On a chilly night in Manhattan, Julie Greenwald is steamed. "I hate free! Why should people get music for free?" says the 40-year-old spitfire COO of Atlantic Records, one of two major labels of Warner Music Group, and the first big label with more U.S. music revenue from digital downloads than physical discs. She's in the VIP room backstage at the Nokia Theatre, where Atlantic rock act Shinedown headlines a sold-out show. "Music isn't free!" she says. She ticks off the costs: songwriters, producers, sound engineers, radio promotions, Internet promotions, people working to place songs in movies and on TV, people to run artists' Web sites ...
Then Shinedown lead singer Brent Smith walks in, and Greenwald smiles. "They can't pirate this!" she says as she hugs the ponytailed and neck-tattooed Smith.
"If they can figure out how to pirate this, we're screwed," says Smith.
It is hardly news that record companies are screwed, or, if you prefer, under serious pressure. Greenwald's boss, Lyor Cohen, 50, says that when he was considering leaving Universal Music Group to run WMG's North American recording business in early 2004, his mother called him from Israel and warned, "Son, aren't you reading the newspapers? The music business is in trouble. Maybe you should rethink this." Cohen's mother, Ziva Naumann, insists she was even more emphatic: "I said he should quit."
Instead, Cohen -- who started as Run-DMC's road manager and rose through the rap world to head Island Def Jam, one of the largest labels at the world's largest music company, Universal -- rethought the traditional role of a record label. And today, WMG is on the verge of cracking the media world's most pressing business riddle: how to successfully replace analog dollars with what Goldman Sachs analyst Ingrid Chung calls a "river of nickels." Cohen's trick has been a clever twist on what the music biz calls a "360 deal," a full-service contract with artists that includes touring, merchandise, Web services, and more. Ironically, it is precisely this sort of deal that cost WMG its biggest single star, Madonna, who bolted in 2007 for a $120 million 360 deal with the concert-promotion and ticketing firm Live Nation. Cohen and his boss, chairman Edgar Bronfman Jr., had already decided to focus their 360 investments on up-and-coming bands like Shinedown, so they parted ways with the Material Girl.
WMG's digital sales were up 11% last quarter, with digital music making up 30% of its revenues worldwide and 47% in the United States. (Sources say that at Atlantic, digital music approaches 60%.) Overall revenue is steady at more than $3 billion annually and margins are up. In comparison, Universal Music's revenue last quarter dropped 13% and digital music sales dipped 2%. While WMG posted its fifth straight quarterly loss and analysts expect it to post a loss this year, those metrics are somewhat misleading. The deficit comes from a goodwill write-off. Cohen is pumping out cash: Operating profit in the first three months of 2010 was $87 million, up 9%. WMG has enough cash on hand that industry watchers expect it to bid for EMI, a competitor whose own ballyhooed reinvention is seen as a fiasco. "Warner Music is mapping to the reality that consumers with a broadband connection and a search bar can get whatever they want," says Mike McGuire, a Gartner entertainment analyst.
"Lyor provides the emotional gravitas every creative enterprise needs," says Bronfman, who was laughed at for putting a rap mogul in charge. "Lyor's proved me right."
"I believe music is like oxygen," Cohen told his skeptical mom when he took the WMG job. "I'm going to rely on how critical it is for society, that it will find its way." Of course, people don't pay for oxygen. For a while it seemed they didn't want to pay for music either. Cohen seems to have found a way around that -- for now.
Spend time in either the Chalet, Warner Bros. Records' airy Burbank headquarters (the other major WMG label), or the Atlantic offices at 1290 Sixth Ave. in the heart of Manhattan, and you'll be regaled with the story of how WMG decided it wanted to expand into touring, merchandise, and 360 deals. A year or so after joining WMG -- as the story goes -- Cohen took his son Az, then 12, to a sold-out show at Madison Square Garden. The band was one Cohen had signed in his living room (he won't say which one), and Az was impressed. "Dad, I'm so proud of you!" he said. "Look at all these people! What a cool business you have!" Cohen pretended not to hear. He didn't want his son to know that WMG got none of the ticket sales. After the show, as they walked down the hallway, Cohen came clean. "Az, I have to tell you, I have no part of the gate sales."
