Platinum Entertainment, Inc.

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Platinum Entertainment, Inc.

2001 Butterfield Road, Suite 1400
Downers Grove, Illinois 60515
U.S.A.
Telephone: (630) 769-0033
Fax: (630) 769-0049
Web site: http://www.platinument.com

Public Company
Incorporated: 1991
Employees: 101
Gross Sales: $48.89 million (1999)
Stock Exchanges: OTC
Ticker Symbol: PTET
NAIC: 334612 Prerecorded Compact Disc (Except Software), Tape, and Record Reproducing; 51222 Integrated Record Production/Distribution

In 1999, Platinum Entertainment, Inc. was the largest independent record company in the United States. The company produces and sells albums through several labels including CGI Platinum, Platinum Nashville, House of Blues, Light Records, and River North Records. Initially a gospel music company, Platinum quickly expanded its roster of artists to include pop, classical, urban, country, and blues performers. The company also developed an innovative business plan. Rather than focus on discovering hit new musicians, Platinum has built its sales steadily by signing contracts with veteran artists, including Peter Cetera, The Beach Boys, and Dionne Warwick. In addition, Platinum Entertainment has been at the forefront of the digital music revolution. The company’s PlatinumCD.com allows consumers to purchase compact discs (CDs) and create custom CDs online. Moreover, Platinum’s HeardOn.com (now part of LiveOntheNet.com’s web site) offers free downloads of Platinum musicians. Financial struggles at Platinum in the late 1990s forced a dramatic decline in the company’s net worth and the value of the company’s stock. In July 2000 the company moved its shares from NASDAQ to the OTC Bulletin Board, as it sought to address liquidity problems through institutional investors.

From River North Studios to Platinum Entertainment: 1985-93

Platinum Entertainment was the brainchild of Steve Devick, an amateur musician who founded River North Studios in 1985 after a short career as an optometrist. Located in Chicago, River North Studios became popular with the city’s influential advertising community, which used River North to record jingles for television and radio commercials. Because of its high-tech equipment, though, River North quickly won the admiration of musicians as well. A consummate businessman, Devick was the first to invest in Platinum Technology Inc., a software company launched by Andrew Filipowski in 1987. (This partnership would endure for over a decade, as Devick and Filipowski fruitfully collaborated on a number of occasions.)

Devick made his next major move in 1990, when he formed Chicago Gospel International (CGI), a record company that produced African American religious music. While many of the major record labels had overlooked gospel music, Devick recognized the genre’s money-making potential. Launching CGI set the tone for most of Devick’s future transactions. Rather than pursuing mass-market artists, Devick concentrated on finding musical niches such as gospel that were underexplored by the major studios.

While Devick ventured into new territory with CGI, River North Studios continued to perform strongly. In 1991, the company recorded “I Wanna Be Like Mike,” a jingle for a Gatorade commercial that featured basketball sensation Michael Jordan. As the commercial and its catchy song proved a hit with audiences across the United States, Devick teamed up with A&M Records to capitalize on the jingle’s popularity. Devick founded a new venture—River North Records—which produced a single of the song. A&M distributed the “I Wanna Be Like Mike” record, which sold over 100,000 copies.

Buoyed by his successes at both CGI and River North Studios, Devick reorganized his expanding array of businesses as Platinum Entertainment in 1991. CGI, River North Studios, and River North Records retained their individual labels within the Platinum company. Platinum also continued to bolster its gospel offerings, acquiring A&M’s gospel division in 1992. In early 1993, Platinum bought the bankrupt Light Records, which had a strong gospel catalogue as well as one of contemporary Christian music. By the end of the year, advertising work accounted for only about ten percent of River North Studio’s total revenue, as the studio devoted most of its efforts to recording Platinum productions.

