We chat to Steve Lewis about his incredible time in the music business, and his advice for successfully building and monetising a music publishing catalogue.
Hi Steve, how did you first get involved in the music industry?
I was 16 years-old and I had just taken what were then called GCE O levels. I wanted a job for the summer holidays so I answered an ad in The Times which said, “Record company/magazine needs young people. Easy work, good money.” That was about the best outcome I could hope for so I phoned the telephone number. I was told to turn up at an address just off Bayswater Road and I was greeted by Richard Branson’s partner, Nik Powell, and they actually didn’t have a record company at all. They had a magazine called Student Magazine.
Nik wanted me to go sell the magazine in Hyde Park. I was going to be allowed to keep half of the cover price and had to return the unsold magazines and 50% of the proceeds to them at the end of the day. I told him I had come for the record company job and he said, “You’ll have to talk to my partner about that and he’s not here. Why don’t you just go and sell these magazines?” I said, “I don’t really want to do that.” So I waited, I met Richard, I talked my way into it and the record company wasn’t actually a record company at all. It was a mail order retail business.
They advertised in their own publication, Student Magazine, and in a couple of other places, and sold albums at discounted prices. You can’t really understand today how revolutionary that was at the time. People didn’t sell records for discounted prices in those days. The manufacturers set the price and retailers all sold records for the same amount. There was no competition in the market at all. So I began working for Richard age 16, for the fledgling Virgin which was really me, Nik, and maybe half a dozen other people. I did everything I could to make myself indispensable, and at the end of the summer holidays they allowed me to carry on working after school. I would get paid £1 for 4 hours work and I had to take my train fare out of that which was 30p.
After school I decided to go to university. Richard said, “Oh you don’t need to go to university. That’s silly. I didn’t go and I’m doing fine. Come and work with us, it’s going to be more fun”. I said, “No, Richard, I want to do this”, so I went to university in London but I was able to continue working at Virgin during my studies. I wasn’t a very enthusiastic student and by 1974 I knew that I was very disenchanted with my studies, I knew it wasn’t going to be vocational. During that time Virgin had become a proper business. In 1973 we had actually released our first record, Mike Oldfield’s ‘Tubular Bells’. And Richard and Nik asked me if I would run Virgin’s artist management company.
I dropped out of university, and began working full time running the artist management company. I did that for four years. At the end of four years, and as I became more aware of how the music industry worked, I realized there was some conflict because the artists I was managing were signed to Virgin Records and Virgin Music Publishing, so I didn’t really feel that I could do the job properly. When all of us went into it, to be truthful, we had no grown-ups telling us how to do things, we had no handbook to tell us how things were done, and we didn’t know how other people did them. We just saw problems and looked for solutions.
I told Richard I was going to leave and I set up an artist management company and Richard was going to transfer the contracts over to me, which he did. But then at the very last minute Richard said, “Oh you can’t leave, we’ve been friends for years now. Why don’t you join the board at the record company?” So I let my partner in the management company do the day-to-day work and I became Deputy Managing Director of Virgin Records in 1978. I had five really successful years where we signed and broke, amongst others, Culture Club, Phil Collins, Human League, Simple Minds, and China Crisis. We were red hot, everything we touched did really well and the company expanded.
Richard called me one day and asked me if I would run the music publishing company, which I didn’t really want to do, to be honest. In those days music publishing was a bit of a backwater and the smart guys worked in the record company. The guys that weren’t smart enough to work in a record company worked in a publishing company so I was a bit offended because we’d been incredibly successful and I didn’t really feel like being banished to music publishing. Richard said, “Look, you’ll run the company how you like. If you think it can be run better you do exactly what you want. As long as you are profitable I don’t care how you do it.” So I then, to my own surprise, found that this was my calling, if you like.
I love music publishing. I love hanging out with songwriters, I love the whole notion of music publishing – the way it works. Without a song, there’s no music industry. I became really fascinated by the whole process and how you could do it better and how you could innovate.
I was asked by my general manager one day if I could approve a use of ‘Tubular Bells’ in a car commercial. She said, “It’s a good offer, we can get £60,000 for this license.” Now this was my first experience with licensing, I was preoccupied with signing writers that were going to sell millions of records. People like Terence Trent D’Arby, Fine Young Cannibals, Pet Shop Boys, and Alison Moyet. We were doing extremely well. The idea of making £60,000 from one usage was very interesting to me because that was the same as having a gold album. So I said, “How did this happen?” And Maria, my general manager, said, “Well we just got a call from an agency.” So I thought, “We have to get more of these calls. How can we do that?” No one was doing that at the time. People were not proactively trying to license their music, it was entirely reactive. Everybody’s focus in those days was selling records.