Az looked at his father, aghast. As they walked out of the arena, Az pointed to the long lines of fans buying band T-shirts and said, "Well, Dad, you should feel proud of the people lined up to buy all those T-shirts."
Riding down the escalator, Cohen again confessed, "Az, I don't have any of the action on that either."
Cohen himself earnestly relates this a-bit-too-perfect tale over breakfast at his town house just off Central Park. Cohen is a larger-than-life guy (6-foot-5) with larger-than-life tastes, such as his art collection, including the giant Yoshitomo Nara painting My 13th Sad Day that greets you in his living room and the full-scale Captain America made from rivets stamped with the Star of David that hangs at the top of the stairs.
Over bagels, lox, and whitefish, and with his German shepherd, Gaunner, at his feet, Cohen tells me how Az's disappointment galvanized him to explore more expansive deals with his artists. It wasn't exactly new territory for him: In the early days at Def Jam, Cohen often had to serve as manager, tour promoter, agent, and publisher -- whatever services the acts needed. "The label becomes the artists' hub, where they go to build their brand and connect with their fans," he says. He sees 360 deals with emerging artists as the industry's best hedge against free music.
At Shinedown's New York show, the faint glow of cameras and video phones dot the crowd the way lighters once did. But WMG can live with that, because the fans recording songs are the same ones most likely to spend $35 to join an online club or shell out $20 for a T-shirt. If Atlantic's Greenwald -- a Cohen protégée who got her start working for him as a summer intern 18 years ago -- can turn someone who downloads three Shinedown songs into someone who also buys a ticket and a T-shirt, she'll have the resources to pump into Shinedown's videos and radio promotions, which in turn drive its tours.
Shinedown's Smith, 32, has spent his entire musical career in the shadow of file sharing. With two albums and a solid following, he seemingly had all the ingredients to go it alone. But no: "Any band that thinks they can do it on their own, more power to 'em," he says backstage before a late April show at the Scottrade Center in St. Louis. He's getting ready for show No. 496 since the June 2008 release of The Sound of Madness, Shinedown's third album (and its first under its 360 deal). "To do all the things the label does, a band would have to start its own management company."
Smith adds that the 360 deal transformed communication between Shinedown and the label from "a version of the childhood game telephone to crystal clear. They're a true partner." Cohen echoes: "A 360 deal is our commitment to transparency, to show we're on the same side. We show them everything."
During a spring visit to Greenwald's New York office, she pulls out the binder that she uses to track sales data for Atlantic's 80 current acts. She runs a finger along her Shinedown entry -- the same data she shares with Smith and the band. The Sound of Madness has sold 1 million CDs, plus 3.5 million track downloads. Other binders detail merchandise and ticket sales. Shinedown's 360 deal "made my life 100 times better than being limited to a silver disc," she says.
Nontraditional revenue now makes up between 5% and 10% of WMG's revenues. "The fruit you will see is not in this quarter's results or next," Cohen boasts, "but when the majority of the artist development projects done in the last five years come to the fattest part of their popularity. We've done the math and we can show you."
And he does, sharing part of a confidential report WMG commissioned to estimate what it would've made if its superstars, such as Green Day, had started with 360 deals. The answer: as much as 160% more revenue for WMG. Cohen says that some current 360 acts are outperforming Green Day and Kid Rock financially at the same point in their careers, though they'll never sell as many albums.
The 360 partnerships also change the personal dynamics. Smith relates the story of when he first brought The Sound of Madness to New York. Greenwald and her cochair, Craig Kallman, took him to Cohen's office. Cohen had him play the whole album, then asked to hear a few songs again. Then he walked over and sat down next to Smith, who was struggling with drug addiction.
"Okay. Now. Are you ready to talk about the elephant in the room?" Cohen asked.
"Yes, sir," said Smith.
