Tommy Boy Can CD Future

Rap`s smartest label shows how brute force yields diminishing returns in the face of a better idea.

The president of Tommy Boy Records punches up the demo tape. She is white, 36 years old, and female, but Monica Lynch enjoys a reputation for unerring taste in the mostly black, largely teen, sometimes macho world of hip hop - the culture of graffiti, breakdancing, and rap that first appeared in the South Bronx in the late 1970s and now constitutes a billion-dollar industry.

In the record business, R&D is called A&R - artists and repertoire - and finding new acts and guiding existing ones is its lifeblood. Lynch settles back to listen. Despite the avalanche of tapes that regularly descends on her, she looks hopeful, unjaded. In a covering note, the independent producer has described the 23-year-old rapper-singer on the tape as a "ghetto princess from South Central L.A. giving an around-the-way-girl's view of growing up in the 'hood." He thinks she has the potential to "blow up" bigger than the platinum-selling hardcore rapper Ice Cube.

The first two tracks belie the buildup. Sweet horn sections and a female chorus give the songs a saccharine, pop feel. Lynch finds the vocals undistinguished, the lyrics trite, the rapping lame.

"There is a historical consumer bias against women rappers to begin with," she explains. "Those who do break through tend to be harder core. This artist would be competing with The Boss and Le Shaun, who not only talk hard but have a sound that grabs you by the balls. I just don't know who would buy this."

The final track proves to be a pop-gospel version of the old Doris Day warhorse "Que Sera Sera." Lynch grimaces and smiles wanly. Mercifully, she stops the tape.

"This is, in short, embarrassing," she says, "a what-the-hell-does-this-have-to-with-anything track. Unfortunately, it's representative of a lot of tracks that come in. You look for a point of view. Artists sometimes describe themselves as versatile. That's the kiss of death. Somebody who wants to be all things to all people ends up being nothing to no one."

Lynch has known the producer for 10 years and values the relationship, but she will meet with him the following day and tell him gently, but firmly, that the label isn't interested. Tommy Boy wants artists with vision.

Vision of another sort consumes Tom Silverman, 39, chairman and founder of the 12-year-old label based in New York: he dreams of finding out what makes an individual consumer need to own a specific record. Working in temporary space while his new offices are completed, he studies the latest figures from Sound Scan, a 2-year-old company that (for the first time in the industry's history) provides record labels with accurate, up-to-the-minute sales figures.

Every week Sound Scan's computer network, tied to the barcode scanners of retailers throughout the United States, breaks out detailed record sales information by title, label, musical genre, configuration (single or album; vinyl, cassette, or CD), market, type of store, label market share, and more. Since it came online, Sound Scan has been blowing away the industry's secrecy and hype faster than CDs vanquished vinyl. Talk about a revolution: the charts no longer lie; everyone knows exactly how their rivals are doing; and studious executives like Silverman, who tease new meanings from the numbers and act on them creatively, can neutralize the bigger labels' advantages of size and money.

Silverman calls Sound Scan "the I Ching of the record business." The book of changes.

"What I'm trying to do is really learn the dynamics of how people buy records and how records are sold," he says, paging through a computer analysis of album sales. "There are three different levels to it. This is the gross analysis: how many units of what are selling, where they're selling, when they're selling. We can identify the buying power index of each market. New York buys 7.7% of all rap records; Los Angeles buys 6.3%; San Francisco buys 6.2%. Those are things I can tell now.

"In a couple of years we're going to be able to find out from Sound Scan who bought what. They're going to start a frequent buyer program with major retail outlets. People will have a membership card so every time they make a purchase their card is scanned. We'll know who bought each record - name, address, age, sex, ethnicity. It's going to blow everyone's mind.

"The third and last level is the psychosociology of how people buy. What makes them have to own the record? We do focus groups. But what we can't get to is this: what clicks in someone's head that says, `I have to have that record; it has to be part of my collection.'"

Silverman isn't sure how he'll get to that elusive third level, but one thing is certain: if there's a way, he'll find it. For just as Lynch is known on the streets for her cultural savvy, Silverman is known in the suites for supplanting the industry's traditional illusions with bracing doses of mathematical reality.