Growth and Development: 1993-97

Platinum’s fortunes changed dramatically late in 1993, when PolyGram Distribution Group (one of the largest record companies in the United States) agreed to distribute Platinum’s CGI and River North labels. PolyGram’s decision reflected the growing stature of gospel music in the marketplace. Although religious music overall accounted for only 3.1 percent of the $10 billion in U.S. music sales in 1993, many analysts anticipated that African American gospel music sales would soar in the mid-1990s. “The potential for gospel is enormous,” an ebullient Devick told Billboard in the wake of his distribution deal with PolyGram, noting, “The key is that it’s good music that can compete in the marketplace not just with gospel, but with R&B as well.” CGI’s gospel music sales bore out Devick’s claims. In 1993, Platinum achieved gospel music sales of $1 million per month, according to the October 29, 1993, edition of the Chicago Tribune. Moreover, every album ever released by CGI had been ranked on Billboard’s Top Gospel chart. By 1994, Platinum was the leading producer of gospel music.

In the months following its distribution agreement with PolyGram, Platinum rapidly diversified its musical offerings. Rather than confine itself solely to gospel, Platinum ventured into the adult contemporary genre as well, most notably when River North Records signed pop singer Peter Cetera (the former lead singer of the hit band Chicago) to a multi-album deal in October 1993. As the Chicago Tribune explained, “Platinum [was] hoping that the Cetera deal w[ould] bring the company as much success with the adult contemporary format as it ha[d] found on the gospel music charts.”

In a similar vein, Platinum sought to enter the competitive sphere of country music. Early in 1994, the company established River North Records Nashville. Headquartered in Tennessee, Platinum’s newest label initially departed from the company’s usual approach of relying on established artists when it quickly released an album by country newcomer S. Alan Taylor. But River North Nashville reverted to form when it signed its first high-profile artist, Holly Dunn (the recipient of the Country Music Association’s 1986 Top Female Vocalist award), in July 1994.

Meanwhile, Platinum formed its own distribution arm in 1994 to complement its agreement with PolyGram. The new entity—Light Distribution—distributed Platinum and other companies’ religious music to Christian bookstores. Platinum also continued to hone the innovative marketing strategies that had helped make its gospel albums best-sellers. For example, while most religious music producers had traditionally sold their wares only at concerts and Christian bookstores, Platinum employed television direct-response ads.

Simultaneously, Platinum strove to develop its roster of artists (in 1995, the company signed perennial pop favorites The Beach Boys to a multi-album deal), and also focused on making key acquisitions of other music companies. In an effort to raise capital to pare down its debt and facilitate further acquisitions, Platinum became a publicly traded company in March 1996, raising $32 million in its initial public offering. Platinum then began a spate of acquisitions, including the purchase of the Double J Music Group, a Nashville-based country music publisher that controlled the copyrights to more than 250 country songs, in June 1996. Platinum’s CGI also won an exclusive recording contract with the 8.5 million member National Baptist Convention USA, Inc. to record live gospel music on behalf of the group for commercial distribution. Later in 1996, Platinum obtained a 50 percent stake in House of Blues Records, a leading blues music label. With this arrangement, Platinum was empowered to produce and distribute all current and future artists signed to the House of Blues record label.

Platinum’s most significant acquisition occurred in November 1996, when it purchased Intersound Inc. for $24 million. Headquartered in Georgia, Intersound was one of the largest independent record companies in the United States, with a solid presence in several music categories, including gospel, adult contemporary, country, urban, dance, and classical. With 1996 sales exceeding $33 million, Intersound controlled its own proprietary distribution system and had signed a stable of artists, including Kansas, Jefferson Starship, The Guess Who, Crystal Gale, and the Bellamy Brothers—much like the proven artists with solid sales Platinum had courted in the past.

Fueled by the company’s numerous acquisitions, Platinum’s 1996 revenues soared to $25.5 million, though a net loss of $3.7 million was reported for the year. However, since Platinum’s future prospects looked bright, it was able to finalize a deal with a consortium of investors that included Maroley Media Group in December 1997. Under the terms of the agreement, the investors took control of 33.8 percent of Platinum’s outstanding shares. In return, Platinum gained a considerable influx of cash, which it planned to use to pay down debt and to continue to grow.