I hired two guys to go out and beat the bushes – to talk to music supervisors on films, television programs, and creatives at advertising agencies, and we soon developed a very healthy income stream. No publishers were actively seeking those uses prior to that.
We called that department the Film and Television department but it was really about getting things licensed for synchronization. When I first started working with bands in the mid to late 70s, it was not cool to put your music into a commercial, movie, or television program. The focus of music publishing was maximizing mechanical income through the sale of records. We were the top independent music publisher in the UK throughout that period, we won umpteen awards in the UK, in America, and in other places. Eventually Richard decided that he was going to sell Virgin Music Group, which was the label, the publishing company and the studios, to EMI. I wasn’t asked to work at EMI nor did I want to so I took some time off. I then met Chris Wright who was the founder of Chrysalis Records, which by that point was a public company trading on the UK Stock Exchange.
Chris had sold Chrysalis Records to EMI and had retained the publishing company, was free of his non-compete provision and able to start a new label. Chris and I set up a joint venture label called Echo, and I became chief executive of the Chrysalis music division. At that point Chrysalis was not trading particularly well. Chris realized he needed to reinvent the company so he brought me in to run the music business, started a film and television division run by Mick Pilsworth, an export division called Lasgo, and developed a radio business under the leadership of Richard Huntingford. We were a very good team, we restructured the company and we were very successful. I had to replace a number of people at the publishing company, I had to start record label from scratch, but within 18 months we were the top UK publisher.
We had taken over from Virgin Music as the top independent UK publisher. Echo became a successful label with artists like Babybird and Moloko, and it was a very enjoyable period of my life. I stayed there from 1993 until 2001 when I decided I was going to leave and write a book. So I started working on that but I was lured back into the music business. I saw an opportunity and I managed to raise money in the city with private equity funds and I started my own company called Stage Three Music in 2003.
What were your techniques for building up a catalogue and finding new artists during your time at Virgin and Chrysalis?
Well the first thing is, get the best possible team of people around you. Chris is a very, very loyal guy, to his credit, but there were difficult decisions that he had avoided making. So the first thing I did was replace the guy that ran the UK business.
I brought in new A&R people because we were not identifying talent early enough. A&R is all about recognizing talent early and moving fast. So I managed to hire very good A&R people, I hired a really good Managing Director, Jeremy Lascelles, I replaced the president of the American company with Leeds Levy. To me the key is the people. You also need robust systems. Before spending any money on A&R I overhauled administration. It’s critical. There is no point in having your A&R team bringing in hits if money is leaking out the company because your administration isn’t sound.
So the first thing you want to do is secure your administration. I made sure that all the songs were being registered and collected properly in accordance with the contracts. I found horrendous examples of errors in the administration and heads did roll. Once I’d secured the administration, I could start bringing in the talent on top of that foundation because then you’re going to be able to do the talent justice, which is crucial. Then you start looking for additional ways to exploit the rights that you have. You also have to bear in mind that times have changed a lot from the 70s when I worked with bands and artists like Mike Oldfield or bands like Henry Cow, many of whom were very anti-establishment.
Post Thatcher the attitude was completely different. In the early days you didn’t discuss the business with the artist in the room, the artist would be ushered out to meet someone to talk about creative things and you would talk to the manager about the deal points and the finances. But artists like Culture Club wanted to know where the money came from, where it went to, how it was structured. They were smart guys and they were not embarrassed about knowing where their money was going, quite rightly in my opinion. So we wanted to build ways of developing better results for writers.
If tools like Synchtank had been available then you can be sure I would have been using them. But at the time we were just moving towards that kind of thing. We began using the Internet when I joined Chrysalis really. That was the beginning of it in terms of general use when everyone had a screen on their desk. When I left Virgin in 1992 I did not have a computer on my desk. When I went to Chrysalis the following year I did, so things started to change rapidly after that.
What was the motivation for you to go out on your own and set up Stage Three Music?
Midlife crisis. I just really wanted to be doing it for myself this time. I’ve been very fortunate and by coincidence have fallen in with some of the most talented people of my generation – Richard Branson, Nik Powell who now runs the National Television School and was a very successful film producer after he split up with Richard. These were great guys. Chris Wright was another hugely influential figure in the British music industry from the mid to late 60s onwards. It was just time to go out there and do it for myself so that’s what I did.
What advice would you have for people nowadays wanting to go out and set up their own publishing companies?
It’s difficult. You’ve got to start with A&R. There’s two ways to go, I think. One is you can do your Malcolm Gladwell 10,000 hours and at that point you might be able to attract investment. I was very lucky; I raised a very substantial amount of money and was able to start a really well funded independent music publishing company. If you are younger and you don’t have the miles on the clock you can’t go to investors and show them what you’ve done. They very much look at track record and things like that. You’ve got to appear to be invest-able.
