Heavy metal makeover

(FSB Magazine) -- Never before in the history of the planet has there been so much music floating around, of all kinds and easily accessible. Thanks to iTunes and its cousins, from YouTube (great for live concert clips) and MySpace (unsigned bands) to satellite radio, Internet radio and the vast underworld of illegal file sharing - well, as Aretha almost said, What you want, baby, you got.

As a music lover, Andreas Katsambas, 35, can appreciate all that. He remembers what a struggle it was to get his fill of his favorites - Pink Floyd, AC/DC and Slayer, in that order - when he was growing up on the Mediterranean island of Cyprus. Which is why a part of him is just as thrilled with the modern digital cornucopia as the rest of us are. But as CEO of The End Records (theendrecords.com), a nine-year-old heavy-metal label in New York City, Katsambas fears for the life of his company.

On the face of it, you might think the guy's in pretty good shape. After launching in his bedroom in San Diego in 1999 and shifting operations to Salt Lake City in 2002, Katsambas moved this past summer to new headquarters in the trendy East Williamsburg neighborhood in Brooklyn. (Incredibly, 13 of The End's 14 loyal employees followed.)

Sales in 2006 were $3.5 million, up 25 percent over the year before, and the company is profitable. In December, Katsambas signed a North America licensing agreement with celebrated Finnish monster-rockers Lordi, whose members dress as mummies and vampires. Lordi's "Hard Rock Hallelujah" took first prize at the 2006 Eurovision Song Contest, an annual pan-European jamboree that launched the careers of ABBA and Celine Dion.

But Katsambas worries. When Tower Records folded in October, The End lost a major distributor that was more friendly to indie labels than are mainstream giants Best Buy (BBY, Fortune 500) and Wal-Mart (WMT, Fortune 500). The fallout was immediate. "Suddenly all the big chains got very tight with their budgets," Katsambas says. Sadly, he can't count on small record stores to pick up the slack. Hundreds of those have closed in the past several years, he says, "and you don't see any new ones opening up."

Meanwhile, back in Brooklyn, expenses are through the roof. The move from Salt Lake cost $30,000. His $6,000 monthly office rent is twice what he used to pay. Internet access is considerably more expensive in New York, taxes are higher, even trash pickup is an extra $200 per month. "Every month I sit down with my accountant," Katsambas laments, "and she says, 'Things are tight. How do we make it work?' "

He's looking for answers to basic questions. "How do we maintain a steady cash flow?" he wonders. "Where do we allocate our available budget?" If the traditional record-label business model - investing in studio sessions and concert tours and making the money back on CD and record sales - is dead, and practically everyone agrees that it is, then what's next for The End?

Katsambas checks his e-mail from bed every morning, even before he turns on the light. He isn't panicking - yet. " In times of crisis, I make the best decisions," he says. But he needs a roadmap.

Over two days, three industry experts recruited by FSB climb the steep steps to The End's second-floor offices to meet with Katsambas and his sales VP, John Cariaso. First up is Nicholas Butterworth, 39. He arrives wearing jeans and a black T-shirt with VEGAS inscribed on the front, and quickly blends right in. Butterworth made his industry bones by running the music Web site SonicNet. When MTV bought SonicNet in 1999, Butterworth became CEO of MTV Interactive Group. These days he's a part-time deejay and full-time entrepreneur. His latest project is Travelistic.com, a video site for travelers.

Katsambas takes Butterworth on a quick tour of the adjacent warehouse, where scary-looking kids with extra holes in their bodies (Katsambas is the only staffer whose skin is neither painted nor punctured), some on skateboards, are picking and packing CDs and mailing them all over the world. Katsambas started this business within a business because he wasn't happy with the mail-order distribution his label was getting from third parties. Today it's the biggest metal music mail-order site on the Web, handling dozens of labels in addition to The End and accounting for two-thirds of company sales and all its profits. "If it wasn't for mail order," Katsambas admits, "the label wouldn't work."

Back in The End's plywood-paneled conference room, sparsely decorated with a Salvador Dali beach scene print, Butterworth asks, "Out of total sales for the label, what percentage are digital?"

"One percent," says Cariaso, the sales guy. "Metal and hard-core fans would much rather buy a full CD. They want to be able to read the lyrics and listen to the whole album." That's a mixed blessing, replies Butterworth. On the one hand, it means The End is less vulnerable to digital piracy than the major labels are. Then again, digital sales generate 10 percent of total sales at a typical major label - not just singles that go for 99 cents on iTunes but also licensed ringtones that can sell for several dollars a pop.

"I think you should continue to investigate digital sales," says Butterworth. "The fact that digital hasn't taken off among this audience doesn't mean that it's not still going to be meaningful." He suggests experimenting on The End's own Web site rather than waiting for iTunes to figure it out.

Maybe the solution is digital content not available on CD, he suggests, or digital prereleases available one month before a new CD hits the streets - but only to preferred customers. "Your first, best customer is somebody who already likes the band," Butterworth explains. "But then I'd rather market to somebody who already has records from The End and knows the label."

