Rock’s New World Order : There’s a whole lotta shakin’ in the business, but the action is taking place inside the boardroom, not the recording studio, as the dominance of a handful of global conglomerates has put the bottom line before creative risk-taking

Nothing since the invasion of the Beatles in 1964 shook the record industry more than the landmark day in January, 1988, when the Japanese electronics giant Sony Inc. bought CBS Records for $2 billion.

After a decade of seeing industries from autos to electronics being gobbled up by foreign interests, the Sony purchase now meant that a sacred piece of American culture--pop music--was being boxed up and sent overseas.

Soon other foreign companies, recognizing the worldwide appetite for American pop music and culture, were rushing in to devour other U.S. cultural icons. And, by 1990, virtually all of the U.S. recording industry had been sold to Sony and five other multinational giants.

Holland’s Philips N.V. acquired PolyGram, A&M;, Mercury and Island. Sony’s archrival Matsushita Electrical Industrial Co. bought MCA and Geffen. Britain’s Thorn-EMI picked up Capitol and Virgin. And Germany’s publishing giant, Bertelsmann Inc., bought the record arm of RCA Corp. U.S.-based Time Warner rounded out the new order of multimedia conglomerates with the 1989 merger of the Time Inc. and Warner Communications empires.

With those changes has come a new recording industry hierarchy--still overwhelmingly male, but a radically revamped Top 40 players and institutions who lead and shape a new world order of recording.

At the top of rock’s new global pyramid: businessmen who are trying to impose a formal discipline on an industry that used to make deals largely on the basis of a single entrepreneur’s instincts and wits.

In the privacy of industry boardrooms from Los Angeles to New York, many of the people who built the industry are troubled and resentful of the changes, and, no doubt, fearful that they have lost control of their own destinies. One industry veteran refers derisively to the new record industry “overlords� as “the Six Suits.�

“I definitely think we are at the end of an era,� says David Geffen, arguably the smartest and most feared individual in the record business. The 49-year-old executive became a billionaire when Matsushita bought his MCA stock in its 1990 acquisition.

“The big change is that all the companies have put these numbers guys in charge,� Geffen says. “It’s starting to be like the movie industry now. All that’s left now in the movie world is a bunch of faceless conglomerates, and the result is that there aren’t many good movies being made anymore, are there? I’m afraid it won’t be long before the music industry ends up the same way.�

“The record business is much better off now than it ever was,� counters Wall Street analyst Harold Vogel, first vice president at Merrill Lynch & Co. in New York. “If the conglomerates didn’t have the numbers people riding herd over the industry, the banks and the stock market would not have enough confidence in what’s going on to supply the enormous amounts of capital these companies need to operate on a global basis.�

Michael P. Schulhof, chairman of Sony Music Entertainment, a $3.4-billion arm of the Tokyo-based, $25.6-billion Sony Corp., is one of the new breed of record company overlords, and he’s not apologetic about the change of emphasis at the top.

“The record industry is no longer a seat-of-the-pants, fly-by-night business,� says Schulhof, who started his career as a physicist working on neutron-scattering experiments at Brookhaven National Laboratory in his native New York.

“The nurturing and support of talent is a crucial factor in maximizing the potential of the industry, but as companies get very large they require a very different kind of management approach. Otherwise they cannot possibly continue to grow. The people who run the music industry now treat it as a business but have to understand the impact of creativity on that business.�

Nowhere is the new global order of things more visible than in the quarterly gatherings of the new conglomerates.

On Dec. 9, nearly a dozen EMI Music executives from around the world will gather for a marathon strategy session in a conference room at the exclusive St. James Club in West Hollywood.

During the eight-hour meeting, heads of the various arms of the $2.4-billion music operation will present elaborate sales pitches, complete with graphs and flow charts. Their aim: secure enough sales and promotion money to market their products in 38 countries, from Europe to the Far East.

“The pizazz is gone in the record business, and we miss it,� says Joe Smith, president and CEO of Capitol-EMI Music Inc. and one of the participants in the meeting, which will be chaired by Jim Fifield, a former General Mills executive who was appointed by Thorn-EMI in 1989 to oversee its worldwide music interests. Also due at the meeting: the heads of the various Thorn-EMI American labels plus their European counterparts.

