Appetite For Self-Destruction Part 3

At age ten, he looked into the sky and his life changed. "It was the first time I ever saw a blimp," he said, years later. "It told me to have a good year." The next day he walked to the Flushing commuter airport to talk his way into riding in one. He hung around the base so often that the Goodyear people eventually hired him as a crew member.

Aircraft became his calling. After graduating from Queens College, he started two New York companies-one to take tourists up in helicopters, another to charter airplanes. They made him a lot of money. In 1982, he pulled out his savings, borrowed money from friends and relatives and, with $250,000, started Airship International, a blimp company that provided advertising for McDonald's and Metropolitan Life Insurance. Sports Ill.u.s.trated Sports Ill.u.s.trated called him "Baron Blimp." called him "Baron Blimp."

Pearlman's flying businesses gave him connections, and not just for life insurance. By the late 1980s, "Air Lou," as he came to be called, had spun off a fast-growing charter jet company, which had made a name for itself hauling rock stars from concert to concert-Paul McCartney, the Rolling Stones, Michael Jackson, and Madonna were among the pa.s.sengers. None of them excited him so much as an unfamiliar name he noticed in a logbook in late 1989: New Kids on the Block. New Kids on the Block. Pearlman discovered the popular boy band was filling stadiums around the world. "I thought the New Kids must be raking it in if they could afford to pay $250,000 a month for one of our planes," he later wrote in his autobiography. They'd made $200 million in concert sales and $800 million in merchandise revenues. Their svengali was Maurice Starr, who'd built the smash R&B band New Edition before they sued to break their contract. Pearlman discovered the popular boy band was filling stadiums around the world. "I thought the New Kids must be raking it in if they could afford to pay $250,000 a month for one of our planes," he later wrote in his autobiography. They'd made $200 million in concert sales and $800 million in merchandise revenues. Their svengali was Maurice Starr, who'd built the smash R&B band New Edition before they sued to break their contract.

Hmm, thought Pearlman. In 1989, the timing wasn't right for a new boy band-yet. He had to wait for the New Kids to peak. And he had to wait out the postNew Kids era, which belonged to Nirvana, grunge music, alternative rock, and college students. Over the next seven or eight years, the pendulum of pop music tastes would swing back to pop-Hanson and the Spice Girls were ascendant, and Ricky Martin was on the brink of graduating from his his boy band, Menudo. "You could tell the alternative age was over and the cycle just came back for pop music," says Paris D'Jon, who discovered the boy band 98 Degrees. boy band, Menudo. "You could tell the alternative age was over and the cycle just came back for pop music," says Paris D'Jon, who discovered the boy band 98 Degrees.

With the New Kids on his mind, Pearlman hired an old friend, Gloria Sicoli, an ex-singer with talent-spotting expertise. They tried out forty young men at his house in the summer of 1992. All of them pretty much sucked, except for Alexander James McLean, fourteen, a veteran of local talent contests, musicals, and theater productions. AJ arrived with his mother and sang three New Kids songs to a backup tape while Pearlman watched from a couch. AJ was talented. So was his friend, Tony Donetti, who pa.s.sed the audition-but then Pearlman's people lost his phone number. During a second round of auditions, in the aircraft parts warehouse of Pearlman's company, Trans Continental, Donetti resurfaced as "Howie Dorough." He had been using a stage name on his agent's recommendation.

They found more local talent-Nick Carter, then twelve, who had a rebellious look and s.h.a.ggy blond hair and had performed with the Tampa Bay Buccaneer cheerleaders for two years; Kevin Richardson, a model and actor who'd been a Ninja Turtle and Aladdin at Disney World; and Richardson's tenor-singing cousin, Brian Littrell. They'd audition other members, who wouldn't stick around, but these five named themselves the Backstreet Boys after a flea market across the street from the T.G.I. Friday's in Orlando. By May 8, 1993, they were playing SeaWorld, in Orlando, before three thousand screaming girls.

Pearlman contacted New Kids manager Johnny Wright, who with his wife Donna had to hear the Backstreet Boys sing over the phone before agreeing to manage them. For a star-making operation, the Trans Continental home base was surprisingly plain. "We were living in Orlando in a nondescript office park, where we were doing all our business," recalls Jay Marose, who signed on as vice president of marketing and promotions after working on a Chicago campaign for Fruit of the Loom underwear. "My office looked out across an asphalt parking lot at Johnny's office, and the other side was the studio. You would have just driven by. That's what kept us pretty normal. You would go bowling, and the movie theaters would give us free pa.s.ses. There was nothing to do. I had these seventeen-year-olds going, 'What should we do tonight?' We were just sitting around staring at each other."

The offices were a sanctuary from the rest of the world, which had started to take notice-loudly. "The pitch of fourteen thousand girls?" Marose asks, answering his own question with a burst of laughter. Those screams would act as a resume for the band.

Pearlman saw right away that he needed a major record label to take the Backstreet Boys to the next level of fame and money. He used his considerable salesmanship to make contact with A&R scouts and attempt to talk them into seeing the Boys live. Unfortunately for Pearlman, the scouts were deep into alternative rock at the time. It took Donna Wright's voicemail, containing the high-pitched din of thousands of kids at a Cleveland concert, to capture the attention of David McPherson at Mercury Records. Intrigued, he accepted one of Pearlman's numerous invitations to see the Boys live-this time, at a high school in Hickory, North Carolina. At the concert, McPherson had a revelation. Hipsters might be obsessed with Stone Temple Pilots and Pearl Jam, he thought, but this is what kids are really listening to. He signed them to a deal at Mercury, but his label superiors didn't really understand the band, so the Backstreet Boys languished without any hits.

Around that time, in 1993, McPherson made contact with Calder and showed up at Zomba for a job interview. Calder asked McPherson what he was working on. McPherson mentioned a couple of R&B acts he thought Calder would think were cool.

Calder wasn't too impressed. Then McPherson mentioned the Backstreet Boys. "He was like, 'You know what? Groups like this are big overseas, and this group could help me expand my operations overseas-and, maybe, if they get big, all over the world,'" McPherson says. "It took a lot of money and a lot of time and a lot of A&R and marketing in a climate where you were crazy to spend that on a group like them. A group like that was unpopular, an uncool thing in a business where cool means a lot lot." McPherson was hired. Mercury bought out the Backstreet Boys' contract for $35,000, then dropped the band. Then the Boys signed with Jive Records, the Zomba imprint that specialized in pop, hip-hop, and R&B.

Clive Calder and Lou Pearlman needed each other, at least at first. Pearlman put together the Backstreet Boys and then 'NSync. Calder had the resources to break them around the world. They weren't best friends, but they had a cordial business relationship. "One of the reasons they got along was because Clive was always in control. It was a perfect symbiotic relationship," McPherson says. "Lou didn't care about the details. He didn't care how many songs were going to be on the alb.u.m and who was going to produce those songs and what outfits the group was going to wear. He had spent so much time trying to get these guys signed-and no one signed them-that when he found willing suitors in myself and Clive Calder, all he had to do was sit back and go for the ride. Man, he was happy! Some people in that situation would try to control this and control that. He didn't care. He just wanted to be there for the pictures and the parties and the accolades and the plaque presentations. He knew Clive was going to take care of the business."

Calder, McPherson, and their Zomba colleagues had two strategies. First, Backstreet needed songs. Calder sent them to Sweden to record with a group of producers discovered by an aggressive scout in Zomba's Dutch offices. Dag Volle, also known as Ace of Base songwriter-producer Denniz PoP, was among them; Martin Sandberg, who renamed himself Max Martin, was PoP's protege. Backstreet recorded their first three songs, including "We've Got It Going On," at the producers' studio.

Next, Calder thought: We have to get them in front of the kids. We have to get them in front of the kids. Aside from the occasional Disney World show, American crowds weren't always interested. After Pearlman booked them to open for a wet T-shirt contest, the crowd pelted them with ice cubes. "We've Got It Going On" couldn't get on the radio, and it peaked at No. 65 on the Aside from the occasional Disney World show, American crowds weren't always interested. After Pearlman booked them to open for a wet T-shirt contest, the crowd pelted them with ice cubes. "We've Got It Going On" couldn't get on the radio, and it peaked at No. 65 on the Billboard Billboard Hot 100 chart. They needed seasoning. The breakthrough was in Germany, a country with government-controlled radio that never quite plunged into alternative rock and hardcore hip-hop. The Boys sold out concerts, scored hit videos, and turned "We've Got It Going On" into an overseas smash. Their success spread around Europe. Hot 100 chart. They needed seasoning. The breakthrough was in Germany, a country with government-controlled radio that never quite plunged into alternative rock and hardcore hip-hop. The Boys sold out concerts, scored hit videos, and turned "We've Got It Going On" into an overseas smash. Their success spread around Europe.

Calder called an old friend, Stuart Watson. He ran SWAT Enterprises, a consultancy that specialized in breaking acts in Asia. Watson listened to four Backstreet Boys songs and knew they were hits. He demanded Calder send the band to Asia, and Calder agreed. The band did promotional show after promotional show, from Singapore to Korea, and posed endlessly for magazine photo sessions. Using the 1980s publicity plan for teen singer Tiffany, Watson put the Boys in malls. Within three weeks, the band sold 1 million CDs in Asia. Later, a Montreal program director, on vacation in France, heard the band and returned home to put them on the radio. Barry Weiss, Jive's president, set up a Montreal concert; fifty thousand showed up. Girls screamed. Weiss called Calder from the show and held up the phone. Weiss and Calder both knew what was next: America.

"They brought them to Chicago, to the station, on a tour bus," recalls Erik Bradley, program director for B-96, the Top 40 radio station WBBM-FM in Chicago. "They came by and met everybody and were so nice and amazingly seasoned for being young people. They sang a cappella in the lobby." The Boys showed up at a dinner in New Orleans, hosted by EMI Music, and schmoozed with independent radio promoters like Bill Scull of Tri State Promotions in Cincinnati. "Unlike rock bands, these bands were perfect for radio stations to do promotions with," Scull says. "They totally appealed to the Top 40 demographic-fifteen to eighteen to twenty-five years old, the female demo. They were cute and they were fun and they could dance! Every radio station wanted them to show up for the birthday bash, the Halloween party, the Christmas show, whatever. We did all sorts of things with them like that." The Boys worked their boyish charm all over the place. They broke in America in 1997, starting a rush of debut CD sales that would ultimately total 14 million.

More good fortune arrived for Jive Records in 1996: a fifteen-year-old girl who had recently moved to New York from Orlando, where, with Justin Timberlake and JC Chasez, she had been a Mouseketeer on The Mickey Mouse Club The Mickey Mouse Club. With help from her mother and a local attorney, Larry Rudolph, Britney Spears was aggressive and ambitious and sent a demo tape of her cover of a Toni Braxton song to record labels all over the city. None heard anything even remotely commercial in her voice. Jive, however, was actively seeking a female star to push to the Backstreet Boys audience. "We were looking for a Debbie Gibson, if you like," says Steve Lunt, a Jive A&R man at the time. "[Spears's demo tape] was in one of those karaoke studios where you lay your vocal over an imitation of somebody else's track. It was totally awful. She was singing totally in the wrong register. But when she got to the end, her voice went up to the sort of 'girlie range,' and you heard the kind of soul she had." The accompanying photos were cute, too.

Lunt took the material to Calder. He agreed to a deal, with a caveat: Be cautious. Be cautious. If Calder didn't hear a hit in six months, Spears would be just another teen with big dreams. If Calder didn't hear a hit in six months, Spears would be just another teen with big dreams.

Lunt went to work. The standard operating procedure at Zomba was to keep everything in-house. Lunt hooked Spears up with a number of songwriters in the company's publishing division, but they mostly focused on R&B. Finally, in the fifth month, he found Eric Foster White, a pop songwriter and producer. Singer and producer clicked immediately, and White linked Britney with a 1986 Jets tune, "You Got It All," penned by Rupert Holmes of "Escape (The Pina Colada Song)" fame. "Sweet and innocent and catchy. A little bit R&B but still basically sweet pop," recalls Lunt, now an A&R vice president for Atlantic Records. "When Clive heard that in the A&R meeting, he said, 'OK, we've got something.' Up until that, it was in doubt." Calder and Lunt then contacted Max Martin, the Swedish pop producer who'd worked with Backstreet, and asked him to fly to New York. Spears, Martin, and Lunt went to dinner and hit it off. Martin and Spears flew back to Sweden and, within two days, sent back a demo-"...Baby One More Time."

"We at Jive said, 'This is a f.u.c.kin' smash,'" Lunt recalls. In all, Spears cut six songs in Sweden. Then she returned to the States and started working the key radio stations. Jive's top radio-promotion executive, Jack Sadder, brought her one day to Star 100.7 in San Diego to talk to one of his longtime contacts, music director Michael Steele. Because Steele didn't have a ca.s.sette deck in his office, Sadder convinced him to listen to Spears's tape in the car. "We go out in the parking lot. It's just hot as h.e.l.l in Southern California, probably one hundred degrees that day. I get in the driver's seat. Jack's in the pa.s.senger seat. This little fifteen-year-old is in the backseat of my car. I want to go to lunch," Steele recalls. "It's '...Baby One More Time.' I go, 'Yeah, this is all right.' We go back into the station, and thirty days later she was No. 1."

As Calder predicted, Backstreet and Britney fed off each other in the marketplace. Pearlman had a piece of the Backstreet Boys, and as they became more successful thanks to Jive Records's machinations, their manager became richer. "Baron Blimp" left blimps behind-his public company, International Ltd., had crashed twice and the stock had dropped from $6 to 3 cents per share-and threw himself into music. Trans Continental grew fast, spending tons of money on studios, training, and touring. Pearlman's Orlando lifestyle became extravagant, as he would later chronicle in a promotional videotape called Lou Pearlman Living Large Lou Pearlman Living Large. The t.i.tle was especially catchy given Air Lou's heft. He lived in a $12 million mansion down the street from ex-Magic basketball star Shaquille O'Neal. He also lived in a Mediterranean mansion in suburban Windermere, off Lake Butler, where he kept boats and Jet Skis. He rode in a blue Rolls-Royce with a chauffeur. He made political contributions to Republicans, owned a small piece of the local arena football team, the Orlando Predators, and showed off a diamond-studded Rolex to guests. He was single and, though he didn't even drink, he couldn't get enough of entertaining. "He was arrogant and thought he was the smartest guy in the room, but he could be very charming," says Bob Jamieson, ex-head of RCA Records and, later, its parent company BMG North America. "But there was always an element of him that made you second-guess. You felt uncomfortable."

It's hard to imagine a more successful act than the Backstreet Boys circa 1997, but Pearlman needed something else. "You can't make money on an airline with just one airplane," he told the Los Angeles Times. Los Angeles Times. According to Pearlman, it was his idea to begin auditions for a second group-but this is where the story starts to get ugly. And full of contradictions. According to Pearlman, it was his idea to begin auditions for a second group-but this is where the story starts to get ugly. And full of contradictions.

In Pearlman's version, he auditioned five new boys, beginning with Chris Kirkpatrick, an Orlando doo-wop singer and Outback Steak-house employee who yearned to form his own band. Kirkpatrick had a friend of a friend named Justin Timberlake, who had a shockingly deep baritone for a teenager and an impressive resume, from Star Search Star Search to to The Mickey Mouse Club The Mickey Mouse Club. Fellow Mouseketeer JC Chasez and a mutual friend, Joey Fatone, joined within a few weeks. Justin's voice coach brought in Lance Ba.s.s. Together, the boys scrambled letters in their names and came up with 'NSync. The auditions and 'NSync's name were all Pearlman's idea. Timberlake's mother, Lynn Harless, had another version of the story, which vehemently contradicted Pearlman's recollection. "[Pearlman] did not 'select' the members of 'NSync," she would declare in a court affidavit. "The members of 'NSync found each other.... Mr. Pearlman did not 'audition' these singers; we all did. The name 'NSync was not Mr. Pearlman's idea but mine."

A feud between the two Trans Continental groups-soon to be the world's biggest pop stars-set in. "We brought in another brother and they saw it as an abandonment," said Johnny Wright, who became manager for 'NSync, which was OK with Backstreet until their new rivals followed their blueprint in Germany and Asia and became just as famous as their predecessors. "And that ended up putting me in a position I did not want to be in where the groups are now competing head to head in a race to the top."

The idea for a second superstar boy band-whether it came from Pearlman or not-turned out pretty well commercially. But there were cracks in the foundation of Pearlman's boy-band empire. The first came from the Backstreet Boys themselves. They were tired. They acted less like boys and more like pop stars. Professionals. Professionals. They showed up in Pearlman's office one day in August 1997 with entourages-girlfriends, brothers, uncles. The They showed up in Pearlman's office one day in August 1997 with entourages-girlfriends, brothers, uncles. The Wall Street Journal Wall Street Journal reported "name-calling" that day and quoted Johnny Wright: "The meeting was not on a positive note." In May 1998, at the height of their success, when they'd earned his company $200 million in revenues, the Boys filed suit against Pearlman. They insisted they had earned $300,000 during the same period Pearlman made $10 million. They called themselves "indentured servants." They were also, sources told the media, a little miffed at having to compete with 'NSync within the same management company. Pearlman settled with the band. They got more control over recording, merchandising, and touring. Pearlman saved face-or so he told the media later. He negotiated a sort of monetary "sixth Backstreet Boy" role for himself, and in 1999, the reported "name-calling" that day and quoted Johnny Wright: "The meeting was not on a positive note." In May 1998, at the height of their success, when they'd earned his company $200 million in revenues, the Boys filed suit against Pearlman. They insisted they had earned $300,000 during the same period Pearlman made $10 million. They called themselves "indentured servants." They were also, sources told the media, a little miffed at having to compete with 'NSync within the same management company. Pearlman settled with the band. They got more control over recording, merchandising, and touring. Pearlman saved face-or so he told the media later. He negotiated a sort of monetary "sixth Backstreet Boy" role for himself, and in 1999, the Wall Street Journal Wall Street Journal estimated he took in $20 million of the band's overall profits just in that one year. "It would be nice to have them as my five sons," Pearlman said. "Instead, it's five sons with lawyers in between." estimated he took in $20 million of the band's overall profits just in that one year. "It would be nice to have them as my five sons," Pearlman said. "Instead, it's five sons with lawyers in between."

Backstreet saw "Big Papa," as he called himself, as anything but fatherly. "Here were some guys that sold twenty-plus million alb.u.ms on their first record and barely had anything to show for it," says Peter Katsis, senior vice president of music for the Firm, which represented hard-rock bands Korn and Limp Bizkit and took over the Boys' management. "Each guy maybe had a nice house in the Orlando area and a couple of bucks in the bank-but certainly nothing reflecting what they should have been able to make."

The Firm inherited the Boys' Into the Millennium tour, planned for late 1999, and its managers were shocked at the behind-the-scenes disarray and B-level concert professionals they inherited from Pearlman's company. "Total Spinal Tap Spinal Tap s.h.i.t," Katsis recalls. The stage was to be five feet tall. The show was to include nine wardrobe changes. "So," he asked, "these guys are going to s.h.i.t," Katsis recalls. The stage was to be five feet tall. The show was to include nine wardrobe changes. "So," he asked, "these guys are going to crawl crawl under this five-foot-high stage to do under this five-foot-high stage to do nine nine wardrobe changes?" Katsis fired a lot of people. The tour sold 765,000 tickets in just a few hours, filling every venue on the docket for thirty-nine cities. It drew 2 million fans in the end. wardrobe changes?" Katsis fired a lot of people. The tour sold 765,000 tickets in just a few hours, filling every venue on the docket for thirty-nine cities. It drew 2 million fans in the end.

'NSync didn't take long to catch up with the Backstreet Boys-in terms of both CD and ticket sales and and friction with Lou Pearlman. Big Papa marketed them in the Boys' image, as a singing-and-dancing team starring the Friendly One, the Cute One, the Rebellious One, and so on. Like the Backstreet Boys and a lot of young, inexperienced stars at the beginnings of their careers, 'NSync signed a contract that allowed their manager to make tons of money off their success. In early 1997, JC Chasez realized the band was selling millions of records in Germany as well as boxloads of T-shirts and other merchandise throughout their European tour. The band complained, demanding accounting for CD sales. On August 1, Pearlman gave each member a paltry advance of $10,000. Chasez contacted a lawyer relative, who looked at the band's contracts and found problems. She referred them to an experienced music business attorney, Adam Ritholz, who had worked for CBS Records and represented singer-songwriter Lisa Loeb and R&B star Maxwell. friction with Lou Pearlman. Big Papa marketed them in the Boys' image, as a singing-and-dancing team starring the Friendly One, the Cute One, the Rebellious One, and so on. Like the Backstreet Boys and a lot of young, inexperienced stars at the beginnings of their careers, 'NSync signed a contract that allowed their manager to make tons of money off their success. In early 1997, JC Chasez realized the band was selling millions of records in Germany as well as boxloads of T-shirts and other merchandise throughout their European tour. The band complained, demanding accounting for CD sales. On August 1, Pearlman gave each member a paltry advance of $10,000. Chasez contacted a lawyer relative, who looked at the band's contracts and found problems. She referred them to an experienced music business attorney, Adam Ritholz, who had worked for CBS Records and represented singer-songwriter Lisa Loeb and R&B star Maxwell.