Tom Silverman made Monica Lynch his first hire in 1981, when he was running the then six-month-old company out of his cramped Manhattan apartment. Ever since, this unlikely pair has been quietly reinventing the record business.

They make for striking contrasts. He's a one-time graduate student in environmental geology who sprinkles his conversation with references to Malthus and Lao-tzu; she's a former topless dancer who speaks the language of hip hop. Silverman is a Taoist and a doo-wop enthusiast. Lynch has been known to photograph rap fans exiting concerts or to spend Saturdays cruising Colosseum Mall in Jamaica, Queens, a magnet for hip hop kids.

Ask Silverman about the business and he will take you on a flight of grand speculation. Lynch will likely take you shopping. Silverman makes you see. Lynch makes you look. As De La Soul, one of the label's most successful acts, might put it, "It's a vision thang."

Their complementary visions have allowed Tommy Boy to hold its own against - and within - the most powerful entertainment conglomerates in the world. Though the company is a small player in the $9 billion recording industry, it has become an object of envy and scrutiny because it does something that few other labels, large or small, manage to do: make money on new releases of popular music. Tommy Boy may well earn the highest margins on new music in the business. In 1991, the worst year for music overall since 1982, the company made profits of $5.8 million on net sales of $26 million - margins of 22%. Last year, Tommy Boy earned $6.7 million on net sales of $25 million - margins of nearly 27%. Sales for the first six months of 1993 had already reached 80% of total revenues for 1992.

What Silverman and Lynch do at Tommy Boy reflects the unique challenges and opportunities of their industry. How they do it offers strategic and managerial lessons for industries across the new economy - that unplanned, unlooked for, but suddenly-upon-us world in which information technology levels the competitive playing field, innovation counts for more than experience, speed beats size, brains beat big money, and product cycles grow as short as the life of a hit record. The story of Tommy Boy is the story of any business in which brute force yields diminishing returns in the face of a better idea about how to compete.

"You look at IBM, General Motors - it's over," Silverman says. "Our biggest concern right now is how big not to be. Most record companies don't think about it. Everybody in the business thinks bigger is better. But if you look at this week's numbers you'll see that 15% of all record sales didn't go through the distribution arms of the majors."

The majors, of course, are the huge entertainment conglomerates whose worldwide distribution systems and frontline labels dominate the industry. There are six: Sony (led by the CBS Records, Columbia, and Epic labels), Time Warner (Warner Brothers, Elektra, Atlantic), Bertelsmann Music Group or BMG (RCA, Arista), Philips (PolyGram, Mercury, Island), Matsushita (MCA, Geffen), and Thorn EMI (Capitol, EMI, SBK, Chrysalis). In addition to front-line labels, the majors own scores of smaller labels and distribute the records of many independents.

Tommy Boy, with a staff of about 40, few secretaries or assistants, no middle management, no regional offices, and only two salespeople, is far from being a major. Technically, it's not even an independent. Warner acquired half the company in 1986 and the remaining half in 1991. But unlike many similarly situated quasi-independents, Tommy Boy is no A&R boutique funneling product into the major label's distribution pipeline.

"Essentially," says Lynch, "we operate just like an independent label." The company controls every aspect of its business: A&R, marketing, sales, pricing, and distribution. It has even seceded from Warner's accounting system because the standardized monthly and quarterly reports don't allow the fine-grained focus that is crucial to the Tommy Boy vision. Although Silverman and Lynch are Warner vice presidents, they are hard put to say what real benefits they get from the relationship.

"Great lunches," says Silverman.

"We got to meet Anita Hill," Lynch laughs. "And Henry Kissinger."

"Warner does stay on the cutting edge of new technologies," Silverman concedes.

"And they did send us Naughty by Nature, one of our most successful acts," adds Lynch. "The group was originally signed to Warner Records, but Warner thought we could do a better job with them. And they were right."

"Truthfully," says Silverman, "Warner gets more from us than we get from them. And that reminds us why we don't want to get too big."

Step off the elevator at Tommy Boy's 13th floor offices in the Flatiron district of Manhattan and you find a company under construction: building materials and unopened boxes line hallways; an architect checks the lighting on the distinctive company logo executed in stainless steel and embedded in a slab of concrete in the floor; an electrician wires a bank of light boxes that will eventually display photos of label artists. The activity is both a sign of the company's stunning success and a metaphor for its secret: Tommy Boy has always been under construction. Working from a blank sheet of paper - without organizational models or previous industry experience - Silverman and Lynch designed a company in response to rap's volatile market, which changes faster than that of any other popular music.