Company Perspectives:

It’s so simple. Music is perfectly suited for e-commerce because like video and software it’s electronically transmittable.

At the close of fiscal 1997, Platinum reported record revenues of $42.6 million, a gain of 67 percent from the prior year. The company’s loss had shrunk to only $91,000. The year had brought a number of other positive events as well. Platinum’s River North Records was ranked tenth among all record labels in terms of total radio play, and the popularity of gospel music (Platinum’s stronghold) continued to increase. According to the Recording Industry Association of America, gospel music sales had increased 38 percent in 1997, and the genre exceeded both classical music and jazz in sales. Platinum’s gospel division even won a Grammy award in 1997, for Cissy Houston’s “Face to Face” album. In addition, Platinum gained another venerable performer in 1998, when Dionne Warwick signed with River North Records in February.

Focusing on the Internet: Late 1990s

Platinum’s business strategy shifted dramatically in 1998. The company announced in April that it was partnering with Platinum Technology to create an Internet-based music site. Soon thereafter, Platinum Entertainment forged an agreement with Liquid Audio, a developer of secure online music delivery systems. On October 1, 1998, Platinum debuted PlatinumCD.com—a web site where the company made its entire catalogue of recordings available to consumers via Liquid Audio. Consumers could “click” on a desired track from the web site, and the song was then transmitted directly to the computer hard drive of the customer, who paid a set fee per song. The buyer could then record the track onto a compact disc. PlatinumCD.com also allowed consumers who used the web site to create custom CDs online. Platinum would then compile the CD mix and send it to the buyer.

With the launch of PlatinumCD.com, Platinum Entertainment blazed a new path in the music industry. Most of the company’s competitors were opposed to the digital transmission of music, fearing that the technology would encourage piracy and erode profits. Devick had a different view. “It’s a natural progression for the distribution of music,” he told the Chicago Tribune on April 30, 1998. With electronic transmission, Platinum also saved on shipping costs, promotional expenses, and manufacturing costs.

Soon after PlatinumCD.com was operational, Platinum Entertainment announced an agreement with The Music Connection Corporation—the parent company of www.MusicMaker.com, the largest custom-music compilation Internet site. Under the terms of the deal, Platinum acquired ten percent of The Music Connection Corporation in exchange for Platinum stock, and the two businesses combined their catalogues of recordings—which could be purchased and downloaded from either company’s web site. “This arrangement allows Platinum to create a virtual inventory of our valuable music catalogue without financial risk, and should provide our company with substantial incremental revenues,” Devick said in a press release. (Devick’s prescience was demonstrated in July 1999, when MusicMaker.com’s initial public offering pushed the value of Platinum’s holding to over $11 million.)

In November 1998, Platinum once again entered new territory when it decided to offer free promotional tracks for digital download in the popular MP3 file format on both MP3.com and PlatinumCD.com. Platinum planned to post four songs on both web sites every two weeks. Consumers could download the tracks after completing a registration card. MP3—a compression technology that sped the download times of sound files while retaining a high sound quality—was considered to be the bane of the recording industry because it had been used to disseminate unauthorized copies of music. Platinum, on the other hand, believed MP3 could play an important role in promoting its artists and driving retail sales. “Our feeling is people don’t really want to buy stolen cars,” Devick told Newsbytes News Network. “I think you avoid piracy by giving people legal alternatives.”

Platinum’s efforts to build PlatinumCD.com were successful. Visits to the web site increased from 13,500 in October to 3.8 million in December. Although most were “window shoppers,” Platinum felt confident that its web sales would grow, mainly because the company’s target customer inhabited the same demographic group that market research revealed as the most likely to make purchases on the Internet. In any event, total sales for the year exceeded $40.6 million, and Platinum artist Otis Rush won a Grammy award for best traditional blues album.

Platinum introduced additional changes in 1999. The company shifted its distribution from a dual system with PolyGram/Universal to a solely in-house one with its own newly created PED Corp., located in Atlanta. This move was prompted when PolyGram filed a lawsuit against Platinum, claiming that its agreement had barred Platinum from moving recordings through its own distribution channels and that Platinum had violated that agreement.