A fixture on the record scene since the ‘60s, Smith remembers fondly the simpler days of the music business--the days when he and such other company heads as Mo Ostin, Jerry Moss and Irving Azoff would conduct business at Laker games.

“In the ‘80s, you could negotiate a deal at the Forum during intermission, sign it during a timeout and sometimes close it in the time it took the ball to get passed from one side of the court to the other,� Smith recalls wistfully. “Nobody ever had to ask anybody’s permission.

“That’s all gone now. You can’t make any deal without first checking with somebody in London or Tokyo or Holland or Frankfurt. Everything has to fit into some giant plan. There are reporting avenues and channels that did not exist before.�

All this change occurs at a time when serious questions are being asked about the health of the record business, at least in the United States. Sales have been virtually flat in this country for two years, and revenue in the aligned concert business is way down from two years ago.

As markets expand in Asia, Eastern Europe and South America, the U.S. share of international album sales is shrinking dramatically.

The U.S. portion of the world record pie has dwindled from 34% in 1986 to 31% in 1991 and is expected to sink to 25% before the end of the decade.

But the reason isn’t just that Americans aren’t buying as many units; it’s that the new world markets are opening so fast--and the record companies are devoting much of their resources to targeting those new markets.

“Executives aren’t just thinking about getting albums on the (U.S.) Billboard chart any more,� confirms Fifield, president and chief executive officer of EMI Music, a division of Thorn-EMI, a lighting, security and electronics firm that earned about $6.7 billion last year.

“Each of the multinational companies is getting increasingly more efficient at exploiting music globally. For instance, we can now pick a date and release a superstar album in dozens of countries simultaneously and successfully coordinate a marketing plan with common advertising and video and packaging all over the world. That didn’t go on five years ago. It’s a completely different ballgame now.�

About 60% of the $18 billion that the industry earned last year outside the United States can be attributed to the sale of albums by American and English-speaking artists, according to the London-based International Federation of the Phonographic Industry.

“No matter how you look at it, you cannot understate the importance of American music in the scheme of all of this,� says Al Teller, chairman of the MCA Music Entertainment Group, a $1-billion division of MCA Inc., owned by the Matsushita Electrical Industrial Co. Ltd., which last year grossed $56 billion.

“In order to keep feeding the overseas infrastructure that the conglomerates have put in place, it’s imperative to have a healthy American record operation. American rock and pop music are by far the biggest sellers overseas.�

Michael Dornemann, chairman and chief executive officer of the Bertelsmann Music Group (BMG), a $2.5-billion division of Bertelsmann AG, a $10-billion worldwide media enterprise, concurs.

“The U.S. is very important because it is here where you have the talent and here where you have the trends,� says Dornemann, a former systems engineer and marketing analyst for IBM in Germany. “The investment is here, and you have to be close to it.�

But even as the global conglomerates open new markets for English-speaking repertoire, they are tapping into the demand for indigenous music in dozens of countries.

“Clearly the big payoff for us is international,� says Robert Morgado, chairman of the Warner Music Group Inc., a $3-billion division of Time Warner, a media giant with worldwide earnings in 1991 exceeding $12 billion.

“Markets are opening up that never existed,� says Morgado, who is credited with helping save New York City from bankruptcy in 1977 when he served as financial adviser and chief of staff in New York Gov. Hugh L. Carey’s Administration .

“Changes in technology and copyright protection are providing us with new opportunities. Five years ago, it wouldn’t have made much sense for us to try to do business in Asia outside of Japan and Hong Kong. But now, it has become an absolutely relevant and important part of our business.�

Morgado and the other industry observers feel there is a parallel benefit to developing regional music acts around the world. Indeed, regional music--say, Polish music in Poland or Indian music in India--contributed more than $7 billion to the global coffers of the conglomerates.

As a result, the six majors have begun gobbling up regional labels in Italy, France, Japan, Latin America and elsewhere that specifically cater to the local tastes of consumers in those lands.

Meanwhile, record companies also are counting on cashing in on the latest in technology. In the future, consumers will be able to buy computerized home entertainment systems that will allow them to interact with a variety of custom-tailored musical and visual products. By cutting out the middleman (record stores), companies hope to add substantially to their profit margins.

