guide the album production process, and market the final product. Labels such as Arista and RCA, for example, fall under BMG's umbrella, while Boberg's MCA, the jazz label GRP, and Interscope all belong to Universal.

Then there are the independents, those labels, such as Rounder Records and Priority, that have either little or no financial affiliation with the majors. Independent labels traditionally account for roughly 20 percent of music industry revenues. (Of late, however, they have been showing considerable strength; in 1996, independents collectively rallied to grasp the number one spot in total U.S. album market share for the first time - climbing over industry giants such as Warner Music Group and Sony Music.)

With record companies' decision to switch to CD format, sales picked up considerably as customers rushed out to replace their vinyl record collections with the same music reissued on the new technology.

With record companies' decision to switch to CD format, sales picked up considerably as customers rushed out to replace their vinyl record collections with the same music reissued on the new technology.

Labels acquire music in two ways. One is by signing an artist who has already produced an album. The other is by "discovering" fresh, unmarketed talent. "That happens through every method, from the sublime to the bizarre," says Boberg. Labels' "artist and repertoire" (A&R) staffs, he explains, continually fly all over the country and the world to major festivals, grungy clubs, and obscure coffeehouses in search of that diamond in the rough. Along the way, they talk to anyone - reporters, radio DJs, retail operators, managers, and even friends. Staff outside A&R, too, keep their feelers out, reporting back to the department on anyone they feel "passionate" about, says Boberg.

"If you've been around music for a long time," says Paul Knutson, who served as Rounder Records' general manager from 1994 to 1996, "you develop an ability to spot a quality act when you see it." In the end, however, admits Boberg, "when we decide to sign an artist, it really comes down to somebody's subjective opinion here at the label."

Building the bonfire: posters, CD cover designs, concert ads, and music videos need to be tied together in a well-crafted campaign to portray the music in a certain way.

Building the bonfire: posters, CD cover designs, concert ads, and music videos need to be tied together in a well-crafted campaign to portray the music in a certain way.

Once an act is on board, the label begins what it hopes will be a long and intimate creative collaboration, providing the artist or band feedback on songs and setting them up with just the right producer and recording engineer to create a harmonious chemistry. In the case of labels focused on urban music, the production company may be owned by the label itself; on the rock and pop sides, producers are usually independent.

Meanwhile, the label begins to create a marketing "image" for the performer or group. Posters, CD cover designs, concert ads, music videos, and other forms of advertising, says Boberg, "all need to be tied together in a very well-crafted campaign to portray the music in a certain way." Part of the process involves educating the label's entire staff about the artist. "You have to get everybody really excited and proud to represent this person or group," says Boberg. "I call it 'building the bonfire.'"

Marketing campaign managers generally choose one of two strategies. One is to prod radio stations to run a hit single from an album as many times a day as possible - what's known as creating "push" in the marketplace. The other is to drum up fan interest in the album by first touring the band and promoting the record in the media - otherwise known as "pull."

"The approach you use depends on whether or not you have what you sense is a 'radio-friendly' hit," says Boberg. "If you do, you take it to radio. If it's an album that has overall power but doesn't have one single that really drives it, you'll tend to go the tour route."

Given the influence of radio in making or breaking an artist, cases of corruption and the "buying" of airtime are legendary in the music industry. Today, however, notes Boberg, things are different.

"That may have happened in the past," he says, "but today radio stations are so niche-driven that they can't afford to play just anything. They do so much research to see if their particular audience will react to a song that if a single is floundering, they'll pull it right off the airwaves. So, in a sense, the process of getting records played on the radio has a lot to do with bringing stations music that will help them achieve their audience."

One boon to the record industry has come in the form of MTV, which hit the airwaves in 1981 as the world's first 24-hour video music network. MTV has undoubtedly become one of the nation's most influential music promoters, and in 1987 the network launched MTV Europe and began to set up other international satellites. Currently, the music channel reaches more than 294 million households on every continent except Antarctica - including unexpected places such as Croatia, Lebanon, and the former Soviet Union.

William Roedy

For William Roedy (MBA '79), serving as president, international, of MTV Networks allows him to combine his two loves: music and world travel. Indeed, Roedy, who began his career as an account manager for HBO, says, "I virtually live on an airplane." The thrill of promoting the biggest and trendiest pop TV channel in the world makes it all worth it, however. "We hooked up MTV in Berlin in November 1989," he says. "Forty-eight hours later, the Wall fell." Coincidence? "All over the world, MTV does play a hand in the passion of the people," he says with a twinkle in his eye.

But according to William Roedy, president, international, of MTV Networks, American record executives looking to MTV as a way to create a dominant world presence for American pop music (similar to the influence American movies enjoy) will be disappointed. "We work very hard at supporting local music on all of our international stations," he says. "We also look to expose international audiences to all sorts of new music, not just American." In fact, he says, "one of our dreams is to make the American audience more open to the incredible diversity we have around the world."

Crooning to Lady Luck

In the end, however, whether a song or album soars to the top of the charts or plummets to musical oblivion depends on one final factor over which music executives have no control. "It's just the luck of the draw," says Zelnick wryly.

Some critics charge that by pressuring musicians to keep selling big, industry executives have lost consumers by fostering music that is less inspired and more generic. "Artists are not developed quarter by quarter," acknowledges Boberg. "There's an inherent conflict in trying to tend to the needs of both the artist and the multinational conglomerate. It's definitely a challenge creating an environment that's beneficial to both."

Lacking the pressures of a major label, such as overhead costs and stockholder expectations, independent labels sometimes have greater flexibility than the majors to nurture cutting-edge talent.