"Desperately seeking guy/gal Friday for new record company," went the Village Voicead that Silverman placed in December 1981. His fledgling label had already scored a regional hit with its second 12" single, "Jazzy Sensation," by nascent hip hop legend Afrika Bambaataa, and Silverman was swamped - keeping books, producing records, scouting new artists, and even shipping to retailers from his two-bedroom apartment. He had arrived in New York three years earlier, abandoning his graduate studies at Western Michigan University after hundreds of job letters yielded two interviews and no work. Enticed back East by two friends from his days as an undergraduate music director at the Colby College radio station, he joined them in founding Disco News, soon renamed Dance Music Report, a tipsheet for deejays in New York's booming dance club scene.

Silverman soon began exhibiting a skill that has become his trademark: leveraging knowledge. In 1979 he convened the first New Music Seminar, at which 200 representatives of clubs, record labels, and college radio stations gathered in a New York rehearsal studio for a one-day meeting about "new wave" and rap music. Since then, the annual event has become the largest and most important music convention in the world, with up to 8,000 delegates, including 2,000 from more than 30 countries outside the United States, offering hundreds of symposia, and showcasing more than 400 new musical artists each year.

As a tipsheet publisher, Silverman was constantly having demo tapes thrust upon him by hopeful artists of little interest to major labels because rap was regarded as a singles market rather than as a higher-profit album market. He set up Tommy Boy in case a promising artist came his way. Six months later, after the modest success of "Jazzy Sensation," he placed his want ad.

Lynch, sometime during her fourth or fifth interview with Silverman, found herself stacking boxes of records at a pressing plant in Queens and assumed she was hired. Though she had neither a college education nor any industry experience, she was not without resources: "I was working with all types of people - being a waitress, being a go-go dancer. I was in a punk rock band. I worked for a fashion designer. I was a disco doyen in Chicago and hung out very heavily on the gay scene. That helped me when I got into the music business. I had to be strong and assertive; otherwise I wouldn't have survived."

In mid-1982 Tommy Boy released "Planet Rock," by Afrika Bambaataa and the Soulsonic Force. Produced by Silverman and Arthur Baker, the bizarre and exhilarating record laid the spirit of a South Bronx throwdown over synthesizer lines from "Trans-Europe Express," by the German technoband Kraftwerk. It was a runaway success. For a time, "Planet Rock" seemed to be coming from every open window in New York, every cellar club stairwell, even from cracks in the sidewalk.

The success of the record plunged Lynch headfirst into the business: she cut deals with artists, dealt with lawyers, designed all the company's ads, wrote a column for Dance Music Report, and spent long evenings in clubs. Meanwhile, Silverman began computerizing the company, programming the machines himself and groping for reporting systems and databases keyed to actual sales and airplay, unheard of in the record business then and, outside Tommy Boy's technology-filled offices, not that common today.

But no matter how much they learned about - and improved upon - the mechanics of the business, their sternest teacher remained the market and the consumers who drove it. Early warning signs came when rappers Kurtis Blow and Whodini, neither of whom was a Tommy Boy artist, succeeded with albums. Tommy Boy had not bothered to secure the album rights to its artists, seeing little future for album rap. The epochal event, however, occurred with the emergence in 1984 of rap's first superstars: Run-DMC, on archrival Profile records. Run-DMC took album rap to new heights, scoring the first gold, platinum, and triple platinum albums in the music's history. Most significantly, their records sold to white and black record-buyers alike.

"I learned a million lessons," says Silverman of Tommy Boy's mid-eighties slump. "I learned not to produce records. I learned that it doesn't matter what I think is a hit. We have to understand the American public and understand what they're looking for, what would appeal to them, why they would buy a record, and not try to impose our vision on them."

Silverman learned his lessons at the right time. As in so many industries - from semiconductors to retailing to steel - powerful new forces have swept through the recording industry over the last 10 years and obliterated the assumptions around which the establishment was organized. The major labels were disoriented by these forces. Tommy Boy came of age alongside them.

