Russell Simmons' rush for profits.
So what's the big deal? You wouldn't believe it. Simmons is investigating the possibility of taking his $34 million New York-based rap and hip-hop entertainment empire public. Yes, public. As in Wall Street. The Big Board. The New York Stock Exchange (NYSE). Big-time capital gains.
And you thought rap was just a fad.
During the past 10 years, Simmons, 35, has been the driving force of rap music and hip-hop culture. His Rush Communications is now the nation's second-largest black-owned entertainment company, which debuted at No. 32 on the 1992 BE INDUSTRIAL/SERVICE 100 list. The company's growth could make Rush Communications in the nineties what one-time perennial BE 100s leader Motown Records was during the seventies. Simmons, who puts his annual income at close to $5 million, is often compared to Motown founder Berry Gordy, just as Rush is often compared to Motown. However, there's one major difference: Motown created and sweetened black musicians for mainstream consumption, while Rush makes the mainstream swallow its artists and their messages black--with no sugar and no apologies. "I'm bringing them today's black culture," he explains. "And I'm putting it out there for anyone and everyone who wants to buy it," he says.
Indeed, Simmons has gone beyond selling music and managing artists to marketing the very fabric of black urban culture to mainstream America. Simmons' company currently includes seven record labels, several management companies, a film and television division and a radio production company. And by mid-1993, if all goes according to plan, a 24-hour satellite-distributed rap radio station, a clothing line titled PHAT Fashion and a sports management operation will be in place. (See sidebar, "Rush Gets Busy.")
But will it sell on Wall Street? Simmons is probably at least two years from making a decision on such an attempt. However, the move, if successful, would make his company only the fourth publicly traded BE 100s company. While going public could generate additional operating capital to finance expansion and new projects, the road could be filled with potholes--such as a loss of the hip-hop cultural integrity that Simmons sees as the heart of Rush's value to the marketplace. A closer look at the development of Rush Communications can provide some insights into whether the company should go public, and what its strengths and weaknesses might be as a publicly held company. The plusses: Rush is a leader in hip-hop entertainment marketing and has a strong management and operational structure. Rush also has a demonstrated ability to establish partnerships (rather than take on inordinate amounts of debt) to take aggressive advantage of business opportunities. The minuses: Rush may need to develop a more consistent earnings stream than can be provided by music sales and films. which may be viewed as hit-or-miss businesses by the investment community. Also, it is still too early to tell whether Simmons can effectively communicate the value of his company and the strength of his management team to the investment community, or whether he's ready for Rush to be judged on the open markets.
Hip-Hop: A Growth Niche
Although film and television productions are some of the projected growth areas for the company, hip-hop/rap music is at the heart of Rush's success. The hard-edged, base-heavy style of rhymes and rhythms was born in the streets of the Bronx and Harlem during the late 1970s. Once dismissed as too hardcore for either longevity or universal acceptance, it has infiltrated and influenced all manner of mainstream culture and shows no signs of retreat. While there are no solid figures on rap music sales, industry experts assert that it accounts for at least 5%, or nearly $400 million, of annual recorded music sales. Madison Avenue uses it to sell potato chips and fast food, and it's common fare on Hollywood movie soundtracks. Cable stations including Black Entertainment Television (BET) and MTV count on rap video offerings to attract young viewers. Its Afro-urban styles, such as those marketed by Los Angeles-based Solo Joint Inc./Cross Colours, another newcomer to the BE 100s, are taking international fashion by storm. And despite albums with titles like Fear Of A Black Planet, young white males are among the most loyal consumers of rap music.
Simmons is one of only a handful of entrepreneurs who cornered the market on rap music and culture--primarily because few others saw the value in the music. "In the beginning, the philosophy of the major record companies was that rap was just a flash in the pan, that it had no longevity," says Rush Management President Lyor Cohen, who joined the company in 1985. "We survived, not because we were especially competent, but because everybody else thought this was not a business to be in."
"Russell Simmons is the main reason for the financial success of the whole hip-hop/rap music culture; if he hadn't gotten into it when he did, who can guess where it would be today," says Clarence Avant, the record industry guru acknowledged as the most powerful black man in the record industry. "Not only is he one of the main reasons that so many people are making so much money from that culture, but he's also at the center of an empire that everyone wants a piece of. That gives him incredible clout in the power corridors of Manhattan and Hollywood."
Today, Simmons is positioning Rush even more prominently in mainstream America via the successful Russell Simmons' Def Comedy Jam television show on Home Box Office (HBO) and his development plans for additional TV programs and feature films. To handle that move and to oversee Rush Communications' recent music deal partnership with Sony Inc., he has built a management team that includes Boston University graduate Carmen Ashhurst-Watson as president of the parent company Rush, and Yale Law School graduate and attorney David Harleston as president of its largest subsidiary, Rush Associated Labels (RAL)/Def Jam Records. (See sidebars, "The Corporate Presence" and "A Man Of Two Worlds.")
Yet Simmons seems as different from the traditional BE 100s CEO as his old neighborhood Hollis, Queens, is from the old-money shrines of Wall Street. His conversation is littered with obscenities, and he dresses like the boy in the 'hood. And although he has three offices in various locations around Manhattan, he rarely visits them, preferring to conduct business from his living room couch or from his bed. (There's a telephone within arm's reach in every room of the $1.6 million triplex apartment he purchased from actress/singer Cher in 1990; he has two more in his white Rolls Royce.)
However, don't be fooled by Simmons' raw language, hip-hop attire (an inspection of his spacious closet reveals only two suits, both gifts and neither of which he's ever worn) and apparent disdain for the executive suite. The CEO of Rush Communications is strictly business.
Simmons' Def Jam has demonstrated a clear ability to maintain its leadership position as the premier rap label in the music business--a plus in the eyes of the investment community.
With 10 gold, 6 platinum and 2 multiplatinum records, and a roster of artists that includes rappers LL Cool J, Public Enemy, Run DMC, EPMD and Bid Daddy Kane, Def Jam was responsible for 60%, or about $21 million, of Rush Communications' annual revenue last year. According to the leading rap music magazine, The Source, Def Jam, the crown jewel of Simmons' empire, is the largest and most important rap label in the business. "Def Jam has had an immeasurable impact on the sound, look and feel of rap," says The Source Editor-in-Chief Jon Shecter. "From the start, Russell has always marketed rap and hip-hop the right way, so that the music never lost its intensity even though it reaches a wide audience. He's marketed it in a way that fans can love it and not feel that it's been sold out."
Simmons, whose father was a professor of black history at Pace University, got his initial exposure to the hip-hop culture and rap music in 1977 when he was a sociology major at City University of New York. He decided to put on several rap shows on campus and used the name "Rush" (a childhood nickname) as the title of his promotion company.
Soon after, he met Rick Rubin, an affluent white student from Long Island who was also intrigued by rap music and had his own record label, Def Jam ("Def" for cool, "Jam" for music), which he operated from a dorm room at New York University. The two soon became partners, investing $5,000 to move Def Jam from being a label to becoming an actual record company. By 1985, Def Jam was selling close to 500,000 records, and CBS Records made a $600,000 label deal with the company that included marketing and promotion. By 1987, rap was headed to the front of the music queue and Def Jam scored three major hits with Run DMC's and Aerosmith's "Walk This Way" becoming the first rap crossover, the Beastie Boys' Licensed to Ill album selling 5 million copies, and LL Cool J's Bigger and Deffer selling 2 million copies.
Observers of the period underscore Rubin's contribution to the music--he was the one who discovered both LL Cool J and the Beastie Boys--while acknowledging that Simmons was the one with the long-term vision. It was he who knew the importance of image, of "living large" while being absolutely true to the inner city. "Russell was legendary," remembers former Billboard Magazine black music editor Nelson George. "He was the point man for rap, but he still wore his sneakers untied and refused to wear anything like adult clothing."
