Hard Times Ahead for Small Classical Labels?

Many small classical record labels are facing an uncertain future in the wake of a decision by Tower Records to put three classical distributors on buying hold. News of the decision, and discussions about its ramifications, have circulated on the Internet after an internal memo was leaked on May 1. The memo from company headquarters ordered store buyers at all 113 Tower stores in the US not to purchase from Allegro, Harmonia Mundi, and Qualiton, until receiving further notice. The three distributors represent dozens of small independent jazz and classical recording labels.

Sacramento, CA–based Tower, long one of the dominant forces in music retailing, has been in difficult financial straits for many months. According to one music industry marketing executive, who spoke on condition of anonymity, Tower's troubles have their roots in junk-bond financing undertaken 20 years ago, during a rapid expansion phase. "Tower simply did not have the cash to make payments when the notes came due this spring," he said, going so far as to speculate that without the backing of Universal/Vivendi, Tower might soon be out of business.

Attempting to stretch its resources as far as possible, Tower initiated a 360-day payment schedule for the classical distributors—meaning that products will be paid for a year after they are received—and won concessions from big suppliers like Sony Classics. Sony reportedly has agreed to price all its titles the same as "mid-priced pop," according to the owner of one of the affected classical labels, who also asked that his name not be used. (Tower may be in trouble, but at this point, no one in the business wants to alienate himself from it.) "Sony Classics is essentially paying Tower $2 per disc to keep its products in the stores, and to maintain some cash flow," the classical exec said, comparing the decision to "selling blood to buy cocaine."

Tower Records has long prided itself on being a "deep catalog" operation, where most available recordings could be found or ordered. Despite the continuing decline in the popularity of classical music, Tower supported the genre by giving it enormous amounts of very expensive floor space. "The Boston Tower has an entire floor devoted to classical," one source told us, "where you can find all five bootleg remasterings of Furtwängler's Beethoven's Ninth, even though it takes more than a year, on average, to turn most classical titles."

Tower suffered a $5.5 million loss in the fourth quarter of 2000, according to a March 19 story in the New York Times, in which Edward Nawotka of Publishers Weekly stated that most of the 184 Tower Books stores soon would be closed. Both the record and book operations are owned by MTS Inc., of Sacramento.

Competition from Barnes & Noble, Borders, and online retailers like Amazon.com has proven too much for Tower Books, Nawotka wrote, citing statements made to the Sacramento Bee by MTS executives. Amazon has also put a dent in Tower Records' sales, according to a principal at one of the classical labels put in jeopardy by Tower's new purchasing policy. "Amazon probably loses 85 cents on each disc it sells," he speculated. "It's a big enough difference to pull people out of bricks-and-mortar stores." This particular executive believes that stores like Borders, with listening stations where customers can audition discs before buying, don't make a profit on music sold but rather on the promotional support provided by big labels, who pay to have their products featured at the stations. "Small labels can't afford that," he said.

They also can't afford to wait a year to be paid. Tower's troubles could be the final nail in the coffin for large-scale retailing of small-label classical music. Should the company emerge from its current difficulties, it's almost certain to downsize its classical offerings; it's likely that an institutional investor who offered Tower "bridge financing" as a temporary solution would require such a change. One hopeful possibility is that an initial public offering—even in the present climate—could raise enough cash to keep Tower on its feet. "The company is substantial enough, and well-known enough, that it would attract investors," the classical executive opined. Whether the owners of privately-held MTS are willing to go that route isn't known at the moment.