For decades, strategy in the music business has revolved around record charts and radio airplay. But no means ever existed for accurately tracking either. Two pieces of information technology, both new in the 1990s, introduced an unfamiliar variable into the strategic equation: truth. The result was fairer competition - and a dramatic power shift.

Sound Scan, a Hartsdale, NY company, opened for business in 1991 and changed the charts forever. For more than 30 years Billboard magazine, the industry bible, had compiled its charts by surveying selected record stores around the country. The system was sloppy and inexact - store employees provided rankings, not unit sales, and they sometimes ignored entire musical genres or simply reported records that the store had overstocked. Worse, the system was corrupt: big labels used big money to influence the employees of reporting record stores. The majors grew accustomed to buying the illusion of chart success and hoping that reality would follow.

At a stroke, Sound Scan ended the undue influence of power and money on the charts. When real sales, not the illusion of sales, became the standard of measurement, the map of the industry changed. Rap and country shot to the top of the charts. Though rock remained the most popular genre, it declined steadily, falling to 33% of the market last year from 48% in 1988. Indeed, since Sound Scan appeared, independent and quasi-independent labels have tripled their market share.

"It's easier to start an independent label now," says Silverman. "If you have a hit record, you get credit for it."

A different company, Broadcast Data Systems (BDS), has brought truth to radio. Prior to BDS, radio airplay charts were largely the province of Radio & Records, an industry tipsheet that relies on reports from program directors at radio stations. Record industry executives, and the independent promoters who are paid large sums of money to gain airplay for a record, zealously sought to influence airplay reports. Despite the publication's vigilance, the system was always open to abuse and riddled with illusions.

BDS shattered those illusions. Using the military's audio print technology, first developed to detect enemy submarines, as in Tom Clancy's The Hunt for Red October, BDS monitors radio airplay in the 100 top radio markets in the United States. Each time a record airs, the system detects it, registers the time of day, and cross-references it with the Arbitron rating system for each radio station, producing precise airplay information about every song played in major markets. During one week last spring, for example, Naughty by Nature's "Hip Hop Hooray" was played on black radio 872 times and accumulated 17,890,000 individual "hears" or gross impressions, the second highest number for a rap song that week. On Top 40 radio, the song aired 1,548 times and racked up more than 27 million gross impressions, the 11th highest number for any record that week.

Other changes reinforced the democratizing impact of information technology. As consolidation in the music business during the 1980s spread to retail channels, the majors' once-powerful stranglehold on distribution became less relevant. In fact, their far-flung warehouses and elaborate shipping systems, designed to accommodate the formerly messy and inexact business of retailing, looked more like a liability than an asset.

Today, Tommy Boy can achieve nationwide distribution through 45 accounts. To service Musicland - with more than 800 outlets, the largest record store chain in the country - Tommy Boy ships to only two locations. And armed with its precise, home-grown, market-by-market analyses, the label can tell the chains how to allocate its records throughout the country.

"The sledgehammer just doesn't work anymore," says Silverman. "While you're swinging a sledgehammer, I can run around you three times and kick you in the rear."

Go back to airplay. The majors have always believed that radio play is the foundation of their business, particularly for breaking new acts. And given the scale on which they must sell records merely to meet expenses, their priority has always been Top 40 radio. But that once mighty common denominator is now in rapid decline. In the past three years the number of Top 40 stations has been cut in half, to 500. The remaining Top 40 stations now slant their programming to particular segments of the market. Radio has fractured into dozens of genres, serving diverse communities that are deaf to each other, but the majors keep flogging Top 40.

Tommy Boy also covets airplay, and nobody studies BDS reports more closely than Silverman. But the company looks to the fine-grain realities of retail, not the macroscopic proxy of radio, as the real foundation of its success. It has little choice. Only about 65 urban stations play rap. If a rap record is a massive hit, perhaps as many as 150 pop stations will also air it. "Hip Hop Hooray," the sixth best selling single of any kind through the first quarter of 1993, was played on fewer than a hundred stations.

As a result, Tommy Boy has become adept at painstakingly working a record city by city, sometimes almost street by street. Its finely focused "guerrilla marketing campaigns," aimed at highly visible people in the hip hop world, build word of mouth for new artists through novel promotions in clubs, record stores, and even car audio shops, ultimately creating demand at retail. Break a song in Jeeps first; radio - and MTV - will follow.

