Music to Their Ears - Interview with James Diener of A&M / Octone

In 2000, the music industry was in the middle of a major revolution – whether they liked it or not. Napster’s popularity explosion the year before and the launch of the iPod in 2001 changed the way people consumed music forever. In fact, it marked the beginning of the end for how the industry made money.

Enter James Diener, a young, accomplished record company executive who not only saw the writing on the wall, but had an idea of how to fix the music industry. Not only did he have an idea for a business model so unique that Harvard Business School published a study on it, but he got financial backing from Howard Lipson and Laurence Fink, two of Wall Street’s most powerful investors. It is not common for independent record labels to attract that kind of capital, but in 2000, Diener did, and made his theory for a unique business model a reality.

Diener’s label is home to multi-platinum artists such as Maroon 5, Flyleaf, Hollywood Undead, and K’Naan. Through recorded music sales, licensing, and ancillary income, Octone grew to become a multi-million dollar company. Diener also headed up OctJay, a joint venture between Octone and Sony BMG Entertainment. In 2007, Diener orchestrated the sale of Sony BMG’s interest in OctJay Records to Universal Music Group for approximately $75 million. This transaction resulted in the formation of a new joint venture between Octone and Universal. The company was then renamed A&M / Octone.

NY Report executive editor Daria Meoli spoke with Diener, now 40, about his ideas for making music profitable again and how he has evolved his business model.

Daria Meoli: You had a career as a successful record executive. Why did you leave it to start Octone?

James Diener: I was working at Columbia records as vice president of both A&R (artist and repertoire) and marketing. A&R executives are the ones who are out there acquiring new talent and noticing new artists—singers, bands, hip hop artists. They are, in effect, the talent scouts. It’s much more senior than just being a talent scout, because you’re also responsible for making all the records. In that way, they’re like a producer of a film. At the same time, I was also a full-time senior marketing director for Columbia Records. I was the marketing director for a number of their multiplatinum acts—Bob Dylan, Pink Floyd, Aerosmith, Bruce Springsteen, Terence Trent D’Arby, New Kids on the Block, The Black Crowes. I didn’t sign or acquire those artists, but I had to manage those brands.

Generally, these are two separate, full-time jobs—you’re either a marketing director or you’re an A&R person. But the chairman of Columbia Records at the time was one of my original mentors, Don Ienner, and he gave me the opportunity to do both. Nothing was wrong with my career. Most people take drastic steps in the face of a significant problem. It’s human nature not to change when things are going well, and things were going great for me. Columbia Records was like the Rolls Royce of record companies. In 1999, the range of performers at that record company was awesome, and working for Columbia was like playing on the Yankees. It was a very high intensity, very challenging, but very rewarding environment.

But Columbia was so successful that I became concerned about the compelling need to develop and break new artists. In the entertainment industry, whether its film, television, or certainly music, necessity is the mother of invention. Sometimes these organizations are just so successful that the opportunity and the mandate to develop new artists is more of a luxury more than a necessity.

I felt that my own path and my own career were to develop new artists. As great as it was being around Aerosmith, Pink Floyd, Iron Maiden, the Jayhawks and all these different artists, my dream was to go out and develop new ones from scratch. The Octone model was really a different model than I had seen at any point in the industry. I also felt that a lot of artists were getting lost in this big system. In my view, starting Octone was an entrepreneurial move. I really felt that we could build a better mousetrap. That was somewhat ambitious to say at the time, but people have to dream big in order to accomplish big goals.

DM: What was your idea for Octone?

JD: When I left Columbia Records in 2000, two things happened at once. I established Octone with some very key guys—Ben Berkman, who is the executive vice president of the company; David Boxenbaum, who is the general manager of the company; and some private investors. At the same time, I became a senior vice president for the RCA Music Group. I never saw Octone as being alone in the wilderness, so to speak; as just an independent label. It was set up as an independent label, but it had the support and backing of a major label, because at the same time I had a senior executive position at RCA Music Group.

Historically, in the music industry, major labels are essential for artists to be developed into world-wide superstars. The capital, the resources, the economies of scale, the promotion, and the marketing machine that these major labels had, and still do have to some degree, is very important. But independent labels by and large, are better in terms of doing the early artist acquisition.

They’re more patient, because very often they have fewer artists on the roster, and their techniques for early-stage development are different from major-label techniques. They have the determination, persistence, and long-term view of the efforts required to break a new artist that sometimes major labels cannot afford to pursue. The independent labels may be better suited to that early R&D work, whereas the major labels are much better suited for the mass-appeal marketing and distribution.