He was also becoming a master marketer. When Run DMC (Simmons' brother Joey is a member) made wearing Adidas sneakers "fresh" after recording the song, "My Adidas," Simmons approached the shoe manufacturer and asked for money to underwrite a concert tour. The executives were skeptical about the marketing potential of rap musicians until they were convinced to attend a Run DMC concert. At a crucial moment, while the rap group was performing the song, one of the members yelled out, "Okay, everybody in the house, rock your Adidas!"--and three thousand pairs of sneakers shot into the air. The Adidas executives couldn't reach for their checkbooks fast enough.
Def Jam's current No. 1 act is the politically and socially controversial group Public Enemy. While black radio stations still refuse to play PE music, their Apocalypse Now album sold 500,000 copies in five days and its follow-up, Fear Of A Black Planet, did the same thing in 10 days.
The most important element for an entertainment company is its roster of artists--those "assets that go home every night"--and they have to be nurtured, guided, cajoled and oftentimes coddled while they're being turned into creative and financial successes. "Russell Simmons set the pattern for rap artist development and moving an artist to higher levels," says Charm Warren-Celestine, president of Flavor Unit Records and former promotions director at Tommy Boy Records, one of Def Jam's chief competitors. "Even as a rival, one of the main goals at Tommy Boy was to become as credible to the rap community and to the business community as Def Jam is."
Building Quality Management
As Rush continued to grow, Simmons began to rethink his operating procedures and he realized his organization could no longer be run in the loose style of the past. Rush President Ashhurst-Watson was brought in to set up a corporate structure akin to that of a major label and she, in turn, hired David Harleston. The two have succeeded in giving Rush and Def Jam a stronger management and financial structure.
However, central to the issue of Rush's potential as a publicly held company is the comfort with which Simmons himself is received by Wall Street investors. It is he, as the entrepreneurial CEO, who must sell potential investors on the value of his company and the soundness of his business plans. How would he respond to having to answer to shareholders who may be resistant to the ideas Simmons' culls from inner-city culture? "Simmons the entrepreneur operates his business and lives his life his own way," says Lemuel L. Daniels, an associate director at Bear Stearns & Co. in Los Angeles. Daniels' company co-underwrote the initial public offering of stock in BET Holdings Inc. (No. 15 on the BE 100s), which became the first black-owned company on the NYSE last year. (See "Black Businesses Woo Hungry Investors," Cover Story, May 1992.)
"Becoming a public company makes one very accountable to stock holders," he adds, "and any newsworthy thing that happens, good or bad, will affect the price of the stock."
The rap mogul's detractors point to his reluctance to tone down his hardcore street image, especially when a deal is pending in the more formal environment of film and television. Two cases in point: When director John Singleton's acclaimed and profitable movie Boyz 'n the Hood was still a script, Simmons wanted to produce it, but Columbia Studios then-president Frank Price was loathe to set up a film deal with a man who came to meetings dressed like a messenger and whose conversation was filled with the rawest of obscenities.
Also, during the early part of his career, Will "The Fresh Prince" Smith was being managed by Simmons, but the rap mogul had so many fingers in so many pies that he didn't focus on trying to move the charismatic performer to the next level--as Quincy Jones and Warner Bros. Inc. executive Benny Medina did when they cast him in the hit TV series, The Fresh Prince of Bel Air. These were errors but, as one entertainment industry insider notes, "It's perfectly acceptable to miss a few pitches, even strike out, then come back and hit a homerun."
And, says Simmons, the homeruns are what count. "People who know me on a business level, who deal with me as a businessman, know that this is a very professional organization," he asserts. "My mouth is no more foul than [former Fox Inc. Chairman and CEO] Barry Diller's or [film and music mogul] David Geffen's. What outsiders don't realize is that these guys and others in this business are my good friends, guys I've done business with for a long time. Also, it's very important to me that my persona, my clothes, my whole outlook is one that shows black kids on the way up that the Cosby way or look is not the only successful black image that's available for them to emulate."
