Music masters: (The hip-hop economy part 3 of a series) a new generation of rap moguls is making the industry dance to a different beat: ownership.

SO SO DEF RECORDINGS CEO JERMAINE DUPRI has been cranking out chart-toppers from his Atlanta-based music factory for more than a decade now. The rap and R&B mogul was just 19 when he discovered the preteen rap duo Kris Kross and put his machinery in motion. He groomed the two, landed them a deal with Ruffhouse Records, and wrote and produced their debut album, Totally Krossed Out, which featured the hip-hop hit "Jump." The album sold seven million copies--a major success by any standard. That was back in 1993 when it was rare for a rap album to garner that type of pop music success.

"Jump" enabled Dupri to strike a joint venture label deal with Columbia Records to the tune of $10 million. Under the deal, Dupri, 29, formed the So So Def label, home to artists such as the teen sensation Lil' Bow Wow, R&B group Jagged Edge, and female rapper Da Brat. In fact, Dupri, who is also a rapper, producer, and songwriter, is one of his label's top acts. He has recorded two successful albums: 1998's Life in 1472 and his current release, Instructions, which includes the hard-driving southern anthem "Welcome to Atlanta."

The rap impresario's hit-making abilities have made him one of the music industry's most respected entrepreneurs and positioned him among the vanguard that is pushing the boundaries of hip-hop. In the process, he has helped redefine popular music. Dupri's jack-of-all-trades approach to music is hardly atypical in hip-hop circles. He keeps company with the likes of Percy "Master P" Miller, Sean "P. Diddy" Combs, Jay-Z, RZA of the Wu-Tang Clan, and the eclectic rap duo Outkast (Big Boi and Andre) among others. All wear multiple hats as producers, performers, and independent label executives. And their efforts have made significant contributions to major record labels' profit margins.

Says Elektra Entertainment CEO Sylvia Rhone, whose joint venture with rapper-cum-entrepreneur Missy Elliott has resulted in multiplatinum sales: "An association with the right independent label or production company can provide an important cachet to us. They can help us reach a community that it might take longer to connect with."

In this third installment of BLACK ENTERPRISE's series on the Hip-Hop Economy, you will discover how rap is creating a bevy of entrepreneurial and financial opportunities for the artists who produce and perform the music. While joint ventures have furnished this new generation of music entrepreneurs with huge financial rewards--can you say "bling-bling"--the true prize is ownership of their music. Can they use their influence to secure the type of decision-making power that they seek? That's the next big step for Dupri and his peers.

WRITING A NEW TUNE FOR THE INDUSTRY

The music created by producers such as Dupri has long been the primary voice of hip-hop culture, and that voice has gained substantial economic influence on both domestic and international fronts over the last 10 years. It comes as no surprise then that major record companies need hip-hop artists as a part of their roster of talent. The music has become one of America's most visible and vital exports.

Today, hip-hop music is the second best-selling genre behind country, having racked up close to $2 billion in U.S. sales in 2000. It is one of only two music genres continuing to grow in earnings even as overall industry revenues slip. Hip-hop artists are now outselling many international music icons. This year already, sales of the new release from rapper DMX have eclipsed those of Michael Jackson, while R&B newcomer Ashanti, with her hit "Foolish," beat out, among others, pop veteran Celine Dion. And the music continues to influence other parts of the Hip-Hop Economy. For example, more than 10 years ago, some radio stations refused to play hip-hop on their airwaves--especially the rude and raw gangsta rap tunes. Now, radio stations with hip-hop formats dominate major markets. Moreover, the production of hip-hop music videos, with their bold styling and million-dollar budgets, has created an industry and propelled lucrative movie careers for its' directors. And hip-hop music has given birth to a score of national and local publications, led by The Source, one of the top-selling magazines in the nation. (See sidebar, "The Voice of a Generation.")

