When I was on Capitol-EMI’s corporate staff in the early 1980s, I had a number of unvaryingly peculiar interactions with Guy Marriott, then head of EMI Music Business Affairs worldwide. I don’t attribute their oddity to Marriott, personally; for several different reasons, which I will endeavor to set forth; they just partook of an aura of unreality. Perhaps it’s because he’s British, and British people typically are amusing, if only because of their quirky accents, demeanor and mannerisms. My purpose in this note is to analyze a few of these interactions, to the best of my recollection. I liked Marriott a lot, he was quite a character, and I learned several important lessons from him about corporate dynamics – mainly, by doing the exact opposite of what he prescribed. “I’m not related to the hotel chain, unfortunately,” was the first thing he told me. In any event, it is well worth taking the time to set forth this brief profile.
These are, of course, my personal reflections. As set forth in various books and articles about their history, the activities and operations of publicly-traded record companies, such as EMI Music, are a matter of public interest – not only to the artists under contract to those companies, the people employed by them, and the consumers who buy their records – but also to their shareholders. That being so, the matters set forth herein are my personal opinion and interpretation of the facts on the ground.
A. Screen Entertainment Ltd.
When I joined Capitol, EMI Music just had been taken over by Thorn Electrical Industries in December 1979 for a reported £165 million. Richard Cave was Thorn-EMI’s chairman, having been inherited from Thorn. In the 1960s and 1970s EMI had accumulated a number of diverse unrelated companies. In retrospect this model of business organization is dubious, because it traps shareholder value. The laggards drag down the prospects of the leaders. Nonetheless, at the time, this strategy was in vogue, and in fairness to EMI had been adopted by many other companies with entertainment divisions, such as Gulf & Western, which owned Paramount Pictures. For a recent economic analysis of this issue, see this article.
Justifying its merger with Thorn, EMI stated: “The main aims for the business areas in which the Company is involved are: to play a leading role in meeting the requirements of the widening and expanding home entertainment industry; to have a strong engineering group with interests in high technology, electronics, defence and other special areas of interest; to support our established mature businesses and to increase our influence in international markets.” Thorn and EMI later demerged in August 1996. The tortuous explanations for why that supposedly made sense, particularly in light of the rosy statements about the desirability of the original merger, are set forth in Brian Southall’s book, The Rise & Fall of EMI Records (2009, Omnibus Press).
In its conglomeratized state, Thorn-EMI copiously acquired and divested itself of dozens of firms. One of its assets was Screen Entertainment Ltd., a major UK movie producer and film studio. It owned, among other properties, the famous Elstree film production facility, a cinema chain, and a library of approximately 2,000 titles. I had a background in independent film, and also was working with a Capitol-EMI subsidiary called Picture Music International, a producer of music videos, which just then were starting to emerge. Taking a straightforward approach, I introduced myself to various persons of interest at Screen Entertainment, and gradually insinuated myself at its corporate level. I already was spending some time in London at EMI Record’s office at Manchester Square and at EMI Music’s office at Gloucester Place, so it was a simple matter to get up to Hertfordshire, which is where Elstree was located. I got busy trying to discern, for example, if there were any “synergies” between Screen Entertainment and EMI Music.
I was surprised when Thorn-EMI’s senior management decided that film was not one of its core businesses. Typically, Thorn-EMI was in serious financial trouble at the time. In 1985, its stock price had declined by 44% over the previous 18 months. According to one analyst, its stock was trading at a “diversification discount” – a value less than that of the individual companies comprising it – of 68%. After shopping it around, in May 1986, Thorn-EMI sold Screen Entertainment to the Australian company Bond Corporation Holdings Ltd., owned by Alan Bond, for $190 million.
I thought the price was low, not only to book value, but also in relationship to the potential future value of the assets. As with CDs, which just then were starting to come on to the market, who knew what new technologies awaited film? I wrote an internal memorandum on the issue, arguing for an alternative valuation approach (it was roundly ignored). I stated that a portfolio of intellectual property assets was worth the present discount value (using a set of interest rate assumptions) of a projected revenue stream (taking into account possible future uses) potentially to be generated by their commercial exploitation over some period of time (say, 10 years). By no stretch of the imagination was this formulation novel, but it seemed so to the people on Thorn-EMI’s corporate staff with whom I dealt. The transfer of classic British assets out of the country provoked debate in the British Parliament; see this amusing exchange. The UK Monopolies and Mergers Commission permitted the deal to go, through, without protest.
I was astonished when, three days later, Bond sold Screen Entertainment to Cannon Group, Inc., for $266 million – a profit of $79 million, after owning it for less than a week. Cannon was owned by Menahem Golan and Yoram Globus. Others shared my amazement – not only on the Thorn-EMI corporate staff, but also by the entertainment industry, the financial media, and the world at large.
