Tommy Boy Can CD Future

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."