The real lowdown on labels.

Independent record labels are the trend, but has it meant more money, power and inflluence for black artists and music producers?

CLOUT IS THE OPERATIVE WORD in the music business. Wherever or not you have it can be determined by the commercial success of any given artist or producer. The

For decades the recording industry has reaped the financial rewards of the worldwide popularity of African American music. And it has engaged in what amounts to a highly exploitative relationship, one in which African American artists and producers are insufficiently compensated for the wealth they help create.

Now the recording industry is offering both black and white music makers sub-label deals at a breakneck pace. These deals enable independent music producer-executives to earn a share of the royalties of the records they produce. Though not a new phenomenon, it has taken a more deliberate from in the past five years.

Because of this trend, the majority of today's hottest African American songs and performers are products of a sub-label or joint venture arrangement between a major label and an African American producer-executive. Some industry insiders say this new development means African American will gain a greater share of industry profits, while others maintain that very little will change. Are these sub-label deals really the great economic opportunity that they appear to be, or have the labels turned the tables on African Americans once again with a new system of exploitation?

PERCEPTION VS. REALITY

Six recording and distribution companies dominate the music industry. Warner Elektra Atlantic (WEA), PolyGram Group distribution, MCA Music Entertainment, BMG Distribution, Sony Music Entertainment, and CEMA/UNI Distribution produce most of the music we hear, through one of their own labels or through an independent label that they have a distribution agreement with. Together, the majors supply music wholesalers and retailers with 90% of the U.S. market.

According to the Record Industry Association of America, in 1994, six of these companies accounted for more than $12 billion in domestic sales alone. Black music--in the forms of urban contemporary, hip-hop, jazz, gospel and pop music combined--accounts for over 25% of all record sales and $3 billion in the U.S.

The abundance of sub-label deals has created a false perception that the reins of power in the music industry have begun to shift from the big six record companies toward African American music executives and entrepreneurs. Many of the entrepreneurs themselves have helped to fuel this misconception by acting "larger" and more powerful than they are. In actuality, only the mega-successful music executives, such as Russell Simmons, CEO of Rush Communi cations, L.A. Reid and Babyface of Laface/arista, and Andre Harrell, president and CEO of Motown (see "Familiar Face on Old Label," Newspoints, this issue), have been able to wrest more dollars, creative control and decision-making power from the major labels.

A typical sub-label deal is based on a royalty rate, usually 20% or less of the net profits of a project. The major label advances the sub-label money for start-up and overhead costs--the advance being recoupable against the profits of the project. Out of that 20%, the sub-label pays about 10% to the artist and 3% to the producer. Essentially, the sub-label company must survive on only 7% of the profits it generates. And that's only after the major label has been repaid for its initial investment at the 7% royalty rate.

LaFace Records has a proven ability to generate hits, and so L.A. Reid and Kenneth "Babyface" Edmonds were able to negotiate something better than a sublabel deal. Laface Records receives a relatively equitable division of its profits in its five-year, $100 million joint venture deal with Arista. Deals like what Laface has with Arista are the exception.

"For the most part, the well-financed, multinational major labels have the upper hand in negotiating sub-label or joint venture agreements," says StepSun Records CEO Bill Stephney. Noting that most potential African American music entrepreneurs have little capital to see their plans through, he explains, "That's where the major labels come in. They can easily advance start-up and production costs to the entrepreneur in return for what they hope will be hit after hit--and a lion's share of the profits."

StepSUN was formed as a fifty-fifty, profit-sharing joint venture deal with Tommy Boy Records in 1992. When the contract expired earlier this year, Stephney elected not to renew. instead, he pursued a more favorable arrangement with Interscope Records, a larger company with more capital and greater marketing resources. At press time, the negotiations had not been finalized.

Generally, joint ventures are more beneficial to music entrepreneurs. The profit-sharing arrangement of joint ventures offers more lucrative financial possibilities than the royalty-earning potential of sub-label deals. But only a handful of producer-executives have achieved enough clout to demand such an equitable split of the profits.

Entertainment lawyer Joi Huckaby Rideout, who has negotiated record deals for producers such as Teddy Reily, explains, "The major labels have embraced the sub-label arrangement in order to capture the millions of dollars they are unable to generate because of the increased fragmentation of the music market. Their immense size and bureaucratic structure hinder them from reacting quickly to new trends."

The growing popularity of alternative music and the ever-expanding hip-hop culture have emphasized this inability to respond to--and cash in on--the everchanging "flavors of the month" in these growing genres. Therefore, the majors have increasingly turned to young African American producers, such as Bad Boy Records CEO Sean "Puffy" Combs, to cultivate these cash crops.

GLORIFIED PRODUCTION DEALS

Customarily, major labels make sub-label deals seem more enciting by offering a hot young producers two or three more percentage points than the industry norm for production deals. And they add on the ego-stroking titles. "president and CEO."

Mike Elliot, president of Source Entertainment, explains: "Unfortunately, a lot of these sub-labels are nothing but glorified production deals; no more, no less. It mean's your a great producer, you're hot and labels want you to produce product for them. But it's not really a label. It's the most brilliant mind game I've ever seen."

Often, these so-called presidents don't even have control over their own budgets. Everything from the marketing budget to the release date of the albums can be determined by the major label. And worse yet, many sub-labels don't even own the music they produce. Unless the producer-executive has real clout and business acumen, the major label will likely retain ownership of the master of any music produced. Ownership of the master means that the major label has complete control over future reissues and sales of the music created during the partnership. In the final analysis, most who cut sub-label deals will get a higher percentage of the profits they generate, but far less than they probably deserve.

Although these deals are slanted heavily in favor of the major lables, they're still a low-risk and finance-free strategy that wannabe music moguls can use to succeed. Huckaby Rideout points out: "There is a clear advantage for the entrepreneur who wants to start a sub-label and get capital from the majors. Where else are they going to get it? It's an interest-free loan, and in many cases you really don't have to pay it back. You may not earn anything for a while, but it's free chances to establish yourself."

Carl Martin, a member of the multiplatinum selling group Shai, recently signed a $2 million sub-label deal with MCA to form Carl Martin Entertainment. The contract requires a minimum of two projects to be completed for MCA each year and allows him to produce music for artists not on his label as well. Although Martin, 25, is happy making music, he confides, "At some point in the future it would be nice to be a stand-alone company."

Another benefits sub-label deals is the common industry practice or reworking contract agreements if the artist or producer is highly successful. "In almost every situation where there is a high level of success, there has been renegotiation to a profit-sharing agreement, so at the end of the day it becomes a win-win situation for everybody," says Stephaney.

PLANTATION-LIKE CONDITIONS

But not everyone can achiieve a high level of success. Thus, for every successful sub-label that has generated enough sales to renegotiate their deal into a more favorable joint venture arrangement, there are probably 20 or more sub-labels in "plantation-like" situations, industry insiders say.

"Many artists today will be as bad off as those in the past unless they become better informed," says Dyanna Williams, co-founder and executive director of the International Association for African-American Music (IAAAM). "The artists signed to these sub-label are the real losers, but they don't realize it until they get a royalty check that's almost nothing, or until they release a mediocre second album, don't get any money from the label, and are summarily cut from its roster."

Many artist are still naive in their approach to the music business. As a result, they continue to be explained. William cautions, "You don't want to be an artist who doesn't write songs. You want to own the published music, thereby maximizing your earning potential." But she concedes that most artist don't have superstar earning power, which they need to demand fair treatment.

HAVE BLACK MUSIC DIVISIONS BEEN HURT?

Fortunately, the sub-label trend has not adversely affected major label black music divisions. Kevin L. Evans, senior vice president of Black Music at RCA, says, "It's obvious that the major labels need black music divisions to remain competitive in the marketplace. You still need executives to work those sub-label projects. You still need your production, promotion, marketing and publicity staffs to go out and break those records effectively."

Stephney agrees. "It's to the benefit of the major labels to have black music divisions. It's a lot easier to have a black music department with employees that you don't have to pay 50% of the profits, than to have a very successful African American entrepreneur who--at the end of the day--you not only have to pay half the profits to, but he may wind up buying his interest in the buy-sell agreement and end up taking all of your acts." Sub-labels have made the marketplace much more competitive and forced black music divisions to be more assertive in finding new talent.