Ritholz studied the contracts. He learned Trans Continental took 50 percent of the band's CD royalties, 50 percent of T-shirt and other merchandise sales, and 30 percent of touring revenues-a far greater share than the standard manager's 10 to 15 percent. He requested more doc.u.ments from Trans Continental's attorneys. He learned Pearlman had formed 'NSync Productions Inc., listing his home as the place of business and giving himself the power to make decisions on behalf of the band. The band was reluctant to go against its Big Papa but demanded a meeting with him at a Trans Continental office in May 1999. They were there all day-maybe ten hours. Pearlman lectured the band. His lawyers tried to scare them: If they continued along this path, they'd endanger their careers. If they continued along this path, they'd endanger their careers. One by one, each member of 'NSync stood up and walked out of Pearlman's office. One by one, each member of 'NSync stood up and walked out of Pearlman's office.

In his negotiations with Pearlman, Ritholz tried to enlist the band's record label, RCA, to help the band extricate itself from Trans Continental. By Ritholz's way of thinking, the label and its parent company, BMG, which at the time was the second-biggest label in the United States, could put far more pressure on Pearlman than five young men and their attorney ever could. He figured the label, wanting to take care of its hot-selling a.s.sets, would agree. Instead, he was shocked to discover that Strauss Zelnick, then the chairman of BMG, refused to abandon Pearlman. "He said to me, 'I have a certain principled way of doing things. This is the girl I brought to the dance-she may not be the prettiest girl, but she's the girl I'm going home with,'" Ritholz says. "It was a very significant misjudgment on his part." As Ritholz recalls it, Zelnick asked to meet with the band in person-at a Times Square hotel room in July 1999. No lawyers were allowed to attend, but Ritholz found out later that Zelnick insisted that he would "do anything in his power" to make sure RCA put out the band's next CD. Once again, 'NSync walked out.*

Ritholz soon realized Pearlman's company had unintentionally given the band a huge loophole. Early on, Trans Continental agreed to release an 'NSync alb.u.m in the United States within a year after its recording. But the band's self-t.i.tled debut came out in Germany-and took almost two years to arrive in the United States. "We took the position that the agreement was therefore terminated and 'NSync was free to make another deal," Ritholz says. As for BMG, it seems the label's German subsidiary, Ariola, had never made 'NSync sign a standard "inducement letter," which would have held them to their label contract even if they broke with their management company. 'NSync gave notice. Although Lou Pearlman and RCA Records didn't see it this way, the band that was about to sell 11 million copies of 2000's No Strings Attached No Strings Attached in the United States became a free agent. in the United States became a free agent.

At first, Clive Calder didn't want any part of 'NSync's dispute with Lou Pearlman. The head of BMG Entertainment, Zelnick, was a friend who'd supported Calder's crazy boy-band notions from the very beginning. Zelnick had authorized the Backstreet Boys' maiden voyage in Germany, after all. Plus, BMG owned 20 percent of Zomba and distributed the labels' CDs worldwide. Calder didn't want to damage that relationship. But he quickly realized he could spin the 1999 'NSync trial into solid gold.

Clive Calder learned this very important bit of information by coincidence. Ritholz had been negotiating with many labels, but he wasn't even considering Calder's Jive/Zomba operation. The label already had the Backstreet Boys, and 'NSync didn't want to work at the same company as its rival. In late July 1999, Ritholz was on the phone with a London-based Zomba executive regarding a producer he represented. Calder knew Ritholz, happened to be in the London office, and jumped on the line. "What's going on?" he asked pleasantly. Ritholz told him of 'NSync's status. Calder couldn't believe it. Maybe he would be interested in signing the band, he told the attorney. Ritholz then convinced 'NSync that having two superstar boy bands on one label wouldn't be a problem-lots of labels have enough resources for multiple R&B singers or alt-rock bands who compete for the same radio play. In about a month, the negotiations went forward and 'NSync signed with Calder's company.

That was too much for Strauss Zelnick.

Back in 1994, Zelnick had been a confident, straightlaced, thirty-seven-year-old wunderkind with a Harvard MBA and a star-studded resume, including ownership of the video-game company Crystal Dynamics and executive t.i.tles at 20th Century Fox and Columbia Pictures. His wife called him "MKIA"-"Mr. Know It All." Bertelsmann recruited him to be president of its record label, BMG Entertainment, whose biggest holdings at the time included R&B stars TLC and diva Whitney Houston. "I had virtually no record business experience," Zelnick says. "My style was, up-front, to acknowledge and admit my lack of experience. I always maintained healthy respect for those who were vastly more experienced than I."

Zelnick would remain the top BMG executive for the next seven years, and he gradually absorbed music business culture. (Zelnick, however, never lost his folksy corporate style: He gave twelve-packs of his homemade barbecue sauce, Strauss in the House, to friends, complete with his picture on the bottles and BMG's address on the back.) Within a few years he would find himself working out at a gym with a trainer named Tyrese, an aspiring R&B singer who would soon become a star for his label. Zelnick would also happily sing along as teen star Pink jumped on a table at a Beverly Wilshire presidential suite label party to perform "There You Go."

It seemed as if Zelnick could do nothing wrong during his first five years at BMG. The label's worldwide sales increased 7 percent, to $4.6 billion. Its US market share jumped from fourth (out of five major record labels at the time) to second, behind powerhouse Universal Music.

But Zelnick's long music business honeymoon ended abruptly in 1999. First, he took the fall for pushing out BMG's best-known record executive, sixty-six-year-old Arista founder Clive Davis, just after Davis had engineered Carlos Santana's 5-million-selling Supernatural Supernatural comeback. But as Bertelsmann's board knew well, Davis spent money to make money, profit margins were low, and he annoyed the company's top bra.s.s by not grooming a successor. Zelnick picked another well-known label executive, Antonio "LA" Reid of LaFace Records, as Davis's replacement. Davis did not go quietly. He told everybody he knew in the music business that he was being pushed out. Barry Manilow called the move "mean-spirited," and Santana and Aretha Franklin threatened to leave the label. (They didn't.) Davis went on to form J Records, discover Alicia Keys, sign a contract with comeback. But as Bertelsmann's board knew well, Davis spent money to make money, profit margins were low, and he annoyed the company's top bra.s.s by not grooming a successor. Zelnick picked another well-known label executive, Antonio "LA" Reid of LaFace Records, as Davis's replacement. Davis did not go quietly. He told everybody he knew in the music business that he was being pushed out. Barry Manilow called the move "mean-spirited," and Santana and Aretha Franklin threatened to leave the label. (They didn't.) Davis went on to form J Records, discover Alicia Keys, sign a contract with American Idol American Idol, and return to his old label as the head of BMG North America. (Zelnick wouldn't comment on the Davis escapade.) Zelnick, too, was responsible for BMG's break with the company's Clive Number Two-Calder. When 'NSync abandoned BMG's ship, choosing Calder's Zomba as their new label, Zelnick was suddenly in a terrible position. He didn't want to lose the band, which was at the time the label's biggest-selling act. And he didn't want to anger Calder, whose label was a money machine for BMG. Yet Zelnick chose to cast his lot with Pearlman and sue the band-as well as Calder and Zomba-for breach of contract. He alienated Calder, once his ally. Then he was forced to settle with the band. Zelnick wouldn't talk about the case, but a source close to BMG at the time speculates why Zelnick made his decision: "Lou is a bad guy. He treated the guys badly. But BMG had a deal with him and [Pearlman] lived up to it. He had not breached it."