Or consider the charts. The majors still concentrate on achieving a high chart position - heavy sales in a given week - as a way to force-feed public perceptions about a record. Tommy Boy, on the other hand, goes after long-term share in its core market. It carefully nurtures music it knows has a basis in the dance or hip hop worlds and then tries to extend its appeal. Earlier this year, the company's newest star, RuPaul, had a huge hit with the single "Supermodel." But you wouldn't know it from the charts, where it never rose higher than number 45 in Billboard's Hot 100 because the label broke the record gradually in different cities.

What is the end result of Tommy Boy's strategic jujitsu? Information technologies may replace illusion with truth, but in the notoriously secretive record business, no comparable system exists to reveal financial performance, to rank industry profit margins like records, to put Tommy Boy's 20% to 25% margins up against the pack.

Is there an industry standard? "Zero," says Silverman, talking about new music, as distinct from profits generated by catalogue (backlist) sales. "If you include everything, not just new music, then I'd say it's about an 8% to 10% margin. Three companies lose money. MCA had zero profit last year. Arista, with Whitney Houston, will bring BMG's numbers up a bit, but I think they're still negative because of RCA, which loses money. SBK and Chrysalis also lose money. And there are companies within Warner, like Virgin and Giant, that had to be negative last year."

How can Tommy Boy prosper when others struggle? "Information is the great leveler," explains Silverman. "Everybody has access to the same information now, so it's a question of what you do with it. And nobody's doing what we're doing. When I tell people at other labels that we use Sound Scan to make A&R decisions - who to sign and how much to sign them for - they look at me like I'm crazy. But we can use Sound Scan to figure out how much money we can make on a proposed album. On that basis, we can bid with any label for talent - unless they want to lose money."

Tommy Boy's unique approach to signing artists speaks to a broader strategic philosophy: it lets the music shape the business and the business shape the music. While the major labels try to manipulate consumption, Silverman, with his reams of statistical analysis, and Lynch, with her constant presence on the hip hop scene, seek to understand consumption and adapt the company to it.

"The majors push the market," says Lynch. "Tommy Boy pulls from the market. We take something we know has a base in the streets and try to extend it."

"But it has to be natural," cautions Silverman. "You can't be manipulative, but you do have to be able to project the trend into the future, which you do in the Taoist way - by letting go."

Lynch looks beyond music. "We see ourselves as a company that is dedicated to reflecting and creating youth culture," Lynch says. "Music is our primary medium, but not the only one, because it includes Tommy Boy gear and a film project we're involved with."

Silverman goes even further: "Most record companies think they're in the record business. We don't think we're in the record business. We know we're in the lifestyle business. Nike was the first company to understand that. Goods and services have been evolving toward information. It's almost a spiritual thing."

A record company that's not a record company? Goods and services as information? For Tommy Boy, it assumes the proportions of a Zen koan. How do you lead the market and follow customer tastes? How do you avoid imposing your vision without endlessly recycling proven hits? This is the record-industry version of a dilemma faced by companies of all kinds as shorter product cycles, the proliferation of product models, and customer-driven strategies draw more industries closer in spirit to the worlds of fashion and entertainment: How do you innovate and give people what they want?

"There has to be a fundamental respect and enthusiasm for hip hop at Tommy Boy, tempered with realism about the marketplace," says Monica Lynch. "It's about balance. And the rules change all the time; the styles change all the time. Rap is so diverse. There are so many subgenres in hip hop right now that have very little to do with one another except that they're all hip hop records in some way shape or form. But the aesthetic values and audiences for those records are very different."

"I love it," exults Silverman. "There is an election every week and the results come in every Wednesday in Sound Scan. The record business should be run by the people who buy the records."

This interplay of aesthetics and business lies at the core of the Tommy Boy vision. And in this core lie the seeds of a lifestyle company. The Sound Scan and BDS numbers are not merely sales and airplay figures that help Tommy Boy allocate resources; they are reports from the front lines of youth culture, real information about changing attitudes, tastes, and styles.

