Home > Uncategorized > The Five Second MBA’s Guide to Record Company Management

The Five Second MBA’s Guide to Record Company Management

February 18, 2007

The math is actually quite simple and consists of the following bright and shiny objects: Revenue, Costs and Profits.

The general idea is to keep revenue high, costs low and profits at least in line with your industry or preferably better. This is also known as the “hey, idiot” school of business or the 5 second MBA: buy low, sell high. (Nothing against MBAs, I have one, but I try to keep it in perspective.)

Revenue: Revenue in its purest form (before all the Enron accounting tricks) is simply what you make when you sell goods or services. In the record business, it’s the total of all the sources of money, like record sales, master licenses for film and TV, advertising, compilations, and so on. It can also include things like gains from selling a catalog, settlements or judgments for copyright infringement lawsuits, and other one-time payments to the record company.

When people say the industry is down 20% on the year, this is the number they’re talking about as a general rule.

This is the number you can’t play with very much because you either have it or you don’t, and it’s either going up or it’s going down. When you have hits, it’s high. When you don’t, you live off your catalog. It’s really very simple.

Revenues are also a way to measure the performance of the company’s managers. It’s not the only way, because it’s also important what you do with Revenues once you get them. But it’s a very important metric, because if that Revenue line isn’t growing, or worse yet if it’s declining, that means that the people making the decisions about what to do with the corporation’s assets are screwing the pooch as the pilots say. And sharply declining revenues eight years in a row are probably a textbook definition of pooch screwing.

Costs: Costs include A&R expenses (our R&D), marketing, promotion, tour support, royalty payments, mechanical royalty payments, salaries and benefits, rent, and—travel and entertainment. Costs are what produce Revenue. You can’t have Revenue (or at least you can’t have growth in Revenue) without Costs. You’ve heard this around the dinner table, or some other place where children learn business lessons in the form of the old chestnut: You Have to Spend Money to Make Money. Again, the 5 second MBA.

In this environment, you hear a lot about “cutting costs”. Sounds good, doesn’t it? Lots of testosterone in that phrase, lots of phallic imagery. Don’t put that cost up here, I’ll it cut off, you wimp. We’re tough guys, we will cut [everyone else’s] costs.

There is no greater human cost to the record company organization that cutting costs, which almost always means cutting people. And eventually you have cut so many people that if you even managed to stumble into a hit accidentally, or, God forbid, more than one hit at the same time, you wouldn’t have anyone to work the records. If you run a record company and you take a product manager who was responsible for ten records and did a great job, and give them 40 records only to find that they suck, don’t blame them. Not unless you’re already working for $1 a year.

Profits: What’s left from Revenues after you deduct Costs. In public companies this is often expressed as “earnings per share”, and a lot of analysts focus on this number—but it’s just one metric for measuring performance. “Profit” and “Earnings” sound like a good thing, and certainly it’s true that on balance it’s better to make money than lose money. But—if Revenues decline and you cut costs to boost profits and tell your stockholders that things are great because Profits are up, that’s not really very honest, is it? Particularly if your bonus is tied to—Profits.

Profits are really the only thing that marginally talented executives who have inherited the work product of generations of artists and record men can futz with in order to make it appear that they know what they’re doing. It’s also the kind of “buy low, sell high” concept that you can get your mind around in that golden hour between the time that last night’s hangover wears off and you start drinking at lunch (on the company, of course), before you go out drinking after what passes for “work” in certain circles. It’s easy.

And after a number of years of artificial “profits” pumped up by cutting Costs, don’t be surprised if there’s not much left in the organization that looks like a record company. Oh, and also don’t be surprised if no one with any talent wants to work for you or sign with you, no matter what your last lap dance told you.

%d bloggers like this: