WWE and Bob the Builder help Koch's bottom line with no treble at all
By Eric Marx
April 28, 2003
Musician Dwight Yoakam, a country singer who reviewers describe as "old-timer" or "veteran," has joined the ranks of Rancid, NickCave & the Bad Seeds, and Ani DiFranco.
After 16 years with Warner Bros./Reprise, part of the largest company in the music industry, Yoakam is turning to the tactics of musicians thriving at independent labels. The 46-year-old star plans to release his 17th album in June on his own label, Electrodisc Records.
But he won't be going it completely alone. "Population Me" will be distributed through Audium Records, a Nashville label owned by Port Washington-based Koch Entertainment.
Yoakam will have both creative and marketing control, and the artist, who has sold 22 million records, says he feels like a partner for the first time.
"I don't know if this model would work for everybody," said Yoakam in an interview via cell phone as he drove through the California desert. "Today you have to think outside the box and be cognizant of the enormous variety of outlets for music that is multiplying daily."
And he's turned to Koch Entertainment for a direct line to those outlets. Koch owns its own label, but also collaborates on distribution with artists working for other independent labels. This relationship fosters a flexibility and artistic control that has helped push Koch into the No. 1 spot among independent music distributors in the country.
The company saw sales increase 20 percent in 2002 to $140 million and is expecting more growth in 2003. And that's all in an industry dominated by five major recording labels that have slashed budgets and released countless artists in an attempt to stay alive as free music downloading from the Internet cuts into profits and threatens the way they've always done business.
Chief executive Michael Koch opened the U.S. offices of Koch International in 1987 as a sales force for the company's CD plant in Austria. Koch International, founded in 1975 by Michael Koch's father, Franz, was sold to Universal Music International in 2002.
Sixteen years later, the company's success has helped it branch out in many musical directions. The four arms of the company include music distribution, its record labels and affiliated labels, video distribution and music publishing.
The company, which says it controls about 1.6 percent of the recording market, has 190 employees, including 150 in Port Washington, where it has recently moved to a larger facility to allow for expansion.
Even though Koch sees this as a period of great opportunity, he worries more than gloats over the contraction of the recording business.
"To a certain degree we benefit from the industry decline, but in the long run it's bad for everybody in the industry," says Koch of a business sector whose total album sales for 2002 dropped by 62.5 million CDs, an 8.7 percent decline principally attributable to free digital downloading, according to figures from music data company Nielsen SoundScan.
Unlike the major labels that have to turn at least 100,000 CDs to break even on a single artist, independents with lower overheads can still turn a profit by moving considerably less product. Koch distributed a total of 1.5 million CDs in 2002.
Independent labels and distributors also have far smaller marketing budgets, but they are able to deliver near-comparable sales through innovative Internet-based marketing campaigns and a network of relationships with traditional and nontraditional retailers.
But at some point alternative will become mainstream in the music industry, and the major distributors are already finding ways to compete. The second biggest "indie" is Warner-affiliated Alternative Distribution Alliance, better known as ADA.
It's also going to be harder and harder for independents to get shelf space with the major retailers because digital downloading is forcing stores to cut back the number of SKUs (stock keeping units) they carry, says Lee Black, senior analyst at corporate consultants Jupiter Research.
One of the recording industry's big problems - for both independents and the majors - has been a lack of variety in products and distribution methods.
"They've got one product and they really only have one channel to sell it through as opposed to the movie industry where you can see film in the theater, pay-per-view, rental and all these different ways to sell content to the consumer," Black said.
Koch figures the wide diversity in its products and affiliations will give it an edge. The company has put together a consortium of 40 labels. Righteous Babe Records (socially conscious Ani DiFranco), Shanachie (R&B dance diva Jody Watley), Epitaph (Bay-area punkers Rancid) and Anti- (dark and humorous Nick Cave and the Bad Seeds) are but four of the labels it distributes in genres that run from urban to smooth jazz, punk and folk.
Koch titles received 16 Grammy nominations this year, including best female country vocal, best traditional blues album, best reggae album and best musical show album. They won for best contemporary blues album, best historical album, and best boxed or special limited edition package.
The Koch labels under Koch Records specialize in pop, rock, hip-hop and soundtracks, Koch International Classics and Koch Jazz, and Koch Music publishing.
Koch Vision stepped up its DVD distribution this month by signing on to distribute Passport Video's library of 3,000 movies. And in February, Koch announced with Richard Lorber the launch of Koch Lorber Films, a DVD label catering to world cinema, independent documentaries, music and the performing arts.
In addition to spreading its services, Koch is concentrating on content ownership through the promotion of its own music labels.
Analysts believe ownership, rather than just being a distributor, will help Koch position itself to take advantage of any models that emerge to sell music that will rival digital downloading. Its biggest franchises include WWE (World Wrestling Entertainment), Pokémon and Bob the Builder; reissued recordings include prestigious American labels like Smithsonian (folk) and Arhoolie (traditional) and imports like Lyrichord Discs, Chandos and Melodiya.
Integrated wireless (music delivered via the Internet to handheld and laptop computers), games and DVD/audio-based products will temporarily stem the bloodletting caused by digital downloading, but the hemorrhaging will continue, say analysts, unless the industry develops a viable strategy to deal with free music sharing.
"The fundamental fact that these digital download services are free is a myth," Black said. "You're paying for it ... and the key is turning it around and saying look here's a better service, here's a better way to organize your files - by building services and features underneath the acquisition of content, so consumers begin to pay for access to huge volumes of content and the service associated with receiving that content. Then, at that point," said Black, "they'll pay."
In traditional terms, Koch is leveraging its experience and relationships to get the most for its marketing dollars, said Jon Cohen of Cornerstone Promotion, a Manhattan-based music marketing firm that partners with Koch and other independents.
"It's not about how many records I have in the Top 50 Soundscan," he said. "It's about my bottom line, and I think Koch deserves a lot of credit because they've been very focused on implementing proper marketing plans and making money by releasing records."
But Cohen agrees that independents need to invest in a digital downloading business model, and not just leave it to the majors, which have thus far failed to attract a significant audience. Independents have the flexibility, he says, but are fearful of making a false move.
"It's going to take a smaller label at the level of Koch, or even smaller, to start having success, and I'm not quite sure who that's going to be," he said. "I just don't have any answers. No one does."
Koch executives, though, are skeptical about being able to trump the free music the Internet offers.
"So how do you come up with something that's better than free?" wondered Michael Rosenberg, Koch's president of distribution. "Free is pretty good. If I can get something for free or 99 cents I'm probably going to go for free. Until they can stop the file sharing and co-opt the whole process, we're not going to run out there and worry about having a digital download strategy.
"At this point right now we will not invest in it. We're focusing on working with the physical distribution, which I don't think is going away for a while or ever," said Rosenberg. "And we're working with our own label to develop content, which in the future, if there is a digital distribution business, will be meaningful."
Clay Pasternak of the Association for Independent Music echoes that sentiment. "Nobody is talking about downloads. I'm not hearing a thing about it because everybody's more concerned about trying to stay alive doing what they're doing right now."
And spreading its net wide to meet the needs of a fickle music and video audience does seem to be working for Koch. "We'd rather have an industry that's overall growing, but we've been growing when the industry was growing, and we've also been growing when the industry is shrinking," Michael Koch pointed out. "Obviously we're doing something right."