"You cannot allow the people around you to destroy who you are," Cohen said, looking him in the eye. "You're not alone in this process. If we're in a foxhole, just me and you, it's not, 'Brent, would you pass the bullets, please?' It's 'Brent, pass the fucking bullets!' "
Cohen says he was just telling Smith that their relationship went beyond the weekly numbers in Greenwald's binder. "We're not in the widget business. This is unique and personal," he says, explaining how 360 deals create this kind of intimacy. Smith, meanwhile, says he's been drug free for more than two years now, and that day in Cohen's office will stick with him for the rest of his life.
"The artist was like a sugarcane worker," says Devo frontman Jerry Casale of the good old days for the record business, which were the bad old days for many musicians. We're backstage at the Coachella Music and Arts Festival in April, a traffic-jam-with-soundtrack east of the San Jacinto Mountains near Los Angeles. Casale, pairing a royal blue suit with a black tie and looking very much the new-wave pioneer, has no love for the labels after 30-plus years in the business. But last November, Devo signed a 360 deal with Warner Bros. Records, and he's here to rebrand his band.
"This wasn't our first idea, believe me," Casale says. "There was a lot of hot air from the cognoscenti in the business world about how record labels are dead, you can make a deal with a sponsor, get marketing money from Dell or somebody like that. Well, forget it." If that was ever true, Casale says, those days are already gone. "[Event promoter] AEG and Live Nation blew their whole wad on major names."
Casale bought in because of the label's willingness to try something different with the promotional budget. "We said, 'You're going to take your marketing money and give it to the ad agency Mother,' " Casale says. "And they said okay."
To build buzz for a spring album release and fall tour, Devo, with support from Mother and Warner Bros., polled fans about such things as what color the iconic Devo energy dome should be (blue) and which songs should make the album. Fans could share the surveys with their friends via social networking. They hoped the song study would peak with 20,000 unique visitors on a single day -- and they hit almost 30,000. "I can't stress how hard it is to go from 2,000 uniques to that level without TV or American Idol," says Jeremy Welt, Warner Bros. SVP of new media.
The next step, Casale says, is to see if Warner's analytics and distribution savvy lead to sales and decent offers for a fall tour. "Then we'll know the machine is working."
Casale thinks the CD's decline means that five years from now, "labels as we know them will be gone," replaced by something like a music-service agency. "The labels have the talent to do it," says Russ Crupnick, a senior industry analyst at NPD Entertainment. "They sit in a perfect spot to help artists navigate the world of touring, merchandising, and digital services."
Maybe, says Bruce Allen, a longtime talent manager who has shepherded the careers of Bryan Adams, Martina McBride, and Warner Bros. artist Michael Bublé, a crooner who had 2009's sixth-best-selling album. Allen says he would never allow a young artist to sign a 360. "They're dangerous," he says.
Then he chuckles, because Bublé basically has a "270" deal. Warner runs his fan club and Web site, it is devising YouTube strategies to raise his profile among younger audiences, and in March, it took on Bublé's merchandising. (Bublé retains his touring business.) "Few artists will manage every aspect of their own career," Allen acknowledges. "Labels are still the only ones that can build global superstars."
The day before Coachella starts, Tom Whalley, the slender, cerebral, and coolly elegant head of Warner Bros. Records, is showing me around the Chalet in Los Angeles. Whalley doesn't make a big show of the grand piano in his office (Bublé signed his merchandising deal on that piano), instead pointing out the well-stocked Sub-Zero refrigerator and the office's main coffeemaker just off reception. He insists that these kitchen appliances have been key to remaking his label for the digital age.
The reason: Whalley placed the modern-day water cooler near his early digital hires, to force interaction between the traditional music folks and the techies. "I wanted people to know they were important, and to get to know them," Whalley says. His tech team has proven how T-shirt sales can be a leading indicator of a band's success. Never Shout Never sold nearly $1 million worth of merch before it released its first album through Warner Bros. this past January. The label can get radio play for acts like the rap duo New Boyz by showing stations the local merchandise sales data from the retailer Hot Topic. Whalley has funded a digital dashboard, inspired by Bloomberg terminals, to track all Warner Bros. artist sites, creating more analytics to parse. That dashboard is now being ported to Atlantic.