What we thought was, “What if there were a way to systemize that relationship and to give artists the best of both worlds?” Octone Records was an independent label in 2000, distributed by BMG. (RCA Music Group was a division of Sony BMG Entertainment). All that meant was, Octone, which is privately funded, had its own artist roster and we did all of the early work. But at the point when we needed to expand an artist’s momentum to a larger audience in the US and around the world, they had the support of the major label.

Frankly, there are indies that had relationships with major labels along the way, but the reason the Octone model was so unique was that I worked simultaneously at the major label. A lot of independent labels are either nervous about or resistant to having a larger entity be responsible for the creative marketing and promotion of something that they may have built for years. It’s like handing off a child. That was never the nature of this relationship. Because I also worked at RCA, and I maintained dual offices and dual responsibilities, the Octone artists could never be mishandled or mismarketed when the RCA team was involved, because I was, in effect, supervising those projects at the major label at the same time.

DM: How does that relationship work from a revenue perspective?

JD: I’ll use Maroon 5 to explain how this worked. Maroon 5 was signed by Octone Records, and in the early days, 100% of the cost was borne by Octone—all of the marketing, all the promotion, all the spend ing. But there was a point where we felt Maroon 5 was ready for that next step, and we whistled for the cavalry. At this point, Maroon 5 would have been contributed, not to RCA Records, but to an entity we created, formerly called OctJay. OctJay was a 50/50 joint venture between Octone and RCA. The artists were never actually wholly owned by RCA, but at the point that Octone needed that next level of commitment, the artist moved from being 100% owned by, and 100% of revenue going to Octone, into the joint venture.

At this point, RCA had to provide all the funding for the joint venture, so Octone stops spending, and we’d split the profits 50/50. RCA is bankrolling the entire venture, but only receiving 50% of the profits. What would be their motivation to do that? Well, the idea is they’re getting artists that are not seeds where they are just wondering if they’ll ever sprout or bloom. They’re seeds that are in the marketplace already developing into a nice crop. Now they’re spending the safest money possible. And why would Octone contribute something that we owned 100% of into a joint venture that we own 50/50? It’s because the spending at this point is big spending. This is millions of dollars of spending. It’s a really nice relationship of give and take.

Investors Back the Biz
DM: In addition to having a unique structure, you raised $5 million in capital from investors outside of the music industry—private equity. Can you tell us about that?

JD: In 2000, I foresaw the need for money. This was the era of Napster, and there was a headline on the front page of The Wall Street Journal that said, “Music Business is Over.” Even though I knew it was going to be tremendously difficult raising money, my intuition said that if I could get through this challenge, then I had a better shot at ultimately seeing this work successfully. I also felt the need for autonomy. I knew if I got money from one of the major label parent companies, I would never have the creative freedom or the autonomy to spend it. At the end of the day, it doesn’t matter what a contractual structure looks like, whoever provides the funding is by and large in charge, it’s the nature.

I was introduced to Howard Lipson in 2000 through a mutual friend. Lipson was one of the senior executives at The Blackstone Group (now a partner at Pilot Group), but he also was a huge music fan. He was the first investor, but quickly thereafter, he introduced me to Larry Fink, who’s the CEO of BlackRock, Inc. Forbes ranked Larry 16th on its list of the world’s most powerful people. Hilary Clinton was number 17, and Angela Merkel was number 15. He’s hugely passionate about music. Both Lipson and Fink know more about this business and have a greater passion for music than many of the people I know in the music industry.

The great surprise of all of this is that I can sit down in an office with Larry Fink and Howie Lipson, because we meet regularly. They have an ability to problem-solve that is just completely different than you would ever see in the entertainment industry. It’s a huge asset to the overall situation. They’re not involved day-to-day in the operation of the business, but when tough moments come, and there have been tough moments, they have a unique way of assessing the situation that someone with just the strict, entertainment industry background couldn’t do. In the end there were a total of about 12 or 13 investors.

Most joint ventures or most independent labels in the music business are either undercapitalized by people who are using their personal savings, or they’re financed in a very ad-hoc way by other record companies.

Becoming A&M
DM: In 2007, your business model changed and Octone became A&M / Octone, and you entered a joint venture with Universal Music Group. How did your business model change?

JD: A&M / Octone now is a straight, 50/50 joint venture between us—me, my partners and investors—and Universal Music. I’m the CEO of that business. All the artists are signed directly into that joint venture, so there’s no uplift to OctJay anymore. There’s no graduated or staged process. All the employees work directly at the A&M / Octone level.

We were given the historic A&M name to basically relaunch the label as the new A&M Records going forward. At that moment, there was also a very significant change in the way that artists were signed and acquired in our company. When we acquire new artists and we’re going to help build a brand, then we’re going to share in all aspects of the revenue—music publishing services, merchandising services, and other ancillary rights.