This is where Marriott comes in. I asked him what went wrong, and what had happened to my valuation analysis. He muttered something (in the way British people are liable to do in such instances) about different valuation philosophies, which I did not regard as a credible answer. The Screen Entertainment sale and its aftermath lead me to conclude EMI had no real corporate strategy. More seriously, it corrupted my view as to the competence (or lack thereof) of Thorn-EMI’s senior management and, by analogy, my perspective on the corporate world at large.
Update on some of the parties involved: Bond Holdings filed for bankruptcy in mid-1991. In May 1992 Alan Bond was convicted of securities fraud. In 1987, Pathé Communications, an Italian company owned by Giancarlo Parretti, acquired Cannon for assumption of a reported $250 million of indebtedness. Pathé also acquired MGM/UA in 1990 for a reported $1.36 billion. The French bank Crédit Lyonnais financed the acquisition. Pathé became insolvent and Crédit Lyonnais took control of it in April 1991. It invested approximately $2 billion in trying to keep Cannon/MGM/UA afloat. In May 1994 Crédit Lyonnais itself became insolvent after losing some $1.2 billion in 1993, and, amid allegations of fraud, was bailed out by the French government. In October 1996, Parretti was convicted of bank fraud. Golam and Globus went on to form various independent film production companies.
A second debacle concerned Rent-A-Center, which was another company Thorn-EMI owned in the U.S. Thorn-EMI had acquired it in 1987 for a reported $594 million – an astonishing 42 times earnings. Rent-A-Center’s business was leasing appliances to persons with low incomes, who could not afford to buy them outright. This turns out to be a lucrative business, and Rent-A-Center quickly became a disproportionate contributor to Thorn-EMI’s pre-tax operating income (PTOI) and return on sales (ROS). In fact, its turnover, and profitability were several times that of EMI Music. Yet, surprisingly, only a few people in the company knew anything about it, particularly in the U.S., even though (arguably) Rent-A-Center pulled away funds Thorn-EMI otherwise might invest in its music division.
All of that changed as evidence of Rent-A-Center’s allegedly unscrupulous business practices gradually came to light. Being the closest person on point in the U.S., I led a (then-confidential) investigation into Rent-A-Center’s operations, together with various members of Thorn-EMI’s internal audit group. The problem continued to fester until it later became public; as summarized in a later expose, Rent-A-Center (allegedly) used high-pressure, predatory sales methods in dealing with its clientele, bordering on the coercive and abusive. One manager is quoted as stating that Rent-A-Center ultimately collected more than $5,000 on a VCR that retailed for $119. Employees encouraged unsophisticated customers to rent more goods than they could afford. When they fell behind in payments, Rent-A-Center repossessed the goods, then re-rented them. Another tactic some employees used was the “couch payment” – sexual favors exacted in lieu of cash.
Not surprisingly, nothing came of the earlier report I had made to Thorn-EMI. I asked Marriott what happened. As with Screen Entertainment, Marriott was unable to give me a credible answer. It wasn’t hard to figure out, though, that it had gotten swept under the proverbial rug, particularly in light of Rent-A-Center’s disproportionate contributions to Thorn-EMI’s turnover and profitability.
C. The Stresa Conference
In June 1988 I attended a management conference Marriott organized in Stresa, Italy, which overlooks Lake Maggiore. We stayed at the famous Hotel des Iles Borromées – the same one where Ernest Hemingway set part of his famous novel, “Farewell to Arms.”
It was a beautiful location and I spent more time lolling about than I probably should have. Marriott had devised a preposterous new-age exercise in corporate decision-making. We were instructed to anticipate a counterpart party’s responses to certain hypothetical deal scenarios, and devise appropriate measures. I naturally couldn’t resist using what had happened with the Bond sale as an example. By using simple principles from game theory, I was able to devise several alternative (and far more remunerative) outcomes. Marriott later came to call this the “Kronemyer strategy,” which caused me chagrin, as there was nothing particularly novel or unique about it. If you’re interested, here is a copy of an amusing piece Marriott wrote called the “EMI Business Affairs Mission Statement.”
D. 10% Royalties and Debit Balances
Many of Capitol’s early artist contracts were an embarrassment. Its 1943 agreement with Nat Cole, for example, called for a one-and-one-half cent royalty (specified in pennies, and not as a percentage). If you want to download it, here’s a copy of the Nat Cole agreement (which appears in various legal actions as a matter of public record):
[In fairness to Capitol, this same situation also pertained at every other record company.]
