Playback and payback series; (Part 3) answering to the stockholders and not the audience

PUBLIC LOSSES were not all that visible if the company didn’t want them to be. Even the I gonifs knew enough to hire clever accountants. The corporations had them on staff. For instance, carefully hidden in the Warner Bros.’ Film paperwork was the fact that in 1963, its five-year-old record division was losing about three million dollars a year. Despite this, in the mid 1960s Seven Arts, a small distributor and producer, doing its best corporate approximation of a tiny mongoose eating an enormous cobra (or the same cobra eating a cow), swallowed Warner Bros.’ Film and record companies. This gave Seven Arts enormous amounts of debt. Unable to sustain it, in 1967 Seven Arts sold out the entire company, which at that point included Atlantic Records.

The buyer – the first major non-musical company to take the plunge into the deep, cold, murky waters of the record business – was the Kinney Corporation. Kinney had built its business on limousines, parking lots, and chains of funeral parlours. The head of the business, Steve Ross, had a lot in common with the self-made music people he’d be working with, one of the reasons Warner Bros. Would actually work well for nearly two decades after it became a public company in the early 1960s. A Brooklyn guy with a great head for figures, a disarming personality, and a mastery of the art of the deal, Ross had married well, but had proved his mettle in the way he ran his wife’s family business, building it into a public company by 1962.

Earlier in 1967, he had acquired a small talent agency, and he enjoyed working in show business. When the Seven Arts deal came up, he saw no downside. “If you’re not a risk taker,” he said, “you should get the hell out of business.” Ross was not a musician, or even particularly musical. He had the dubious honour of pioneering the era in the record business in which business acumen meant more than musical acumen. For example, at the CBS Record group in the “Black Rock” building, the 2001-like mock obsidian monolith at the corner of 52nd street and sixth avenue that housed the company at the time, a similar change took place. Goddard Lieberson, the conservatory-educated president of Columbia Records, retired, turning over the record company president’s office to one of the company’s lawyers, Clive Davis. Davis recalled:

It took several years to break down the barriers of the suspicion that existed against lawyers and people who couldn’t read music… . I was not a rock ‘n roller, by any means. I came to my position at CBS as someone who loved Broadway, someone who loved songs. I was a lawyer and I wore my suits and ties in New York and I never tried to be “with it.”

Within a few years at Warner, Ross had sold off all the nonentertainment assets of his company and, 10 years after he took Kinney public, Ross renamed the company Warner Communications, Inc. For the first 10 years, Warner’s record division was the envy of the music business, mostly because it was run as if it were a privately held company. Ross put experienced music businesspeople like Mo Ostin and Joe Smith in charge while keeping other music business legends like Atlantic Records honcho Ahmet Ertegun doing what they did best – finding music they liked and selling it. Business as usual put Warner on top of the music business heap and kept it there.

“Warner’s Mo Ostin and Joe Smith had clout, but Steve Ross was the big boss,” recalled Walter Yetnikoff, who replaced Davis as head of Columbia about the time Warners moved across the street from Black Rock, into its new Rockerfeller Center digs in 1975.

With Warner movies and Warner music at his command, Ross was a smooth operator, a much beloved leader who, unlike CBS, paid his underlings well. With the Grateful Dead, Van Morrison, Black Sabbath and James Taylor, Warner was winning market share left and right. Ross also had a selling tool that I lacked: Ross told artists he could put them in the movies. I had no movies to put them in.

“Steve Ross realised it was music, not film, that was the engine of growth,” said Jac Holzman, who headed the Warner-owned label Elektra Records at the time. “We threw off so much cash that we were self-funding as we went along. Jerry Levin [the former Time Warner CEO who succeeded Ross] didn’t have a clue about what the music business was about. He didn’t respect it. He didn’t care, and it showed.”

Because of that disrespect, the record companies Time Warner held started falling into disrepair, suffering from their own success. The nature of publicly traded companies is inherently very different from that of privately held companies. Because a publicly traded company sells stock to the public, it has to publish financial information quarterly via the Securities and Exchange Commission (SEC), and provide a corporate report annually to all of the people who hold its stock. Before the record divisions became so visible and the profits became such a driving force within the web of corporate holdings for already public companies like RCA and CBS, the performance of those divisions flew largely under the radar.

By the 1980s, however, the music divisions accounted for a much larger percentage of their corporate parent’s profits. As the people in charge went from old-line professional music people like Joe Smith to corporate appointees, accountants, and MBAs, the nature of the business began to change. Those quarterly reports became more and more important, and the method of generating the profits less and less essential.