Others who deal with Simmons can vouch for his business savvy. "Compared to many other record company executives I've dealt with, Russell is much better in the negotiations process," says Vernon Brown, a partner in Tarrytown, N.Y.-based Bilal, Brown & Williams Financial Services Inc. who, as Public Enemy's business manager, negotiated with Rush for a multimillion dollar contract for the rap group.
To be sure, Rush Communication's track record over the last five years, a key factor to investment bankers evaluating the potential of a company to go public, is impressive. Simmons has demonstrated an ability to establish partnerships to take advantage of business opportunities.
During the late 1980s, when the CBS/Def Jam contract came up for renegotiation, Simmons and Rubin disagreed on the direction their record company should take and the two came to an acrimonious parting of the ways. At this crossroads in his career, Simmons explains, "I was a manager and I wanted to break and establish acts. I knew I couldn't do it on my own. I needed a big company with marketing and promotional muscle like CBS to do that and to fully develop the artists' potential."
Simmons continued to negotiate with CBS (which by now had become an arm of Sony Inc.) and in 1990 the two parties set up a joint venture agreement that became the new standard for rap music deals. In what was a typical record label deal, the major label/distributor takes the profit, and then pays the independent label a royalty. The most distinguishing detail of the RAL/Def Jam deal with Sony is that Def Jam enjoys full profit participation in the deal. In addition to splitting the profits, the Def Jam/Sony joint venture gives Def Jam $3 million annually for operating costs.
In late 1991, Simmons' teamed with Hollywood producers Bernie Brillstein and Brad Grey (whose credits include the two Ghostbuster films and Wayne's World) to produce Russell Simmons' Def Comedy Jam, a series of eight half-hour comedy specials for HBO. Hosted by comic Martin Lawrence and featuring African-American comedians with decidedly X-rated humor, the cable network relegated it to the Friday-midnight time slot. But the show's astounding success, even in that late-night time period, came as no surprise to Simmons. "Across the country, there are lots of discos and rap music clubs that become comedy clubs for one night out of the week," he explains. "And those nights are always sold out. That told me there was an interest in African-American comedians, and I jumped in to service that market."
"We knew what Russell had done in the music world, and the effect of the hip-hop world on style, fashion, culture and language," says Bridget Potter, senior vice president of original programming at HBO. "If comedy was going to be a part of that world, then we knew it was something that could work for HBO."
During the winter of '92, Def Comedy Jam made staying home on Friday nights (or at least returning home in time to watch it) de rigueur. The show's initial ratings so impressed HBO that the network renewed the Simmons/Brillstein-Grey contract for 22 additional episodes. Sources estimate that HBO paid the Def Comedy Jam partners approximately $2 million to deliver that package, and that it costs Simmons and his partners well under $500,000 to produce all 22 shows. You figure out the profit margin.
The Quest For Earnings
Rush has experienced rapid growth during the past decade; Simmons expects earnings to jump to $50 million this year. How Simmons positions his company will help determine the growth rate and future earnings potential investors are likely to expect from Rush. "Record sales, television programs and movies may be considered hit-or-miss as revenue generators," Daniels explains, "while items like a film library and music publishing rights are looked on as income generators." Henry Dorshow, director of research at Baltimore-based The Chapman Co. investment banking firm, agrees. "Investors, especially from large institutions and pension funds, are very fickle and the uncertainty of the future of rap music may deter some of them," he avers. "Even so, there are probably enough people who would be interested in taking a serious look at Rush Communications, either via a public offering or a private placement."