Sales performance has given this generation of music entrepreneurs more leverage to negotiate favorable deals from major record companies and distributors such as Sony, BMG, Universal, and WEA. For instance, recent reports show that rap moguls now rank among the industry's heavyweights in pay and clout. Dr. Dre, the pioneering gangsta rapper who created the Aftermath label, ranked No. 2 among the top 50 music star earners for 2002. According to Rolling Stone magazine, Dre's net income--earnings that include touring, recording, and publishing royalties--was $51.9 million, beating out the Beatles and Madonna. Dre reportedly received as much as $35 million from Vivendi Universal SA's Interscope Records to increase its stake in Aftermath--which boasts the hot white rapper Eminem among its stable of artists--from 50% to 80%. Another rapper took the sixth spot on the list: rap honcho Master P, who earned $36 million, surpassing such artists as Carlos Santana, N'Sync, Aerosmith, and Sting. Rap music has also been the launching pad for the development of burgeoning hip-hop empires. Take Sean Combs, the artist formerly known as Puff Daddy. He turned his 1997 album, No Way Out, which went platinum seven times on the strength of such tunes as "It's All About the Benjamins" and "I'll Be Missing You," into a $300 million empire that includes apparel and restaurants. Says Russell Simmons, the hip-hop veteran who founded Def Jam Records: "We were the guinea pigs for the corporate music business to build a new kind of relationship with entrepreneurs who wanted to fight for a bigger share of profits. These young guys have way more power, control, and access than I ever had."

But in an industry where the costs of producing, distributing, and marketing an album are astronomical, hip-hop labels still deal with the daunting challenge of creating top-selling artists and maintaining control of their work. Maintains Dupri: "The advantage [of a joint venture] is that [the major label] funds a good part of the overhead. The bad thing is that you sometimes hit heads regarding the creative areas."

While his decade-long relationship with Columbia Records (a division of Sony) has been lucrative, Dupri is discovering that creative conflicts over how a single project is marketed can throw a wrench into an independent label's overall direction and growth. He points to Jagged Edge's current album, Jagged Little Thrill, as a source of recent discord between So So Def and Columbia. Released last July, the album scored an immediate hit on rap, R&B, and pop radio with the single "Where the Party At," featuring the enormously popular tapper Nelly. Dupri, who has never been a rap or R&B purist, knew that Nelly's appearance on the track would help Jagged Edge gain a broader audience and sell more records. A more rap-influenced remix featuring Lil' Bow Wow, Da Brat, and Dupri extended the track's airplay, but Dupri says he believed a second release would fuel continued interest in the album. Columbia execs--who control the marketing budget and have the final word on how it is spent--held out, however, banking on the power of the remix. "We had one of the biggest hits [of the year], but the album only sold one million copies because we didn't release another song soon enough. You can't have that type of momentum and lose ground," explains Dupri, who wants the power to determine how his label's releases are handled. As of press time, Columbia Records was unavailable for comment.

Dupri says he will look for favorable deals when his joint venture with Columbia is up for renegotiation at the end of the year. If Columbia isn't willing to afford him more decision-making power, Dupri could pack up his imprint and stable of talent and partner up with another record company.

THE MONEY IS IN THE MASTERS

Columbia's cachet and financial bottom line may be affected if So So Def departs, but ending the relationship is not as simple as an expired contract. Columbia, like most large labels that enter into joint ventures with independents, will still own the masters, or original recordings, to all of So So Def's material made during the agreement.

Major record companies usually retain ownership of masters because they finance most of the expenses associated with creating the records, and the costs are far from minimal. The average budget for recording a hip-hop album is upwards of $250,000 these days. Factor in pressing, distribution, and marketing, and a major label can easily spend more than $1 million before an album even hits the stores. Holding on to the masters allows a large label to continue making money from its investment by selling songs for use on compilations, in commercials, and other publishing opportunities. Possession of those tapes is key because hit songs are what give any label its value. As Suge Knight, CEO of Tha Bow, the label that owns the rights to the songs of such legendary rappers as the late Tupac Shakur and Snoop Dogg, said in a recent television talk show: "If you don't own your masters, you don't have a label. You're an employee."

Buying back the masters is an option but, as Dupri points out, that can prove to be an expensive proposition. "I think Columbia charged DefJam some astronomical figure like $50 million to get back their masters."

NEGOTIATING WITH A NEW GENERATION

Even with their dominant financial might, major label executives are in no position to disregard the growing demands for more control and greater ownership from young hip-hop music executives. As the music and culture become more sophisticated and powerful, so too do its purveyors. A few savvy entrepreneurs have negotiated impressive joint ventures that allow them to maintain ownership of their creative properties even while they receive significant financial backing. They were able to do so primarily because they sold hundreds of thousands of records before they even inked a deal. Cash Money label owners Ronald "Slim" Williams and his brother Bryan "Baby" Williams (whose label has sold more than 20 million records since 1991), Ruff Ryders Entertainment co-CEOs and brothers Joaquin and Damn Dean (whose label is home to artists such as Eve, The Lox, Jadakiss, and others), and No Limit Records founder and CEO Master P (whose roster includes Lil' Romeo, Silkk The Shocker, and Master P himself) have all been successful in negotiating prime deals.

Ruff Ryders' deal with Interscope, according to Joaquin, is worth as much as $40 million annually. The brothers were able to acquire such a lucrative deal because they came to Interscope with rapper DMX's multiplatinum DefJam Records' debut, It's Dark & Hell is Hot, in pocket.

While starting a label imprint was always their goal, the Deans built negotiating power by signing DMX to their production company, shopping him for a recording deal, and garnering major success before ever seeking a label deal. Once Interscope made its offer to finance their imprint, the brothers also negotiated a clause that keeps them somewhat independent of their larger brethren. If Interscope is not interested in working with any of the new artists the Deans sign to Ruff Ryders Productions, the brothers can shop those artists to other labels.

When the Williams brothers began negotiating with Universal for Cash Money's joint venture in 1993, they had moved more than 160,000 albums independently. The New Orleans-based label's roster already featured rapper B.G., and the joint venture allowed the brothers to sign new talent such as Juvenile, Big Tymers, and Lil' Wayne, whose albums have all gone multiplatinum. "It was about working with a company that respected our opinions," says Ronald. "We wanted the freedom to be creative and to market and promote our product with our ideas. In the studio we have control, but outside the studio we wanted to make sure everything was right, [too]."

Maintaining master ownership not only allows the Williams brothers and Master P to pocket a larger percentage of the royalties, but also allows them to set the publishing rate for use of their original recordings. "Master royalties are based on how popular a song is. It's [sort of like] market value, and that's the [advantage] of owning the master; the [larger] record company may not know the underground value of a song."

Perceived market value can be especially important for labels such as Cash Money, which has a catalogue that includes Juvenile's "Back That Thing Up" and Lil' Wayne's "Tha Block is Hot." While both songs were national hits, the tracks may have greater value to an advertiser in New Orleans than in Milwaukee.

Going forward, entrepreneurs like the Williamses, Dupri, and others will continue to push the industry to dance to their tune. In fact, at press time, Bad Boy Entertainment's Combs regained control of his record label from BMG's Arista Records. He terminated the 50/50 joint venture and, under the terms of the split, Combs retains complete control of the artist roster and entire catalogue. (Financial aspects of the deal were undisclosed.) This is further evidence that the creators of hip-hop culture will continue to be a thriving creative and economic force in the foreseeable future. The folks who create it insist on controlling it.

RELATED ARTICLE: America's most wanted: hip-hop's top independent labels

according to the Recording Industry Association of America, an artist receives gold or platinum status because it represents the number of sales through retail, record clubs, and all other supplementary markets that legitimately distribute music. The gold awards were begun by the RIAA in 1958. It created its platinum award in 1976; its multiplatinum award in 1984; and the diamond award in 1999. All of these awards are based on sales made within the United States. The formula for determining the status of an album is as follows:

Gold: An album goes gold when it represents 500,000 units sold, with a manufacturer's dollar volume of at least $1 million, based on 33.33% of suggested list price.

Platinum: An album goes platinum when it represents 1 million units in sales, with a manufacturer's dollar volume of at least $2 million based on 33.33% of suggested list price.

Multiplatinum: An album goes multiplatinum when it represents 2 million units sold with a manufacturer's dollar volume of at least $4 million based on 33.33% of the suggested list price.

Diamond: An album goes diamond when it represents 10 million units sold.

So So Def
Jermaine Dupri

Distributor
Columbia

Year Founded
1993

Top-selling Artist
Lil' Bow Wow

Roster
Xscape, Jagged Edge, Da Brat, Fundisha

Roc-A Fella
Damon Dash

Distributor
Def Jam Records

Year Founded
1992

Top-selling Artist
Jay-Z

Roster
Memphis Bleek, Beanie Sigel, DJ Clue, Cam'ron, Amil

Cash Money
Bryan & Ronald Williams

Distributor
Universal Records

Year Founded
1991

Top-selling Artist
Juvenile

Roster
Lil' Wyane, Hot Boys, Turk, Big Tymers, Mack 10

Ruff Ryders
Joaquin & Darrin Dean

Distributor
Interscope Records

Year Founded
1988

Top-selling Artist
Eve

Roster
The Lox, Ruff Ryders, Jadakiss, Swizz Beats, Drag-On

Bad Boy
Sean "P. Diddy" Combs

Distributor
Arista Records

Year Founded
1994

Top-selling Artist
Notorious B.I.G.