If you are a young entrepreneur then you have to start in a different place I think. At Virgin in the early 1970s we were the audience, we were teenagers. When ‘Tubular Bells’ came out Mike and I were exactly the same age. We were able to make records and understand the taste of the audience because we were the audience. So that’s the other way of doing it. When you do that you are under the radar of guys who are the age I am now. I’m not the right age to be going out there doing those kinds of things. It’s a lifestyle thing. I’ve spent my whole life watching support bands in pubs and grotty venues and all of that kind of stuff. But I don’t want to do that anymore and there are people that still love doing that.
So it’s about being a tastemaker?
I think, as I say, you have to fly under the radar, and it’s great if you are the same age as the audience. A great example is someone like Richard Russell, he was a DJ who now runs XL Recordings, one of the most successful independent labels in the world with Adele and all sorts of fantastic artists. He’s a great guy but he was making records to please himself in the early days of XL, it was his vision. If you’re going to start you have to do that – you have to be the audience, and you’ve got to fly under the radar of the people who’ve got more money than you. In the early days of Virgin we were able to sign artists because other people didn’t want them. No one wanted to release ‘Tubular Bells’. They didn’t get it. It was one piece of music over two sides of an album, 40 minutes of music with no lyrics just Part 1 and Part 2.
But we got it because, as I say, Mike and I are just days apart in age. We knew what he was trying to do. I wouldn’t take the credit for that by the way. Simon Draper, the managing director of the label, is due more of the credit than I am. But we were all the same sort of age as the artists. You get to a point where you meet the artist and they are 10 years younger than you and that’s when need other people who are their age to do some of the work. You have to do other things at that point.
How would you advise people with more of a track record to acquire private equity backing?
You are going to have to show how you can make a return for the investors. And you have to be credible. It’s very simple but very difficult. When I started Stage Three I had a very clear strategy of what I wanted to do. I realized that there were publishers who owned catalogues, which in some cases they had inherited, in other cases they had built whilst they were much younger. They had songs which they owned for the life of copyright and royalty rates that were possibly 50% of receipts. They were not what you would call state-of- the-art deals by the end of the 20th century, they were old-fashioned looking deals and they were run by people I thought didn’t really drive the catalogue hard enough. My strategy was I’d buy these catalogues and run them more efficiently and therefore get a good return on the investment. That was the proposition I was able to persuade investors was worth investing in. You’ve got to have a good history and something unique people aren’t doing or something that you can do better than other people.
So one of your strategies was to find other catalogues and just buy them out?
Yeah. I believe that a real publishing company, to have a real beating heart, has to have an A&R function. But at the same time I know that’s an intimidating proposition for investors because you could invest in a writer that you believe in with your entire being and you could be wrong. Even the best A&R men don’t get it right every single time, you just hope that your successes will pay for your failures. Also you can sign an artist that’s got all the talent, but not the intelligence, or the application, or just the good luck. You need to have a little bit of luck in all these things as well. You have to take all of those things into account and you have to persuade your investors.
A&R gives the company character, it gives it depth, and it gives it emotional resonance if you like. You’re not just trading a commodity. But when buying a catalogue you can look at historical revenues and that’s much more comfortable for investors. I bought catalogues including ZZ Top, Gerry Rafferty, Aerosmith. Let’s take Gerry Rafferty’s ‘Baker Street’ for example. When I bought it, it had been earning consistently for thirty years. It’s not suddenly going to stop earning. Investors take comfort from that. If this guy, Stephen Lewis, is right he can turn these earnings of ‘X’ thousand pounds a year into twice ‘X’ thousand pounds a year. But if he’s wrong, it’s still worth ‘X’ thousand pounds a year. As opposed to A&R where you can sign a band for a six figure sum or more and earn zero. And obviously you combine that with your own track record. I had a good track record, I was able to get good references from people that I’d worked with on the creative side and on the executive side of the business.
What other elements go into judging the value of a catalogue?
Well you’ve got the hard facts. One of the key factors in valuing a catalogue is the NPS, Net Publishers Share, the difference between money in and money out. So if I sign you and I pay a royalty of 75%, then for every £100 that comes in, you get £75, I get £25. The £25 is the NPS. A catalogue is valued, amongst other things, on a multiple of NPS. Let’s say the multiple is ten. If I’ve got an NPS of £25, then the catalogue is worth £250. What investors liked about the proposition I put to them is you can increase shareholder value by that multiple. So in other words, if I buy a catalogue that has an NPS of £25 and therefore a value of £250, if I can add £5 of NPS the NPS becomes £30 but the value doesn’t go up by £5, the value goes up by £50. So that’s an attractive investment proposition. But there’s also a subjective element. Sometimes if you look at a catalogue and the MPS is £25 it’s going to stay £25 because there’s nothing else you can do with that catalogue.