Although three of the major black music division executives profiled in "The BLACK ENTERPRISE Entertainment Power Broker 50" (see cover story, December 1994) have since lost their jobs, it's likely due to the naturally high turnover rate of the youth-driven recording industry. In fact, there has been an industry-wide shake-up that's taken place over the past year, affecting both black and white music executives alike, Says Eldridge, vice president of communications for Perspective/A&M Records and IAAAM co-founder: "At some point, we're all going to lose a job. That's just how it is in the music business."

However tenuous job security may be in the record industry, the departure of several high-level black music executives from the major labels clearly indicates where the power really lies. Nowadays, it appears that the president of a major label music division is as subject to the trends of the music industry as the artists. If that's true, then even the most highly placed black music executive is in a relatively benign position of power, especially since the sub-labels have proven effective at developing new talent and producing hit records.

"Black music divisions are being phased out," asserts IAAAM's Williams. She suggests that since black music is becoming so popular, it is slowly being included in the pop music category. As this happens, major labels won't need to make distinctions. "Rather than have a black music division do the marketing and promotion, you will see black divisions eliminated due to downsizing and the increasing ability of white people to market black music," says Williams.

Eldridge agrees with Williams and also says technology will play a role in shrinking the number of black music executives. SoundScan, a record sales tracking system, and the ability to sell records in cyberspace are just two examples of how jobs will be eliminated. She warns, "As white ownership of Black-music radio stations increases, black music executives will be pushed out--not up."

CHANGE THROUGH COOPERATION

Although there's disagreement over whether the sub-label phenomenon means more money for African Americans, few argue that it has exacerbated an existing problem--the lack of cooperation and unity among African Americans in the industry. "Basically everyone is going for themselves," says Williams, "and the collective power of African Americans in the industry has diminished. Aside from the graduates of the Russell Simmons' School of Music moguls [which includes Bill Stephney, Andre Harrell and Sean "Puffy" Combs]' there aren't may alliances among African Americans to form a power base."

Industry-wide unity was one of the overriding concerns at IAAAM's second annual executive consortium in September held in New York. Executive after executive who attended the meeting cited the lack of positive networking and communication between African American music industry executives as the major reason for their lack of real power in the industry.

Networking is one way African Americans could carve out a bigger share of the $12 billion domestic music industry pie. Says David Linton, senior vice president for black music promotions at Arista Records: "We have to come together as a family and build together on ideas to market product collectively. Right now there are enough of us out here, financially, to support and pull together the resources to establish that."

At the consortium, ownership was also stressed as an essential step to gaining a better foothold in the music industry.

Ownership of record labels, distribution companies and radio stations will help African Americans gain more control over their investments in the music business, and help ensure higher returns. "When you do all of the distribution, recording, pressing and selling yourself, you make a lot more money than when you have the record signed to some major label," says David McPherson, director of A&R at Jive Records.

Several artists who were formerly signed to major labels are proving that independence works. Flutist Bobbi Humphrey, owner of New York-based Paradise Sounds Records, and singer-producer Kashif Jones, owner of Brooklyn Boy Records, are making a lot more money by working for themselves. "If you're only the artist, you're getting about 13% of the royalties. I've been able to get a greater portion than that," explains Humphrey, who began distributing her label's first CD, Passion Flute, in 1994. "If I sell a CD to a distributor for $8, that goes directly to my company; I don't split that with a label." Although she pays all production costs to produce her CD, Humphrey also owns the masters, making all future royalties hers alone.

Of course, not all artists will have the capital or business acumen to be independent. But each artist can look to form alliances. By networking, information can be passed along that can bring an artist one step closer to independent production. Once they've established the financial strength to stand alone, they can reach back and form business networks that establish industry-wide power and influence.

As Humphrey points out, it's been done before. "All around us you see megamergers like with Ted Turner and Time Warner. I think we can learn from them how we can merge and pool our talents to make our companies stronger."