Def Comedy Jam has become the catalyst of his most recent assault on Hollywood. He tried it once before; during the mid-1980s, he co-produced two of the first hip-hop movies: Krush Groove, a fictionalized version of his life and, Tougher Than Leather, which starred Def Jam artists Run DMC in an action/comedy. Although panned by the critics, each film was considered mildly successful, netting $5.1 million and $6.2 million, respectively.
Today, he's partnered with longtime film and television director Stan Lathan (Roc, Frank's Place) in Russell Simmons Visual Productions (RSVP) as the umbrella company for future films and television shows, as well as the Brillstein-Grey duo for Def Comedy Jam and a new comedy series called The Johnson Posse, described as "Married With Children in the projects."
"The key to Russell's future now is to take the talent he has under his wing with Def Comedy Jam and translate that into films and television shows," says Nelson George. "He won't make lots of money until he makes a hit film and he's got to find and develop a breakout performer--the next Eddie Murphy or Damon Wayans--before that happens. And he'll have to pay a lot of money to do it--developing a movie star is a lot different than developing a rap artist."
Yet with all of his ambitious plans and deals, Simmons has to stay true to the audience that makes him and his artists successful. He's a man who better knows how to reach kids than even their parents, but he may soon find it hard to retain that "street rebel" image since a Rolls Royce is his preferred mode of transportation and Cristal champagne has replaced Colt 45 as his beverage of choice. "Russell can't abandon his base; if he's not attractive to the hip-hop world, he won't be nearly as attractive to the power boys in Hollywood," notes a longtime observer.
In a move toward entering the publishing business, Simmons tried unsuccessfully to buy a piece of The Source. In early 1992, he partnered with Quincy Jones/Time Warner to develop Vibe, a new magazine with a hip-hop flavor, but Simmons pulled out in May because of creative differences. Jones/Time Warner wanted the magazine to have a slick, Rolling Stones look, while Simmons was hoping for a harder, street edge. It's 9 o'clock at night and Simmons is in the only place in town where he feels truly relaxed and can be found without a telephone in his ear--the subterranean, 150-degree steam room of Manhattan's West 10th Street Baths. Here, in the basement of a 100-year-old, coed Russian bath house, he mingles with Hasidic Jews while sweating and cleansing his body and mind. "I can quiet down in here, think about what the next move should be, the next place to take hip-hop culture and rap music," he says after tossing a bucket of cold water over his head. "My best friend, Andre Harrell, calls these our 'rah-rah' years, and he's right, but there's more to come."
(Harrell's company, Uptown Entertainment, has emerged as a new force among black-owned entertainment companies, after cutting a seven-year, $50 million development deal with MCA Inc. earlier this year.)
While Berry Gordy may have been Simmons' entrepreneurial role model when he became a partner in Def Jam Recordings more than a decade ago, today Simmons is more likely to mention someone like music mogul David Geffen, chairman of the Geffen Records unit of MCA Inc., as a figure to emulate. Geffen built Geffen Records into one of the world's most successful independent labels, and sold it to MCA for 10 million shares of stock worth $545 million in 1990. Then, when Matsushita Electric Industrial Co. acquired MCA, Geffen cashed out, while remaining chairman of Geffen Records with a salary of $600,000. Today, he has amassed a fortune of nearly $1 billion, including $700 million in liquid assets. In addition to producing films such as Beetlejuice and The Last Boy Scoutthrough his own films such as Beetlejuice and The Last Boy Scoutthrough his own film production company, Geffen frequents blue chip law firms and Wall Street investment banks--still sporting his standard white T-shirt, blue jeans, sneakers and a two-day growth of beard--shopping for deals.
It is that kind of business success for which Simmons strives--and he doesn't plan to change his style any more than Geffen had to achieve it. "I plan to be a major player in the entertainment industry," Simmons says bluntly. "It's about time there was a black man who doesn't have to give up his blackness in order to play with the white guys."
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|Title Annotation:||Company Profile; Rush Communications; includes related article|
|Article Type:||Cover Story|
|Date:||Dec 1, 1992|
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