Platinum focused on maximizing its online sales. Cognizant of the fact that Internet music sales had accounted for only one percent of total sales in 1998, however, Devick cast about for innovative ways to turn a profit. “In the short term, the real increase in profitability going forward on the Internet will be the promotional use of music and the nonmusic sites that will be willing to pay content holders for their use of their catalogues,” Devick explained to the Chicago Daily Herald. In other words, Devick hoped to sell Platinum’s music to other online companies, such as electronic greeting card businesses.

Key Dates:

1985:: Steve Devick founds River North Studios.
1990:: Chicago Gospel International is formed.
1991:: River North Studios is reorganized as Platinum Entertainment, Inc.
1993:: Platinum purchases Light Records; establishes a distribution arrangement with PolyGram.
1994:: Platinum creates River North Records Nashville, as well as Light Distribution.
1996:: Platinum Entertainment goes public and acquires House of Blues, Double J Music Group, and Intersound Inc.
1998:: PlatinumCD.com is launched, and company establishes an equity investment and revenue-sharing arrangement with The Music Connection Corporation.
1999:: Platinum Entertainment creates HeardOn.com.
2000:: HeardOn.com becomes part of LiveOntheNet.com’s web site; company’s stock is shifted from NASDAQ to Over the Counter Board, following financial difficulties at the company.

In November 1999, Platinum raised the stakes yet again, when it created a new web site—HeardOn.com. Unlike PlatinumCD.com (which would remain operational), HeardOn.com made Platinum’s entire catalogue available for free download. Platinum intended to profit in this venture by attracting online advertisers to HeardOn.com, and also believed that the site would promote the retail sale of the company’s records. The new business offered an added bonus. Every visitor to HeardOn.com who downloaded music was required to complete an in-depth registration card that provided a wealth of data. Platinum would eventually collect a powerful marketing database, which the company could use to target customers in specific ways or to sell to other companies.

Platinum also believed that HeardOn.com would bring new talent to the company. Unsigned musicians were encouraged to post their songs on the web site. Every three months, the most frequently downloaded artist would then receive a record contract worth at least $250,000. Moreover, HeardOn.com contained a classical music radio station—with all recording available for free download. While many analysts and industry insiders decried Platinum’s venture as the end of the music business, Devick was optimistic. Despite naysayers, Devick observed to the Chicago Sun-Times, “Radio turned out to be the biggest boost for music that ever occurred.” Devick believed the Internet held out similar potential.

Soon after launching HeardOn.com, Platinum divided its online and “bricks and mortar” operations. While the company’s digital division would remain in Downers Grove, in November 1999, Platinum moved its traditional operations to Atlanta to join the distribution center. Further changes quickly followed. In January 2000, Platinum announced that HeardOn.com would be folded into LiveOntheNet.com—a web site that offered online music, concerts, and sporting events. LiveOntheNet.com, a member of the divine interVentures, Inc. family of e-commerce companies, paid Platinum a $2 million licensing fee. For Devick, the deal illustrated Platinum’s “emerging role as a business to business Internet content provider,” as he explained in a press release.

However, the move was also part of an effort to consolidate operations and cut costs. Financial struggles for Platinum in 2000 had intensified when it terminated its distribution contract with PolyGram Distribution. Without PolyGram’s services, Platinum was forced to retool, and logistical problems arose when it moved to new distribution facilities of its own. Reportedly, the new facilities were not available on time and the move then had to occur during the company’s busiest season, just before the winter holidays. Distribution operations were delayed during the move, and the company experienced excessive customer dissatisfaction in the form of high product returns for 1999. With liquidity problems beginning the new year, the company’s primary bank loan came due and could not be paid. The future of the company, so bright a year before, was in question in the new millennium.

Principal Subsidiaries

CGI Records Inc.; Intersound Inc.; Just Mike Music Inc.; Lexicon Music Inc.; Light Records Inc.; Peg Publishing Inc.; Recording Experience Inc.; Royce Publishing Inc.