The BMGTrans Continental lawsuit against Zomba, the band, and Calder himself was for $150 million in damages. The trial lasted two and a half months, but it seemed like forever. The band and its old, estranged friends from Trans Continental found themselves in US District Court in Orlando on Christmas Eve 1998. "Justin and I were texting each other about our suits-because we'd never seen each other in suits," says Jay Marose, head of marketing for Trans Continental. The band settled with Pearlman's company just after Christmas 1998, for an undisclosed amount. "That was the most stressful time of my career," says Bob Jamieson, then chairman of BMG North America. "I don't want to talk about that. It's too far gone and brings up a lot of pain."

On January 12, 1999, Jive Records put out 'NSync's new single: "Bye Bye Bye."

Swooping in to grab 'NSync from BMG was merely part one of Calder's long-term plan. That made him tons of revenue, as the band's debut Jive alb.u.m would be the record-setting No Strings Attached No Strings Attached. Part two was even more involved-and savvy. Calder had set the table for it in the early 1990s, when he sold huge chunks of Zomba's profitable publishing and record divisions to BMG. In 1996, BMG execs and Calder made a deal involving a "put option"-an agreement for BMG to buy Zomba for a certain price at a later date. Negotiated before Jive's 'NSync bonanza, this price was reportedly three times Zomba's profits during a three-year period. By the early 2000s, that price was suddenly-and unexpectedly to BMG-very high. Calder could sell anytime he liked. Or not.

Masterfully, Calder held out until precisely the right moment. No Strings Attached No Strings Attached came out in early 2000 and sold 11 million copies in the United States alone. (That in itself was a lot of revenue that BMG, having lost the band to Calder, didn't get.) In June 2002, after 'NSync, Britney Spears, and the Backstreet Boys had set international records for alb.u.m sales, Calder must have been pretty sure this type of music was reaching its peak. He called BMG and declared he wanted to sell. The price, based on the 1996 formula, was $2.74 billion. BMG could afford it. Its parent company, German publishing behemoth Bertelsmann, had recently sold a share in America Online Europe back to AOL Time Warner for more than $7 billion. came out in early 2000 and sold 11 million copies in the United States alone. (That in itself was a lot of revenue that BMG, having lost the band to Calder, didn't get.) In June 2002, after 'NSync, Britney Spears, and the Backstreet Boys had set international records for alb.u.m sales, Calder must have been pretty sure this type of music was reaching its peak. He called BMG and declared he wanted to sell. The price, based on the 1996 formula, was $2.74 billion. BMG could afford it. Its parent company, German publishing behemoth Bertelsmann, had recently sold a share in America Online Europe back to AOL Time Warner for more than $7 billion.

As Rolling Stone Rolling Stone reported at the time, Island Records's Chris Blackwell, who discovered Bob Marley and U2, received $300 million when he sold his company. David Geffen got just $550 million. Richard Branson, jet-setting airline magnate and music industry genius, received a paltry $950 million for Virgin. reported at the time, Island Records's Chris Blackwell, who discovered Bob Marley and U2, received $300 million when he sold his company. David Geffen got just $550 million. Richard Branson, jet-setting airline magnate and music industry genius, received a paltry $950 million for Virgin.

"The most impressive man ever in the music business, if you ask me," the Firm's Peter Katsis says of Calder. "Here's this guy who built all this stuff up and knew exactly what to do with it, knew exactly how far to take it, knew exactly when to sell his company."

Ruthless is a word many in the record business have used to describe Clive Calder, who pops up in is a word many in the record business have used to describe Clive Calder, who pops up in Forbes Forbes magazine every year as something like the 317th richest person on the planet. But his sell-out to BMG may not have been motivated purely by ruthlessness. An old friend says Calder's att.i.tude changed, perceptibly, one terrible day in 2001. It seems Calder used to be able to see the World Trade Center from Zomba's offices. "Anyone who knew him knew that he tended to put work before family," says ex-Jive A&R man Steve Lunt, who has known Calder since the late 1970s, when his English rock band City Boy signed with Zomba. "After 9/11, there were subtle changes to that equation. He would start taking vacations. He would go on boat trips with his wife and kids. It wasn't long after that when he made that huge deal. He realized, ultimately, there were other things more important to his life. I'm sure he's currently dedicating himself to those as we speak." Clive Calder lives, reclusively as ever, in the Cayman Islands. magazine every year as something like the 317th richest person on the planet. But his sell-out to BMG may not have been motivated purely by ruthlessness. An old friend says Calder's att.i.tude changed, perceptibly, one terrible day in 2001. It seems Calder used to be able to see the World Trade Center from Zomba's offices. "Anyone who knew him knew that he tended to put work before family," says ex-Jive A&R man Steve Lunt, who has known Calder since the late 1970s, when his English rock band City Boy signed with Zomba. "After 9/11, there were subtle changes to that equation. He would start taking vacations. He would go on boat trips with his wife and kids. It wasn't long after that when he made that huge deal. He realized, ultimately, there were other things more important to his life. I'm sure he's currently dedicating himself to those as we speak." Clive Calder lives, reclusively as ever, in the Cayman Islands.

LOU P PEARLMAN LOST his two jewels, but he kept hustling. He still had other teen pop acts-C Note, Innosense, LFO. He shifted to reality television, appearing on MTV's his two jewels, but he kept hustling. He still had other teen pop acts-C Note, Innosense, LFO. He shifted to reality television, appearing on MTV's Making the Band Making the Band series about a.s.sembling the next Backstreet Boys or 'NSync. The result of this experiment, O-Town, was named after Trans Continental's $6 million recording studio, and the group sold more than 1 million copies of its debut. But Pearlman never regained his old touch. "He was never hands-on. He would always p.a.w.n you off to another guy who was working with the company at the time," says Raul Molina, a singer for C Note, a bilingual singing-and-rapping group marketed, a bit against its will, as a boy band. "They never really had any music experience." series about a.s.sembling the next Backstreet Boys or 'NSync. The result of this experiment, O-Town, was named after Trans Continental's $6 million recording studio, and the group sold more than 1 million copies of its debut. But Pearlman never regained his old touch. "He was never hands-on. He would always p.a.w.n you off to another guy who was working with the company at the time," says Raul Molina, a singer for C Note, a bilingual singing-and-rapping group marketed, a bit against its will, as a boy band. "They never really had any music experience."