Another lesson from the majors: The End should think about moving into a different sort of partnership with artists, where they can participate in touring income as well as merchandise such as hats, T-shirts and collectibles. Katsambas jumps at the idea: "That's something we want to establish as well - the merchandising part for sure."

"You don't want to get into a bidding war for merchandise rights with established artists," Butterworth cautions. "It's even worse than bidding for music rights. It's more risky, and you can get stuck with inventory that you don't want. But maybe you could offer [a partnership deal] to new bands you're developing. They'd be ecstatic, and you could grow with them."

Butterworth also wonders if there's a way to add some higher-margin products to the mix. "Either reissues or greatest-hits records or cover records and concept albums," he muses. Katsambas looks skeptical. Butterworth grimaces a little. "I mean, all these can be cheesy," he says. "It will never be a hit and deliver the upside in the same way but, you know, TVT Records (tvtrecords.com) was built on recordings of songs from TV. They sell every year at insanely high margins."

After lunch comes Dan Levy, 48, a former management consultant who now builds Web sites for rock stars, including Bob Dylan, Pearl Jam, Patti Smith and Bruce Springsteen. Levy checked out the Web site before he got here, listened to some clips, found at least one band he liked, Estradasphere ("weird band, weird name, major musicians," says Katsambas), and ordered a CD.

He says he was struck by the large number of international bands on the label. "I was thinking it would be really neat on the Web site if you had a world map that showed where all the bands come from," he says. Katsambas nods approvingly and writes down the suggestion.

"When I go to the Web site, I'd like to be able to find out more about the bands," says Levy. "If you have bands that are really motivated, you should make them create more content for your site. You've got the kind of audience that really wants to know more. You can create original content like audio interviews, or just Q&As, or open up the Q&As to the fans."

Levy wants to know if The End has thought about any other places it could sell CDs besides record shops. "You're probably not going to get this music into Starbucks (SBUX, Fortune 500)," he allows. "But is there some other retail environment that your audience goes to? Maybe it's not skateboard or surf shops, but it has to be someplace."

"This is the dilemma I'm facing," says Katsambas. "There is no audience for this music. We've created it. There was nothing like Estradasphere before."

Levy isn't buying it. "The teenagers who like this music now are very similar to teenagers who liked [1970s progressive rockers] Emerson, Lake & Palmer and" - he pauses for a beat - "have since grown up to be journalists and consultants. There's a mentality of music appreciation. It can't be that your audience is so alienated that they don't shop in stores and go places."

Last up is Peter Spellman, 49, director of career development at the Berklee College of Music in Boston and author of two books on the music industry, including "The Self-Promoting Musician" (Berklee Press, $24.95).

Spellman sports a black ribbed pullover, a pencil mustache and a goatee. "I think it's always wise to be looking at the low-hanging fruit," he says expansively. For example, Katsambas could generate a tidy revenue stream by licensing The End songs for TV, film and videogames. "Just focus on plugging the songs and then outsource the administration for a 5 percent fee," he urges, "so you don't have to worry about the details so much."

"I totally agree," says Katsambas, sounding not quite convinced. "This is something I need to explore. But you know, with the move to New York ..."

"I totally understand," says Spellman, not letting up. "But you need to learn as much as you can about licensing. You should also figure out as many ways as possible to make the fan a co-creator in the success of these acts. It can be as little as getting fans involved in selecting what single gets pushed to radio. It can be deciding which one of three graphic images gets selected for a CD cover. The artists who are open to that are going to find that it's the most powerful solidifier of loyalty ever."

"Keep doing what you're doing," Spellman says, summing up. Here he's on the same page with Butterworth and Levy. All three consultants agree that the Lordi signing is a key development, one that could make or break The End. "My opinion?" says Spellman. "Seeing everything you've done so far - the smart decisions that have been made, the infrastructure you've built, the contacts you've made - you've got the ingredients to now put a large act into that and amplify that success."

A few weeks later we caught up with Katsambas by phone at a music industry trade show in Cannes. He told us about one cash-generating idea he had already implemented: publication of a $40 limited-edition book/CD combo tied to the release of The Novella Reservoir, the latest album from the dark-metal band Novembers Doom. Katsambas is also working to expand international distribution of his mail-order catalog. Next checkpoint: the Lordi release in March. Stay tuned. We promise to follow this story right through to the end.

Our consultants suggested everything from selling CDs in skate shops to offering digital sneak previews to committed fans. Please e-mail your thoughts to FSB's Makeover editor at fsb_mail@timeinc.com.

Could your business use a makeover? In general, successful Makeover candidates are profitable small companies with at least $1 million in annual gross revenues. To submit your firm for consideration, e-mail the FSB makeover editor. Please describe your business briefly, provide your most recent and projected revenues, and explain why you think your company would benefit from a Makeover.

------------------------- 

Could your business use a makeover? In general, successful Makeover candidates are profitable small companies with at least $1 million in annual gross revenues. To submit your firm for consideration, e-mail the FSB makeover editor here. Please describe your business briefly, provide your most recent and projected revenues, and explain why you think your company would benefit from a Makeover.