Paul Knutson

Just after graduating from college in 1987, Paul Knutson (HBS '98) went to work for Cambridge, Massachusetts-based Rounder Records, where he eventually became general manager. "When I started, very little work was being performed with the assistance of computers," Knutson says. Thanks to his technical know-how, Rounder, which is committed to documenting quality grassroots music from all around the world, has greatly enhanced its operational efficiency, a key to its competitive health as a small but highly regarded independent label. Knutson, who still keeps in touch with his former employer, says he plans to return to the music industry after graduation.

Privately owned Rounder Records in Cambridge, Massachusetts, for example, which specializes in what Paul Knutson calls "roots-based" music, such as bluegrass and folk, will sometimes sign an act even if it knows it will lose money. "Rounder is not just a company, it's a cultural institution," Knutson says of the label that has brought to public attention little-known groups such as Burning Spear and Nathan and the Zydeco Cha-Chas, as well as the better-known George Thorogood and the Destroyers and J.D. Crowe and the New South. "The founders see it as their mission to release certain albums just to have the music documented."

Maintaining a strong "catalog" - the label's backlist of albums more than a year old - is often what gives a label the dependable income stream it needs to be able to take risks on new, untested artists and projects. Candace Bond manages Motown's catalog, which, she says, "many regard as the best in the business." Indeed, with artists such as Stevie Wonder, the Supremes, and the Jacksons in its cache, Motown's catalog has kept the label afloat during a time of major organizational restructuring. "You're going to see us maximize our catalog assets to an even greater degree in the future," says Bond. "By creating major, multimedia release campaigns and using both traditional and alternative distribution channels, we'll be taking full advantage of Motown's worldwide artist and brand recognition."

A Techie Fix?

In its quest for revenue growth, it may be that the music industry will once again turn to new technology to amp itself up, much as it did in the early 1980s with the CD. Last year, entertainment companies experimented with the enhanced CD (ECD), a compact disc format that holds multimedia content and runs on a personal computer. An emerging optical disc technology called digital versatile disc (DVD), which will contain enough storage space to hold huge volumes of multimedia and interactive programming, is also in the works.

The ability to deliver audio digitally presents some interesting opportunities - and dilemmas - for record companies as well. "With digital transmission, you can send music over phone lines and cable modems without losing quality," says HBS associate professor John Sviokla, who has studied the music industry in connection with his interest in the "marketspace" potential of cyberspace commerce. "As my colleague [HBS assistant professor] Jeffrey Rayport says, recorded music is one of those products that is actually 'dematerializing' - it's moving out of the realm of physical 'product' and becoming pure service."

One possible future application for this new technology is in-store CD manufacturing, which would allow a store to digitally download from a central facility any CD a customer requested and press it on the spot in a matter of minutes. "This could eliminate the need for inventories and would solve the problem of merchandise returns," explains Paul Knutson. Blockbuster Entertainment and IBM tested such a concept in the early 1990s but terminated the project after failing to receive commitments from major record labels and retail franchisees.

Perhaps more immediately on the minds of record executives is how to use digital transmission over the Internet to their best advantage. "Record companies are scared to death of the Internet," says Sviokla. "Once you start digitally delivering music on it, there will be nothing to stop people from sending copies - perfect replicas - to everyone they know. We're only one or two generations of technology away from that."

Strauss Zelnick

As president and CEO of BMG Entertainment North America, a division of the world's third-largest media company, Germany's Bertelsmann AG, Strauss Zelnick (MBA/JD '83) manages the company's core record labels, as well as its distribution, music publishing, merchandising, special products, and television divisions. "I'm responsible for nearly $2 billion in revenues," he says. Previously, Zelnick held prominent positions in the movie industry, including a stint as president of Twentieth Century Fox. He decided to try running a small business in 1993, signing on briefly with the entertainment software company Crystal Dynamics before leaving for BMG in 1994. "I'm much more suited to big corporate life," says Zelnick.

Analysts predict that digital transmission may cause a major restructuring of the record industry as distribution becomes a thing of the past and record companies grapple with copyright protection of their product. Strauss Zelnick, however, remains circumspect. "Distribution, while very important, is actually a small part of our business," he says. "The harder part of what we do is to choose new artists and market them. That activity won't change. I also think that the concern over piracy has been blown out of proportion."

Still, Sviokla sees major challenges ahead for record labels. "They had better get busy understanding how they're going to police their intellectual property rights in a digital environment," he says. To protect themselves from revenue losses due to piracy, Sviokla also says record companies will need to develop and market merchandise beyond just music. "They should start copying what Disney does - every time a movie is released so are toys, clothing, even fingernail appliques," he says.

More important, Sviokla maintains, record companies will need to use the Internet proactively by developing innovative new virtual distribution strategies. As the Internet itself becomes more sophisticated, in the near future a concert tour, for example, could become a "pay-per-view" extravaganza. "You could present the concert over the Internet," says Sviokla, "and before, during, and after that concert you could be offering viewers the opportunity to buy records, magazines, and other merchandise."

As they nervously eye the Internet, record executives continue to search the globe for the new group or trend that will so revitalize the music business that questions of technology will hardly seem to matter, at least for a while. "I think we're going to see an entire new genre that will shake up the world the way rock-and-roll did," observes BMG's Zelnick. As to what exactly that new kind of music will be, however, he says, "If I knew, I'd be doing it now." Until "the next big thing" hits, then, fans and audiophiles can expect the music industry to keep singing the blues for a while longer.

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