And styles, no matter how short-lived, are not merely ruffles and flourishes. They are a matter of the most urgent meaning for the people who adopt them. Whether it is white boys in Des Moines buying gangsta rap as a badge of mild rebellion against their suburban life or black kids formulating a usable personal philosophy out of shards of Malcolm X and samples of James Brown, Tommy Boy's customers construct their highly volatile identities out of signs and symbols from the culture.

Of course, people have always used products to create and clarify their identities. But today we live in the age of identity. Never before, the world over, has the search for identity been the driver of so many events - from bloody assertions of ethnic independence in Central Europe to school-board debates over multiculturalism. The politics of identity - ethnicity, race, gender, sexual preference - has everywhere replaced the politics of consensus.

Thus, to operate as a lifestyle company in the Tommy Boy sense is to tie the organization to the most potent force operating in the world today. Tommy Boy is not only on the cutting edge of music, but on the cutting edge of culture itself. And cutting edges cut both ways.

If Tommy Boy is a model of a genuine lifestyle company, it is also a reminder that such companies become lightning rods for criticism. When that lifestyle company has a highly visible parent like Time Warner, the synthesis of aesthetics and business can sometimes crack under the strain, as with the controversial political rapper Paris and his song "Bush Killa," a fantasy about presidential assassination. Under pressure from Time Warner and Warner Records, which were themselves under intense attack from police organizations for issuing Ice-T's "Cop Killer," Tommy Boy declined to release the Paris song or the album on which it appeared.

Silverman did help Paris set up the independent Scarface Records, which eventually released the album, including the song "Bush Killa." And he remains quick to defend rap against its offended detractors. He describes Tommy Boy's role as a neutral midwife for cultural trends.

"People should do what they have to do," Silverman says without apology. "If there is a market for something, people buy it; and if they don't, then there's not a market. We reflect the streets; we don't control them. We're like their newspaper. We're op-ed for the streets."

Indeed, with its highly focused vision Tommy Boy has achieved something rare in the record business: brand identity. Record buyers expect innovative music from Tommy Boy. Industry insiders expect innovative marketing. Retailers expect Tommy Boy's salespeople to urge on them only as many records as the company's precise market analyses say can be sold.

For companies outside the recording industry, the larger lessons of Tommy Boy go beyond tinkering with cross-functional teams or some other organizational-design flavor of the month. It means recognizing that to succeed in the age of identity, more companies will have to embrace the lifestyle model, which requires not the dismal science of segmentation but the difficult work of cultural knowledge. And it means working toward an organic structure capable of performing this work.

Tommy Boy prospers, says Silverman, not because the company is small, but because it is holistic. He offers a cautionary tale for companies that fail to meld all parts of their organization.

At a recent music convention, three people gave Silverman demo tapes of new artists they thought Tommy Boy should sign. All three said the same thing: This is a hit, but a major label would only blow it - if the out-of-touch A&R department would even listen to it. Silverman, like Lynch, frequently has tapes thrust upon him, but in this case the donors could be expected to know what they were talking about. All three were experienced record promotion people. The major labels they didn't think were worthy of the tapes were the ones for which they worked.

Bruce Tucker writes on business, popular music, and American culture. He is the coauthor of The New Individualists (HarperCollins, 1991). He also co-wrote James Brown: The Godfather of Soul (Macmillan, 1985).

Record Economics: It's a Black and White Thing

Making Markets of cultures can be a tricky business, especially when the culture is black and the marketers are white. When the question of economic justice arises, Tom Silverman is less likely to tick off the list of highly placed African-Americans in the company than he is to talk about economic empowerment. Tommy Boy artist Queen Latifah co-owns The Flavor Unit, an entertainment company that manages a score of musical acts and runs a record label associated with Epic.

A joint venture with Bill Stephney, one of the founders of the searing, black nationalist rap group Public Enemy, takes Tommy Boy a step farther in its commitment to black empowerment - and allows the label to grow without becoming unwieldy. Stephney, a gifted black record executive whose fondness for progressive music and progressive marketing matches Silverman's, will try to replicate the success of Tommy Boy with his StepSun Records.

Says Stephney, "I've recently done an analysis that shows that 75% of rap records in the last nine years have been sold through the quasi-independents - hybrids like Tommy Boy/Warner, Jive/Arista, Def Jam/Sony. The rap market changes so fast you need the smaller, swifter company. As Tommy Boy grows, doin

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