Pearlman nonetheless micromanaged C Note. "Watch, at the end of the next song, David [Perez] will unb.u.t.ton his shirt and they'll go crazy," Pearlman told Los Angeles Times Los Angeles Times reporter Geoff Boucher during a fairgrounds concert in 1999. Sure enough, singer Perez unb.u.t.toned his shirt at the end of the next song and the girls went crazy. But C Note didn't agree with Pearlman's decisions. He insisted they add a blue-eyed, blond-haired white boy to the all-Hispanic lineup-which they did, reluctantly. When their label, Epic, scored the band a float with Jennifer Lopez for the Puerto Rican Day parade in New York City-ideal for their bilingual audience-Pearlman nixed the plan. He sent them to an Adidas-sponsored show at Bryant Park instead. The parade drew 2 million spectators. reporter Geoff Boucher during a fairgrounds concert in 1999. Sure enough, singer Perez unb.u.t.toned his shirt at the end of the next song and the girls went crazy. But C Note didn't agree with Pearlman's decisions. He insisted they add a blue-eyed, blond-haired white boy to the all-Hispanic lineup-which they did, reluctantly. When their label, Epic, scored the band a float with Jennifer Lopez for the Puerto Rican Day parade in New York City-ideal for their bilingual audience-Pearlman nixed the plan. He sent them to an Adidas-sponsored show at Bryant Park instead. The parade drew 2 million spectators.

"He's one of these salesmen who could sell anything to anybody," says Molina, twenty-eight, now recording with a new, post-Pearlman version of the band. "We'd go into a meeting and be ready to tell him: 'This is what we need to do!' And before we knew it, it was all turned around. The sky was green and the gra.s.s was blue. We ended up signing even the same contracts 'NSync and Backstreet Boys signed. At that point, we didn't know any better." is what we need to do!' And before we knew it, it was all turned around. The sky was green and the gra.s.s was blue. We ended up signing even the same contracts 'NSync and Backstreet Boys signed. At that point, we didn't know any better."

Then the teen pop bubble burst, as every teen pop bubble does. Fans grew up. The next generation of kids-the little brothers and sisters of the boy-band fanatics-just didn't have the same emotional connection to these superstar acts. Not only that, the acts were obviously getting older, with no choice but to remake themselves into the more sophisticated crooners you might hear on adult-contemporary radio stations. The transition did not go well for most of them. Record sales plummeted for the Backstreet Boys. Nick Carter left the group. His solo alb.u.m went nowhere. Britney Spears, of course, transformed from schoolgirl to snake-wielding burlesque dancer to Kevin Federline's wife to head-shaving mom to MTV awards show bust to suicide risk to sitcom guest star. Only Justin Timberlake made the transition; after he split from 'NSync, he released 2002's Justified Justified (on Zomba, of course), which would turn him into one of the world's biggest pop stars. Years later, teen pop came back-in the form of (on Zomba, of course), which would turn him into one of the world's biggest pop stars. Years later, teen pop came back-in the form of Hannah Montana, High School Musical Hannah Montana, High School Musical, the Jonas Brothers, and other smash TV shows, alb.u.ms, and concert tours by stars on the Disney Channel and other Disney-owned properties.

Pearlman survived the end of teen pop by forming corporations-talent agencies,* artist management firms, airlines. He wooed investors for Employee Investment Savings Accounts. He reminded them of his glory days with 'NSync and the Backstreet Boys and showed them the ma.s.sive car collection and Jet Skis he kept at his suburban Orlando mansion. A lot of people, sadly, succ.u.mbed to his charm. Manhattan dentist Steven Sarin met Pearlman through a connection with his Florida retirement home. Pearlman called Sarin and his wife every year on their birthdays and invited their whole family to various teen pop concerts. They invested their life savings. Joseph Chow, an engineering professor at the University of Illinois-Chicago, dumped more than $14 million into Trans Continental ent.i.ties-in exchange for hanging out with Pearlman in the 1990s. artist management firms, airlines. He wooed investors for Employee Investment Savings Accounts. He reminded them of his glory days with 'NSync and the Backstreet Boys and showed them the ma.s.sive car collection and Jet Skis he kept at his suburban Orlando mansion. A lot of people, sadly, succ.u.mbed to his charm. Manhattan dentist Steven Sarin met Pearlman through a connection with his Florida retirement home. Pearlman called Sarin and his wife every year on their birthdays and invited their whole family to various teen pop concerts. They invested their life savings. Joseph Chow, an engineering professor at the University of Illinois-Chicago, dumped more than $14 million into Trans Continental ent.i.ties-in exchange for hanging out with Pearlman in the 1990s.

Even to sophisticated investors, Pearlman had an irresistible charm. "He was certainly very friendly," says Jennifer Chow, Joseph's daughter, who dutifully went to Backstreet Boys concerts with her father even though, in her early twenties, she liked Nirvana better. "He would always say, 'I'm trying to make new things happen! Break boundaries! Take things to the next level!' He was very excited and animated." Over the years, Pearlman treated former Chicago freight company owner David Mathis to lunch with Britney Spears, introduced him to stars like Sylvester Stallone, and accompanied him on a Budweiser blimp ride. "He told us he had 412 airplanes, the company had a value of $1.8 billion, and the IPO was coming out at $17.50 a share," Mathis told the St. Petersburg Times St. Petersburg Times in 2007. "It was totally convincing." in 2007. "It was totally convincing."

The problem for Pearlman, an accounting major at Queens College, was accounting. Basically, he didn't do any. In what investors later called a Ponzi scheme, Pearlman shuffled funds from one of his corporations to the next, paying bills without keeping track of which company owned what. Sarin, the Manhattan dentist, lost his life savings. His wife cried every day.

Mathis, the Chicago freight-company owner, claimed a loss of $2.8 million. Chow, the engineering professor, died in 2002, leaving his children to deal with his defaulted Trans Continental investments. In 2007, the Florida Office of Financial Regulation declared Pearlman may have duped about 1,800 investors out of $317 million. The FBI raided his home and Trans Continental offices in Orlando. Banks seized his a.s.sets. Investors sued by the dozens. Pearlman declared bankruptcy.