“Digital distribution of music is going to dramatically alter home entertainment,� says Alain Levy, president and chief executive officer of the $3.7-billion, London-based PolyGram N.V., of which 80% is owned by the $33.3-billion Eindhoven, Netherlands-based Philips N.V.

“The technology to do it is already available. It will offer a lot more choices for the exchange of intellectual property and activity. The whole aspect of interactivity is going to have a deep impact on the way art is created and the way the business is run. The future of the global music industry is wide open.�

This interest in technology is a touchy issue in the record business today because four of the conglomerates are electronic giants that manufacture the hardware on which music is played. Some industry observers worry that their allegiance may be more to the hardware than the software.

“Really what’s going on now is that more than half the recording artists in the world are being used as research and development in the software divisions of these hardware companies,� says Giant Records Chairman Irving Azoff, whose company is part of the Time Warner family. “I guarantee you that if hardware sales plummet in the years ahead, there are going to be major budget cuts at labels like MCA, PolyGram and Columbia.�

In a dramatic lawsuit filed this month in London, British pop star George Michael is attempting to break his contract with Sony-owned CBS Records, accusing the electronics giant of placing a higher priority on trying to develop “hard-sell, high-profile sales techniques� than to nurture the “creative process.�

“I have seen a great American music company that I proudly signed to as a teen-ager become part of the production line for a giant electronics corporation, who, quite frankly, have no understanding of the creative process,� Michael says. “With CBS, I felt that I was believed in as a long-term artist, whereas Sony appears to see artists as little more than software.�

Regardless of the outcome of Michael’s case, the singer is clearly right about one thing: The buzzword of the era is software . And, for the most part, that means big-selling American artists such as Michael Jackson, Madonna and Prince.

“What is the business based upon anyway?� asks L.A. music attorney John Branca. “This entire $25-billion infrastructure is based upon some guy who sits in his room and plucks his guitar or tinkles on the keyboards.�

Ironically, the two American record company executives most often cited as “young visionaries� are already running into problems with the conglomerate structure.

Jimmy Iovine, president of Time Warner-affiliated Interscope Records, and Rick Rubin, head of Time Warner-affiliated Def American, favor signing rap and alternative rock acts that often go against the grain.

“A lot of record companies don’t understand what creative vision is about,� Iovine says. “It’s absolutely important to let rappers and rock bands have creative freedom and control. If you go anywhere near them all you’re doing is messing with the culture.�

But Steven Hill, an entertainment analyst for the San Francisco-based brokerage firm Sutro & Co., warns that this “creative freedom� argument may lose out in the corporate world.

“The people who run the conglomerates that own these companies do not like lawsuits,� he says. “They don’t like controversy. They don’t want to have to deal with anything that puts them on the front page in a negative way.�

The danger is that companies, in trying to sidestep controversy, may end up with a bland product that will not appeal to the mostly teen-age crowd that wants its music to have a rebellious edge.

For the men who made the record industry such a glamorous and profitable corporate gem, there must be some comfort in the knowledge that the business can’t exist without their kind--gutsy individuals who just knew in the ‘50s that a red-neck kid from Memphis or four long-haired boys from a northern England industrial backwater had what it takes to reshape a whole world’s culture.

“Music isn’t like toothpaste,� says Capitol’s Smith. “It isn’t some easily identifiable product like Heinz Ketchup or something. It’s a strange, amorphous creative thing. It’s pop art.�

* TOP 40 EMERITI

Several key players who helped define the modern record business were frequently cited as pillars in the industry, but left off the Top 40 list because their roles in the new corporate structure lean more toward long-range counsel and policy than day-to-day operation. This group includes Chris Blackwell at Island/PolyGram, Ahmet Ertegun at Atlantic Records, Jerry Moss at A&M;/PolyGram, Joe Smith at Capitol-EMI and former CBS kingpin Walter Yetnikoff, who many predict may re-enter the business soon.

* WHAT ABOUT WOMEN?

Why is there only one woman listed in Calendar’s Top 40 pop industry power chart? It wasn’t that we didn’t try to find more. Page 58