We cannot necessarily rely on recorded music sales to justify all of the risks, opportunity costs, time, energy, and marketing investment that we’re making in the groups. Because technology has played a factor in the erosion of album and CD sales, the revenue from just selling music is not what it was. It’s been a year-over-year decline for the last eight or nine years and that’s problematic. People consume music in different ways then they used to.

For example, a lot of music is consumed as singles instead of albums, which changes the economics of the business. Also, a lot of people consume music without paying for it. Whether that’s a right or wrong thing, that’s the reality if you’re in this business.

DM: Do any of the artists or artists’ management fight that arrangement?

JD: We’ve certainly earned the right to make that deal. Since the advent of A&M / Octone, every time we sign a new artist, the contracts are what we call “360 deals,” and are no longer just recorded-music deals. Frankly, most of the attorneys and the representatives who represent talent know that an A&M / Octone 360 deal is a very real commitment and a different type of relationship than maybe a 360 deal that’s being offered by a competitive label.

At most major labels, artists can get record deals, but they’ll find that it’s really survival of the fittest in terms of which of the artists turn from caterpillars into butterflies. There are a lot of really sad stories within those major labels, because even though certain artists got recording agreements and records made, they didn’t get a commensurate level of attention or a real marketing plan. That’s never the case at A&M / Octone, because all the artists are priority artists and they’re going to get a 210% commitment. We’ve got nine artists on the roster who are in the marketplace, in the studio recording, or we’re just closing deals on. You’re not on the roster unless we believe you’re a multi-platinum act.

DM: What is the downside to this commitment philosophy of the company?

JD: We pursue things almost too long, irrationally. There have been times when the marketplace suggested that one of our artists was not what we ultimately thought. And we’ve almost disregarded that type of recon and just continued to spend money and pursue the success of that artist on the basis of our emotional beliefs. That’s a very dangerous problem; you’ve got to know when to stop.

Culture is Key
DM: Are you responsible for signing and nurturing all the artists on your label?

JD: The company acquires artists by consensus. The long-term commitment that this label makes is so emotional, because the signings don’t happen on the basis of one person’s opinion. It happens with a process where the senior management really commits as a group. This is very different than some other labels where one person is a talent scout who just individually sponsored an artist to be signed, but the rest of  the company is completely uninformed of what the creative people are doing.

DM: How else is your company culture different than what you experienced at the major labels?

JD: The thing that I’m most proud of about the label, and it’s often commented on by the artists and the managers, is not even just the track record of how many gold and platinum records we have, but it’s the culture of this company relative to other record labels and music publishers.

The people in this company have been carefully selected, and we’ve built a culture that’s very hard for outsiders to enter. It’s really like, to make a military analogy, a platoon. By the time you’re out there fighting on behalf of these artists, you have to have complete confidence and trust in the people you’re doing this with.

In the music industry, people are just so overwhelmingly consumed with finding hit songs and hit records that sometimes there isn’t a parallel emphasis placed on finding hit people. The nature of the entertainment industry is not as focused on developing human capital as it is focused on iconic people who have magic ears and who can just find hits. And I totally believe in that. There are people I’ve met in this industry—maybe people consider me one of them now—that have an intuition about hits. All the people that work at our label have a very strong intuition about talent. But just relying on icons is not a realistic approach in the environment anymore.

In the days when the economics were not as challenging in the industry, and frankly the road to success was easier, labels didn’t require this much long-term persistence, and so they didn’t benefit from this kind of team-building. Today, it’s much more of an integrated effort. We fight like cats and dogs and it’s not a Disney movie in here, but I have such confidence in the team we’ve built. I really believe the winning ingredient is the teamwork, the culture, and the morale of the company.

DM: How were you able to recruit that dream team? How did you find people that would fit in with this culture in an industry that doesn’t bring people up that way?

JD: The way that we staffed up the executives was not by filling org charts, but by gathering people who had tremendous lateral. People that were both specialists and jacks of many trades. This may all sound like a pretty conventional management theory—team building, morale, and company culture—but in the music industry, it’s not the case.

Tips from the Top
Hire hit people. Diener recruited his staff based on each employee’s proven individual talent, as well as how they would contribute to the entire executive team.

Build a better mousetrap. Not only did Diener take a risk and develop a new business model for the music industry when he saw big changes coming, he has since made changes to that model—instituting the 360-deal structure—in anticipation of the continued evolution in the way people consume music.

Find partners with passion. Diener found equity partners who shared his passion for the music industry. As a result, those partners have provided more than financing; they have become trusted advisors for business decisions.