Cole of course was one of Capitol’s most famous artists. If this is what it did to Cole, think for a moment of what it was doing to other artists of less renown. In the late 1980s and early 1990s I found myself regularly called upon to testify about various irregularities in Capitol’s royalties calculation practices and gaps in its contracts. There were a myriad number of ways in which the financial calculations called for by Capitol’s contracts disadvantaged its artists. Beyond that, they variously were characterized as unfair, unconscionable, unilateral and adhesive. Artists sought to have them declared void, or invalid, or to have them unilaterally amended by a judge. And, even though they purported to be exclusive, Capitol’s contracts did not appear to cover acetate recordings of live performances on radio, made during an odd lacuna of time in the mid-1940s when members of the American Federation of Musicians (“AFM”) were on strike. [Hard to believe, but this issue was not resolved from a legal standpoint until 2010 in a case involving Hank Williams].
The Cole situation was particularly vexing in that Capitol’s A&R department had the genuinely brilliant idea of creating a faux duet between Nat Cole and his daughter Natalie Cole, singing his signature song “Unforgettable.” Royalties to the Cole estate were an impediment to making this happen. I met with Maria Cole (together with Clark Duval, another Capitol-EMI executive) at the NARM convention in New Orleans, where we laid the groundwork for resolving this issue.
Trying to take a broader view of the situation, in mid-1992, I proposed Capitol unilaterally amend all of the artist contracts it had entered into before 1972, to provide for a minimum 10% royalty rate. I also proposed that all outstanding “debit balances” – the amount an artist’s account must recoup before royalties actually become payable – be forgiven. The reason why we selected 1972 is because that was the year the U.S. Copyright Law was amended to extend copyright protection to master sound recordings. Before then, only the musical composition embodied in the master sound recording could be copyrighted. In retrospect this doesn’t particularly make a lot of sense; there’s no reason why the applicable date couldn’t have been earlier, or later. The best way to think of it now is that the early 1970s were the birth of the modern era in the record business, when artists started to have better representation, and their contracts with record companies actually began to get negotiated, rather than simply propounded as a “take-it-or-leave-it” type of arrangement.
This was not a new idea. Atlantic Records and (surprisingly) MCA Records already had implemented similar reforms. The economic consequences to Capitol would be minimal, as only a handful of artists from that era still were popular and sold any records. Imagematically, though, it would demonstrate a spirit of corporate concern and altruism. Despite these arguments, Marriott opposed this initiative. EMI’s more-senior corporate management, however – all the way up to Jim Fifield, then Chairman of the company – were for it, so it was adopted. Sony later followed suit, although PolyGram, BMG and Warner Bros. declined to do so.
E. Rhino Records and other Aborted Acquisitions
Finally, there is a sad tale of corporate incompetence I must share involving Capitol-EMI’s mis-steps with Rhino Records, one of its distributed labels. In 1990 EMI and Rhino bought the Roulette Records catalog, owned by Morris Levy. Capitol-EMI acquired rights for the world ex-U.S.; Rhino acquired U.S. rights. I worked on the U.S. aspects of this transaction with Marriott. I urged him in the strongest possible terms to negotiate for worldwide rights; there was no need to include Rhino in the transaction.
Roulette had a practice of not paying royalties to its artists. Apocryphally, Levy pulled out a gun when Tommy James of the Shondells fame inquired as to the whereabouts of his modest 5% royalty. “I’m concerned about this type of liability,” Marriott told me. “Don’t worry about it,” I said. “Any claims will be minor; we can settle them easily; and take a reserve for them in any event.” “I just won’t do it,” Marriott replied. Shortly after the transaction closed, Marriott approached me, somewhat ruefully. “Can we change things around and get world-wide rights back from Rhino?” he asked. I dutifully presented this request to Richard Foos and Harold Bronson, Rhino’s owners. We all doubled over in spasms of laughter.
I later attempted to acquire Rhino Records on behalf of Capitol-EMI; see this post. I tried to acquire Motown Records from Berry Gordy in 1985, and had the opportunity to do so for $35 million (it later was acquired in July 1988 by the investment banking firm Boston Ventures for a reported $61 million; Boston Ventures sold it to Polygram in August 1993 for a reported $325 million, resulting in notional profit of $264 million.) I tried to acquire the independent label Fantasy Records from Saul Zaentz in 1986, and had the opportunity to do so for $50 million; it later was acquired in 2004 by its present owner, Concord Records, for a reported price in excess of $100 million.
It was while working on the Rhino deal that Marriott definitively revealed his corporate philosophy to me. We were walking around Cologne, Germany, one evening. He said, and I’ll never forget it, that the best thing to do is “absolutely nothing. The single greatest mistake one can make in a corporate environment is to think you were hired to take the initiative and actually do something, which is a false conceit. You might think you have ideas, but they’re idiosyncratic. If you follow your business instinct, it will only get you in trouble. If you make a decision, there is a significant chance it will be the wrong one, or will lose money, in which case you will get fired.” My philosophy being the exact opposite, I didn’t really have anything to say in reply.
Update: In May 1999 Marriott was fired from EMI Music and joined a private law firm. He later became chairman of the International Optical Disc Replicators Association, a trade group concerned with the licensure of patents for manufacturing and formatting of DVDs.