For months, Pearlman went missing. He wrote a letter to an Orlando newspaper saying he was busy in Germany promoting a new boy band, US5. In 2007, a federal grand jury indicted him on three counts of bank fraud. Creditors liquidated his a.s.sets in an Orlando auction. They sold a platinum Millennium Millennium alb.u.m for $2,300 and Pearlman's honorary key to the City of Orlando for $1,400. Officials finally captured him in late June, where he was registered in an Indonesian hotel under the name "A. Incognito Johnson." He returned home to Orlando and, in March 2008, acknowledged he oversaw schemes that fraudulently took $300 million from investors and banks. He pleaded guilty to several federal charges: conspiracy, money laundering, and making false statements during a bankruptcy proceeding. On May 21, 2008, a US district judge sentenced him to twenty-five years in prison, with a chance of reducing his time by one month for every $1 million he paid back to investors. "I'm truly sorry, your honor, to all the people who have been hurt by my actions," Pearlman said in the courtroom, wearing an orange jumpsuit and leg shackles. Further ugly revelations came with Pearlman's fall. In alb.u.m for $2,300 and Pearlman's honorary key to the City of Orlando for $1,400. Officials finally captured him in late June, where he was registered in an Indonesian hotel under the name "A. Incognito Johnson." He returned home to Orlando and, in March 2008, acknowledged he oversaw schemes that fraudulently took $300 million from investors and banks. He pleaded guilty to several federal charges: conspiracy, money laundering, and making false statements during a bankruptcy proceeding. On May 21, 2008, a US district judge sentenced him to twenty-five years in prison, with a chance of reducing his time by one month for every $1 million he paid back to investors. "I'm truly sorry, your honor, to all the people who have been hurt by my actions," Pearlman said in the courtroom, wearing an orange jumpsuit and leg shackles. Further ugly revelations came with Pearlman's fall. In Vanity Fair Vanity Fair, a census taker named Alan Gross declared himself himself the subject of Pearlman's famous early history about becoming obsessed with blimps and hitching a ride with the blimp hangar people in the 1960s. "The stories he tells?" Gross said. "They're not about Lou. They're about me." As Gross told it, he and Pearlman were childhood neighbors in the Mitch.e.l.l Garden Apartments in Flushing; Gross saw the blimps from his window, made friends with the blimp operators, and became a gofer at the blimp hangar. Pearlman merely adopted Gross's stories as his own. And if that weren't creepy enough, the subject of Pearlman's famous early history about becoming obsessed with blimps and hitching a ride with the blimp hangar people in the 1960s. "The stories he tells?" Gross said. "They're not about Lou. They're about me." As Gross told it, he and Pearlman were childhood neighbors in the Mitch.e.l.l Garden Apartments in Flushing; Gross saw the blimps from his window, made friends with the blimp operators, and became a gofer at the blimp hangar. Pearlman merely adopted Gross's stories as his own. And if that weren't creepy enough, Vanity Fair Vanity Fair's reporting revealed Pearlman allegedly showed some of his young male singers p.o.r.n movies, wrestled naked with them in their beds, and created a culture where s.e.x with the boss was expected, almost inevitable. Pearlman has denied the claims.

"Karma's a b.i.t.c.h," 'NSync's Lance Ba.s.s said.

ONETIME WUNDERKIND STRAUSS Zelnick would last at BMG for only another year after the 'NSync settlement. By late 2000, Zelnick and his boss, Bertelsmann chief executive officer Thomas Middelhoff, had worked together for more than six years. They liked each other. But one day, Zelnick was sleeping at home after a strenuous oral-surgery session, and he received a phone call from Middelhoff that would be the beginning of the end. He told Zelnick that Bertelsmann was about to invest millions of dollars in a small Silicon Valley startup that allowed music fans all over the world to share songs online for free. Zelnick felt blindsided. "How could the music group not know about this?" he said. As Middelhoff well knew, Zelnick considered this business model to be outright theft of copyrighted music. Middelhoff held the opposite belief. He felt Napster would save the record industry. Zelnick would last at BMG for only another year after the 'NSync settlement. By late 2000, Zelnick and his boss, Bertelsmann chief executive officer Thomas Middelhoff, had worked together for more than six years. They liked each other. But one day, Zelnick was sleeping at home after a strenuous oral-surgery session, and he received a phone call from Middelhoff that would be the beginning of the end. He told Zelnick that Bertelsmann was about to invest millions of dollars in a small Silicon Valley startup that allowed music fans all over the world to share songs online for free. Zelnick felt blindsided. "How could the music group not know about this?" he said. As Middelhoff well knew, Zelnick considered this business model to be outright theft of copyrighted music. Middelhoff held the opposite belief. He felt Napster would save the record industry.