The two divisions push each other to break new tech experiments. Atlantic has used its artist Web sites to do things like reward people who purchase albums with personalized videos (Trey Songz recorded his shirtless). Jonathan Tyler fans get free downloads of his band's live performances. The day of Shinedown's St. Louis show, Atlantic updated the band's Web site with the latest features from Cisco's Eos social-networking platform. The technology lets fans post concert videos and pictures and allows Atlantic to offer full streams of songs for site members. The following week, Smith comes to New York to get a tutorial on the new features and does an impromptu video chat from a studio Atlantic has designated for the specific purpose of having artists record online content. Despite the short notice -- Atlantic sent an email to registered members just a couple of hours earlier -- about 1,000 fans show up.
"We need to continue to experiment, test, and better understand what motivates fans to love music," Cohen says. In April, Atlantic followed up alternative rapper B.o.B's smash hit "Nothin' on You" by releasing his next single, "Airplanes" (recorded with his label mate Hayley Williams, lead singer of the alt-rock band Paramore), on his Web site. Atlantic's primary promotion? Having Williams and B.o.B tout it via Twitter. Within a day, they doubled registrations at B.o.B's site and "Airplanes" hit No. 2 on iTunes, behind only "Nothin' on You."
Two weeks later, B.o.B's album, The Adventures of Bobby Ray, debuted at No. 1.
Of course, No. 1 these days might mean a debut sale of just 84,000 albums (as opposed to, say, the 872,000 copies of Get Rich or Die Tryin' that 50 Cent sold in one week in February 2003). But that drop disguises an interesting truth about music -- people consume more than ever. According to media analyst Bridge Ratings, music listening in the United States has increased 6% since 2005. People listen via YouTube; streaming services like Spotify and Rhapsody; Internet radio programs such as Pandora and Slacker; music cell-phone bundles with Verizon and Nokia; and Thumbplay, which makes iTunes playlists available on iPhones and select Android and BlackBerry devices.
All the deal making and experiments have taught WMG lessons. Cohen's boss, Bronfman, scion of the Seagram's liquor fortune, is starting to be more selective about which digital nickels may actually materialize. After early investments in the social-music services iMeem and Lala, both of which failed, Bronfman has said he's done funding digital-media startups. In February, Bronfman said WMG would no longer support ad-based music streams; they simply didn't offer a return to artists. An early report from Sweden claimed that Lady Gaga received only $167 for 1 million Spotify streams of "Poker Face." (Spotify retorted that the data was 15 months old.)
WMG is driving toward a day in the not-too-distant future when most people won't own music but pay a fee to access it from anywhere, via some perhaps not-yet-invented service. "I've always believed that the mobile platform, and those devices that tap into the Net, are the greatest distribution opportunity for content that's ever been created," Bronfman says. "Especially for music." He admits that he's still waiting for his vision to pan out. He wryly adds, "But that's because Steve Jobs doesn't own a phone company yet."
Cohen agrees with the vision of music as a service, but cites Bronfman when he says, "We still need to deliver songs." One spring day in Los Angeles, Cohen zips around meeting with superstar producers: his old partner Rick Rubin; David Foster (who works with Bublé and Josh Groban); and Rob Cavallo, Warner's chief creative officer, whose work has sold almost 30 million records in the past five years. In Cavallo's rec room in his home-cum -- recording studio northwest of the city, gold and platinum discs from Green Day, Shinedown, and others fill the 12-foot-high walls. My Chemical Romance's Gerard Way wanders in during a break from recording the band's next album, says hello, then wanders back out.
When Cohen sweeps in, he hugs Cavallo, asks him if he and My Chem are on track for their fall release date, gets a thumbs-up, and accepts an espresso and a Cohiba Gran Reserva cigar. They start talking about the potential impact of the iPad on music delivery. That -- and espressos being the stimulant of choice -- is the only sign that it's not 1976 anymore. The sun beams in from the rear picture window, and Cohen slips off his loafers and puts his feet up. He doesn't light the victory cigar. There's still work to be done.
Michael Fitzgerald wrote about trickle-up innovation in the March 2009 issue of Fast Company.
Update: In an exclusive interview, Jim Wright talks to Shinedown.