I looked at Gerry Rafferty’s catalogue and the amount the catalogue was making from sync and I knew that I could do better. I knew that every company I had ever run prior to that had had much better proportion of sync to overall income. And if I could get that proportion up to the level that I thought it justified, then we would make a great deal of money. In the first 18 months that we owned Gerry Rafferty’s catalogue we increased the sync income by something like 800% because we just went out and let people know that yes, you can license ‘Baker Street’. He’d previously had an admin deal with Universal who are very good publishers for what they do but they have scale, they own something like 3,000,000 songs which means their top earners alone number 450,000 songs or so. They don’t have enough staff to be familiar with every song in that catalogue. I was running a much smaller, much more focused business and that is where our strength lay. We were able to look at that catalogue and really give it the attention that a bigger company couldn’t.
With publishing there are so many revenue stream opportunities.
That’s fundamental to music publishing, yeah. The first thing I learnt when I went from the record company to the publishing company, someone said to me, “You’ve got to understand, this is a penny business.” I didn’t really understand at first what that meant. I focused, when I was running Virgin Records, on selling shed loads of albums, that was how you made the most money. With publishing, as you said, you’ve got lots of different revenue streams. You’ve got your mechanical income from the sale of records, but you’ve also got performance income, sync licensing, sheet music, lyrics, re-prints, sampling, you’ve got all kinds of things. Some of the things are applicable to the owners of the masters, of course. It’s about proportions and where you apply the effort and what the opportunities are.
Record companies are having to adapt. They’ve now got label services divisions where they don’t get to own the rights in the way that they did previously, they don’t make as large a percentage of their income from the sale of records, whether that’s a download, or a piece of physical product, or streaming. The proportions have changed and now they’re also focusing very much on licensing opportunities for sync, what they call master licensing usages.
You must be pleased that you got into publishing so early on at Virgin!
I think I was saying to someone over the weekend that that thing I’m most pleased about is that I had a chance to be involved with all of the changes that have come along in the music industry. And so far the biggest one that has benefited writers, artists, and rights owners was the introduction of the CD. That was a great period in the 80s and 90s until the late 90s when file sharing began, it was when you could financially do the best in the music industry. What I find satisfying and always have done are the changes that occur over the journey. Of course there are the financial benefits of the introduction of the CD, but there were also other changes that were interesting in the patterns of consumption and the way that we sold records. I think that the current climate is fascinating. If I were in my teens now, I would probably be interested in being in a tech business. I think it’s the new Rock ‘n’ Roll.
The record industry is struggling to adapt, the tech guys are sharp and they’re moving faster and they’re changing the world. I don’t hear any artists that want to change to world anymore. They all want to be on X-Factor. Look at all of the stuff going on in the world and there is no artist that has anything to say about it. It’s pathetic. The people that are doing the most to change the world are the tech companies and the artists, in many cases, are providing a bland soundtrack to that. Whereas before they were in the vanguard, as young people we were marching for things we believed in or against things we didn’t believe in. And the music was the equivalent of the Scottish Piper. We were led by the music. Now it’s just bland, corporate mush.
Artists nowadays need to step up and be more outspoken.
Yeah, but they are too careerist. They are just worried about being rich and famous. They want to have designer brand everything and I don’t have a great deal of respect now for a lot of the young artists that are out there. Many of the new successful artists don’t really care that much about their craft. There are obviously many exceptions, don’t get me wrong. I still find artists that I get excited about now and then, but they are fewer and farther between.
Many artists seem less concerned with longevity and more focused on making as much money as they can whilst they are in the spotlight.
Well I think the industry is like that. It’s expensive to launch a group these days. In the early days of Virgin we would sign a group and we wouldn’t even really make a judgment about whether they were going to be successful until they had made three albums.
And now it’s seems if your first album bombs that’s kind of it.
Even if you first single doesn’t make it you might not get your album released these days. Of course there are labels that stick with their artists and believe in their artists and have really admirable values. I’m a huge admirer of Richard Russell and XL. I’m a huge admirer of Domino, Cooking Vinyl. There’s some really good people in some of the majors as well, by the way. You can’t just divide it as crudely as independents are good and majors are bad, it’s not like that at all. A lot of the people that I know that work in majors are passionate about music and very good at it and do a great job. But corporations, by definition, are psychopathic. They don’t have any empathy; their loyalty is entirely to the bottom line. The interesting labels to me were always the ones that were run by guys that had a vision and loved the music.
We’d like to say a huge thanks to Steve for taking the time to speak with us. Check out Part 2 where we delve more into the value of sync, sub-publishing, Steve’s involvement with Synchtank, and his career highlights.