Big Music's Big Mistakes, Part 4Killing the SingleIn 1959, when Terry McMa.n.u.s was twelve, he bought a 39-cent copy of Jerry Lee Lewis's single "I'll Sail My Ship Alone" from a drugstore in Birmingham, Alabama. Later, when the Beatles and Beach Boys started putting out arty alb.u.ms like Sgt. Pepper's Lonely Hearts Club Band Sgt. Pepper's Lonely Hearts Club Band and and Pet Sounds, Pet Sounds, he went along with them, sh.e.l.ling out $3.99 apiece. For years afterward, he used singles as a cheap way to decide which alb.u.ms to buy. But as the major labels started to make more money than ever off CDs in the 1980s and 1990s, McMa.n.u.s began noticing he couldn't find a single anymore. "Here is where the North American music industry made its greatest mistake of the twentieth century," McMa.n.u.s, a veteran Canadian producer and songwriter, wrote in a he went along with them, sh.e.l.ling out $3.99 apiece. For years afterward, he used singles as a cheap way to decide which alb.u.ms to buy. But as the major labels started to make more money than ever off CDs in the 1980s and 1990s, McMa.n.u.s began noticing he couldn't find a single anymore. "Here is where the North American music industry made its greatest mistake of the twentieth century," McMa.n.u.s, a veteran Canadian producer and songwriter, wrote in a Billboard Billboard op-ed. "When it stopped making vinyl singles and offered nothing to replace them, the industry stopped a whole generation from picking up the record-buying habit." op-ed. "When it stopped making vinyl singles and offered nothing to replace them, the industry stopped a whole generation from picking up the record-buying habit."McMa.n.u.s was prescient. He wrote his Billboard Billboard piece in 1997, two years before millions of music fans would learn how to get singles their own way-for free-via the internet. "If you think about water that's trying to reach the surface-it comes up in one place and you plug it up. And you go, 'OK, that's plugged up, my water problem is finished.' It's not. It's still seeking a way to rise to the surface," says McMa.n.u.s, now a music business professor at Fanshawe College in London, Ontario, Canada. "As soon as Napster opened up, the single came roaring back up. I call Napster 'the revenge of the single.'" piece in 1997, two years before millions of music fans would learn how to get singles their own way-for free-via the internet. "If you think about water that's trying to reach the surface-it comes up in one place and you plug it up. And you go, 'OK, that's plugged up, my water problem is finished.' It's not. It's still seeking a way to rise to the surface," says McMa.n.u.s, now a music business professor at Fanshawe College in London, Ontario, Canada. "As soon as Napster opened up, the single came roaring back up. I call Napster 'the revenge of the single.'"Why did the business phase out the single?"Very simple," says Jim Caparro of the Entertainment Distribution Company, who was, in the 1990s, president of Island Def Jam Records: Not enough profit. The single cost too much to produce and didn't make up enough in sales. For years, major labels used singles as cheap or free promotional tools. They'd give them away to radio stations, persuading programmers to air their songs. They'd gussy them up and give them out at concerts. "The industry was looking for excuses to get out of it," Caparro recalls. "You had these arguments that singles were cannibalizing alb.u.m sales. So they killed the single."By the late 1990s, the record business had boiled down much of the business to a simple formula: 2 good songs + 10 or 12 mediocre songs = 1 $15 CD, meaning billions of dollars in overall sales. Ca.s.settes, too, gradually fell victim to this formula, and were phased out. Attempts to resuscitate the singles market, like the "ca.s.single" and a shorter version of a record known as the EP, ultimately failed. "They tried everything," says ex-Tower executive Stan Goman. Instead of singles, Tower started displaying candy bars and other tchotchkes at the counter for impulse shoppers to buy for less than $1. "It's no coincidence that the decline of ca.s.settes and the rise of CD burning arose simultaneously," says Steve Gottlieb, president of the independent label TVT Records. "People realized the only viable way to buy music was $16.99, because CD was the only viable format."In the short term, dozens of artists and labels made mountains of cash off this formula. Remember OMC's "How Bizarre"? Chumbawamba's "Tubthumping"? These were one-hit wonders, but the acts were lucky enough to make records in an era when fans had no other choice but to buy the alb.u.m in order to get the single. "If you only sold hand lotion in five-gallon bottles, pretty soon people would be tired of it," says Albhy Galuten, a well-known producer who later became Universal Music Group's senior vice president of advanced technology. "You can't go around forcing people to buy something they don't want."Yet that was precisely the direction the record industry wanted to go in. CDs were big. How could major labels make them huge huge? The answer was to sell more CDs, at bigger record stores. Music chains like Tower and Wherehouse were well and good, but for huge, huge, labels had to go to Wal-Mart. Or Best Buy, Target, or Circuit City. But there was a fatal flaw in that strategy. labels had to go to Wal-Mart. Or Best Buy, Target, or Circuit City. But there was a fatal flaw in that strategy.Big Music's Big Mistakes, Part 5Pumping Up the Big BoxesFrom the mid-1980s to the mid-1990s, on a stretch of busy highway in Merrillville, Indiana, Hegewisch Records occupied a small, nondescript hut of a building, next to a gravel parking lot, in a part of town that epitomized suburbia-strip malls on every corner, endless traffic, especially during holiday shopping season, and Chili's, Taco Bells, and T.G.I. Friday's stretching as far as anybody could see. Inside the store, Red Red Meat CDs were displayed as prominently as Madonna CDs on the racks. "Guitarist Wanted" fliers papered the small, narrow entryway, next to worn copies of the Illinois Entertainer Illinois Entertainer and other thin newspapers devoted to the local rock scene. Hipsters who played in bands on the side stood behind the counter in horn-rimmed gla.s.ses and bowl cuts. This Hegewisch was part of a three-store chain, and it survived by selling an eclectic mix of rock, pop, and jazz CDs. and other thin newspapers devoted to the local rock scene. Hipsters who played in bands on the side stood behind the counter in horn-rimmed gla.s.ses and bowl cuts. This Hegewisch was part of a three-store chain, and it survived by selling an eclectic mix of rock, pop, and jazz CDs.One day in 1992, a Best Buy came to town, across and about a quarter-mile down US 30 from Hegewisch. Circuit City showed up a year later. It wasn't so bad at first-dishwashers and computers didn't exactly compete with music. But soon Best Buy started marketing its CDs and cutting prices more aggressively than ever. It would take a loss on hit CDs, drawing music fans into the store to buy much more profitable toaster ovens. This was an awesome development for consumers. The Beatles' Anthology 2 Anthology 2 cost $27.99 at Hegewisch and $22.99-with a free, limited-edition interview disc-at Best Buy. It was ridiculous for Hegewisch. "We can't keep up with that," Dave Diaz, the store's twenty-nine-year-old manager, said at the time. The Merrillville Hegewisch closed in 1995. The other two stores in the chain hung on until 2003. cost $27.99 at Hegewisch and $22.99-with a free, limited-edition interview disc-at Best Buy. It was ridiculous for Hegewisch. "We can't keep up with that," Dave Diaz, the store's twenty-nine-year-old manager, said at the time. The Merrillville Hegewisch closed in 1995. The other two stores in the chain hung on until 2003.Best Buy started selling CDs at all its stores in 1986, as a way of supplementing its core business, stereo equipment. Best Buy's CD sections took off as CD sales exploded; its stores were stocking 40,000 to 60,000 t.i.tles by the mid-1990s. Not only that, Best Buy could afford to drop the prices on CDs, even the hot new t.i.tles, when Tower and Hegewisch were stuck selling them for the usual prices in order to make a profit. (Although numerous record label executives say Best Buy's music economics involved taking a loss on a wide swath of CD t.i.tles, the company's executives insist they always made money from music. "The reality is all of our businesses have to be profit contributors," says Gary Arnold, the chain's senior entertainment officer.) Consumers were thrilled, because CDs were cheaper than ever. Labels were happy, too, until they realized just how much they had to compromise to sell millions of CDs in these stores.In 1996, Best Buy and Wal-Mart sold more than 154 million units out of more than 616 million overall, according to Nielsen SoundScan. With their newfound clout, these chains started dictating terms. Wal-Mart pushed back against explicit lyrics and alb.u.m covers-in 1993, the company refused to stock Nirvana's In Utero In Utero due to back-cover artwork depicting human fetuses. Nirvana's then-label, Geffen Records, decided not to censor the artwork and just live with the lack of sales at Wal-Mart's 1,964 stores. Labels would compromise within three years, producing "clean versions" of certain hip-hop records and airbrushing racy images out of CD covers so Wal-Mart would stock them. due to back-cover artwork depicting human fetuses. Nirvana's then-label, Geffen Records, decided not to censor the artwork and just live with the lack of sales at Wal-Mart's 1,964 stores. Labels would compromise within three years, producing "clean versions" of certain hip-hop records and airbrushing racy images out of CD covers so Wal-Mart would stock them.Best Buy was far less moralistic but developed hefty financial requirements to stock alb.u.ms. The chain demanded $40,000 to $50,000 from labels to push CDs in house ads and on displays and racks, sources say. This practice changed record stores forever. Tower Records, for one, went ballistic. "Frigging Best Buy!" says Stan Goman, Tower's former chief operating officer. "That was it." For years, Tower Records had a policy of not accepting money to display CDs prominently on store shelves. Store managers made those decisions based on what was selling and what they thought was good. It was a fair policy, but it was a dinosaur. Eventually, Tower couldn't resist the compet.i.tive pressure-and caved. "I couldn't believe it-all this stuff I never heard of on end-caps in the store," Goman says. "You wind up displaying all this c.r.a.p. c.r.a.p. I had a fight on a daily basis with that. I said, 'What the h.e.l.l are we taking this money for?' When the big boxes got in, they just used the same strategy that they used with everybody else, which was common in the grocery industry. We had a different philosophy. It ended up blowing up in our face a little bit." I had a fight on a daily basis with that. I said, 'What the h.e.l.l are we taking this money for?' When the big boxes got in, they just used the same strategy that they used with everybody else, which was common in the grocery industry. We had a different philosophy. It ended up blowing up in our face a little bit."But the label distribution execs didn't want to kill off Hegewisch, or Tower Records, or Sam Goody. These stores had been loyal customers for decades, and sold a lot of records. If they sold Anthology 2 Anthology 2 for $5 more, that, too, was good for the record companies, right? So the major labels came up with a policy: "Minimum Advertised Price," or MAP. Any store that sold CDs above a certain price would receive a financial boost from the record labels in the form of newspaper or television advertising. Newbury Comics in New England sold 'NSync's CD for $5 more, that, too, was good for the record companies, right? So the major labels came up with a policy: "Minimum Advertised Price," or MAP. Any store that sold CDs above a certain price would receive a financial boost from the re