The Business of Hip-Hop, and How It Grew

Dan Charnas’ The Big Payback details the genre’s origins and evolution into a branding and marketing phenomenon

After the end of the 2000 fiscal year, Loud Records co-owner Rich Isaacson discussed his label’s finances over lunch with Mel Ilberman, the chairman of its parent company, Sony Music International. Although the previous 12 months had seen Loud artists such as Wu-Tang Clan, Big Pun, and Xzibit haul in gold and platinum albums, an exasperated Ilberman confronted Isaacson: Never before had he seen a company spend $100 million without making any money.

Isaacson, understandably, was taken aback. This was, after all, how Loud operated: The company had recently lavished $1 million on a promotional video for a single Mobb Deep track. Surely Sony must have known that the label and its previous partner, Bertelsmann Music Group, had parted due to years of inadequate profit margins? Apparently not. Sony shuttered Loud shortly thereafter.

This episode, described in Dan Charnas’ The Big Payback: The History of the Business of Hip-Hop, typifies the music business in general and hip-hop in particular. This new genre wasn’t exactly built on solid financial ground. The first successful rap record, Sugarhill Gang’s 1979 Rapper’s Delight, was facilitated by a $5,000 loan from Morris “Mo” Levy, a grizzled music business veteran with close ties to the Gambino crime family. Yet over the intervening decades, hip-hop invaded the suburban zeitgeist and launched its own full-blown ancillary industry replete with clothing lines, fragrances, liquors, travel agencies, and antique-looking chalices known as “pimp cups.”

Is there financial wisdom to be gleaned from this multibillion-dollar enterprise? Perhaps. Charnas, a former talent scout and a writer for The Source magazine, has written a book that presents itself as a business manual of sorts, “focusing on successful marketing strategies” and providing a “primer on hip-hop’s bold and compelling paradigm for business success.” Unfortunately, as Charnas reveals in his 600-page-plus tome, the paradigm was actually based on the old business practice of winging it, then cashing out.

During its three tumultuous decades, hip-hop’s top executives often appeared to be improvising as adroitly as their platinum-certified rappers. For years the so-called rap game was a virtual gold rush that attracted all manner of colorful entrepreneurs and left countless artists nursing serious financial grievances. The moguls who came to dominate the industry in the mid-’90s—Sean “Diddy” Combs, Russell Simmons, and Damon Dash—were all gifted self-promoters who, as portrayed in The Big Payback, were more or less extemporizing in a marketplace created by a young, capricious demographic.

This formula didn’t guarantee big bucks for record companies. In the early ’90s, Charnas writes, Sony was exasperated at the “endemic disorganization” through which its Def Jam imprint, under Simmons’ stewardship, had accrued some $17 million in debt. If only they’d realized that record sales were becoming a secondary revenue stream. With the creation of the clothing line Phat Farm in 1992, Simmons became the first rap entrepreneur to look beyond mere music and attempt to market the ghetto-quixotic lifestyle preached in hip-hop’s lyrics. Five years after he and his partner Lyor Cohen had unloaded their stakes in Def Jam for $135 million, Simmons cashed out of Phat Farm, in 2004, for nearly $140 million.

The message hidden within The Big Payback is that while hip-hop may be a volatile industry, few of its business strategies are unique. After Simmons’ initial success, virtually every major rap figure tried to establish a presence in the rag trade. Combs’ Sean John label and Jay-Z’s Rocawear line were among the most prominent companies to follow in Simmons’ footsteps. (Combs recently signed an exclusive distribution deal with Macy’s (M), while Rocawear was sold for $219 million in 2007.) Rapper 50 Cent also launched a successful clothing line, G-Unit, before entering a 2004 partnership with Vitamin Water parent company Glacéau. 50 Cent’s unimpeachable street credibility—he was shot nine times at close range in 2000—helped sell millions of bottles of his signature drink, Formula 50. In 2007, Coca-Cola (KO) purchased Glacéau for $4.1 billion, and “Fitty” walked away with, Charnas writes, upwards of $60 million.

Of course, others weren’t as lucky. Jay-Z’s former wingman Damon Dash steered Roc-A-Fella Records on a self-immolating expansion drive that included magazines, movies, and a vodka brand. Despite Dash declaring himself the Tiger Woods of business, banks foreclosed on his two New York condos in 2009.

While The Big Payback is no business primer, it does contain hope for aspiring music moguls. Despite record sales’ free fall, most of hip-hop’s ruling class is enjoying some well-earned rest after making millions on all the lifestyle extensions they launched. Looking on the bright side, there’s now ample room for a new cohort of inventive mavericks to take over.

By: Steven Daly (Business Week)


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