Roster
Faith Evans, Mase, Puff Daddy & the family, 112
Carl Thomas, Black Rob, G-Dep, Dream

Tha Row
Marion "Suge" Knight

Distributor
Interscope

Year Founded
1992

Top-selling Artist
Tupac

Roster
Snoop Dogg, Crooked I, J. Valentine, N.I.N.A.

Aftermath
Dr. Dre

Distributor
Interscope

Year Founded
1996

Top-selling Artist
Eminem

Roster
Dr. Dre, Truth Hurts, Rakim

--Compiled by Christina Morgan

RELATED ARTICLE: The voice of a generation

the glow from the letters on the wall in the reception area blaze like fire. It reads The Source. Faint music from rapper Eminem can be heard in the background. For years this office has provided the No. 1 source--no pun intended--for industry insiders and observers of hip-hop. It has been the bible of the industry. At the helm of The Source Enterprises Inc. are founder and CEO David Mays (above right) and his College friend from Harvard University, Raymond Scott (above left), president of the company. To0ether, they have created an empire that provides a platform for hip-hop culture.

"Our goal is to build the AOL Time Warner of the hip-hop generation," says Mays. "That opportunity exists. There's a big market and the majors don't get it. They don't have the infrastructure to get it. The Source has played a large part in helping to influence the whole global hip-hop market. We know what's going to be bigger at an early stage, which is why the name fits us: The Source."

Magazine publishing was one of the first industries to benefit from hip-hop culture's burgeoning popularity. Since the 1980s, many magazines targeting hip-hop fans have hit the stands. Unfortunately, not as many have lasted. The people behind Vibe magazine tried to publish Blaze, a strictly hip-hop magazine targeted to hard-core rap fans, but Blaze folded last year. Other publications that have emerged include XXL, King, The Fader, and One-world, which is owned by Russell Simmons, CEO of Rush Communications of NYC Inc. (No. 16 on the BE INDUSTRIAL/SERVICE 100 list with $192 million in sales), and the 2002 K Company of the Year.

The Source was one of the firsts, and it survived. It began as a newsletter covering hip hop-music. Ten years later, it achieved, and still maintains, the highest newsstand circulation of any U.S. magazine on the market, moving 475,000 copies monthly at $3 each. The magazine also boasts an impressive pass-along rate of more than 5 million readers. What may be most telling about the power and nature of hip-hop economics, however, is that The Source is one of the only successful independently published magazines to ever hit the newsstands.

"Hip-hop has always taken a different turn, and right now it's going mainstream," says Scott. "Each time hip-hop moves in a certain direction, The Source moves with it. As hip-hop evolves and things change, The Source has had to adjust to it. [For instance], hip-hop has inspired a whole generation of entrepreneurs. There are young people who are entrepreneurial minded and that's a characteristic that comes from hip-hop culture. There are a lot of underdeveloped moneymaking possibilities that hip-hop brings. There's room for television programming. There's room for filmmaking targeted to this generation, for better marketing and advertising consultants. There are tremendous opportunities out there."

"The hip-hop economy is reaching a critical breakthrough, a sweet spot as I like to call it," Mays explains. "I've watched the economy evolve and grow in 20 years, and it will be the biggest growing industry over the next 10 years. Right now there is a convergence of forces at all levels of corporate America and Madison Avenue that recognizes the impact that hip-hop has. It's imperative that every major corporation that wants to reach the youth market understand that hip-hop is not a fad. It is a voice of a generation. No, it's multigenerational because it reaches whites, blacks, Asians, Hispanics, rich, poor, East Coast people, West Coast people, people from Iowa to Bed-Stuy, Brooklyn."

Earlier this year, Mays and his team received a considerable contribution by the Black Enterprise/Greenwich Street Corporation Growth Fund, the venture capital arm of Earl G. Graves Ltd., the parent company of this magazine. The fund approved a $15 million to $20 million investment in The Source and, in exchange, it gets a sizable minority stake in the operations of the company. Chased by creditors, Mays originally put his company up for sale, asking $200 million. Several high-level executives expressed interest, including BE 100S executive Ed Lewis, founder of Essence Communications Partners. With the new cash infusion, The Source can continue to be found at a newsstand near you. --The Editors