Proximity to celebrity could cloud one’s judgment—it was more fun to sell music than industrial lubricants, regardless of the outcome for shareholders. Reporters had never been kind to Junior in the first place, but with the failure of the movie studio they smelled blood. He became a whipping boy for Wall Street and a piñata for the press. His period as CEO had coincided with some of the best equity market returns in American history, but Seagram’s stock had flatlined, even as the stake he had sold in DuPont doubled in value.

Universal Music Group was the bright spot in a dismal landscape, as even Bronfman’s fiercest critics had to concede. Junior wanted to leverage its strengths, so in May 1998 he announced a new transaction. Seagram would sell its Tropicana division to Pepsi, to fund the purchase of PolyGram Records from Philips. The orange juice business was everything Junior hated: boring, stable, and highly profitable. The music business was everything he loved: exciting, glamorous, and brimming with unforeseeable risks. After the deal’s completion, the majority of Seagram’s revenues would come from entertainment and Morris would once again be one of the most powerful music executives in the world.

Seagram’s stock sunk on the announcement of the transaction. PolyGram was not the recording label of the future. Its bestselling act in 1997 had been the boy band Hanson, led by their hit single “MMMBop.” Mostly, PolyGram’s roster represented the commercially successful recording artists of yesteryear: Elton John, Bryan Adams, Bon Jovi, Boyz II Men. But its position in foreign markets was strong, and that, along with the distribution rights to the back catalog, made it expensive.

The price tag was ten billion dollars, and executives at Seagram worked out the prospectus for the deal. This was a legally required public document that presented shareholders with the economic rationale for the transaction. The prospectus made aggressive estimates for future growth, targets that would have to be hit for the price tag to make sense. As tended to happen in corporate America, the executives had looked at the last three years of revenues, then extrapolated from those a trend line that extended off to infinity.

As required by law, the prospectus also contained an exhaustive examination of the potential risks. Chief among these was piracy, which had plagued the recording industry since its inception. (In fact, piracy had plagued the creative industries since the invention of movable type, and in the context of copyright infringement, the term “pirate” was more than 300 years old.) Piracy was something every recording executive took seriously, and already, as a result of the physical bootlegging of compact discs, PolyGram had been forced to exit certain markets in Asia and Latin America entirely. Bootlegging in those countries was more a product of organized crime syndicates than individual actors, but there was a risk that, with the rise of the home CD burner, the problem could spread to Europe and the United States.

Something like this had happened before, in the early 1980s, with the home audio cassette, after the introduction of the dual-head tape deck. The investment bankers considered this a relevant case study. They had dusted off a 16-year-old analysis of the adverse effects of the home-taping craze, conducted by the economist Alan Greenspan, who was now the chairman of the Federal Reserve. Drafted during a severe sales slump in 1982, Greenspan’s paper had taken an independent look at the industry. His analysis blamed tape bootlegging for declining revenues, then considered various pricing strategies the industry might employ to counteract this trend. But, using advanced econometric techniques, he found that neither raising nor lowering album prices was likely to work. Instead, Greenspan figured, the only way to reverse the sales slump was through an aggressive campaign of law enforcement against the bootleggers. In other words, the success of capitalism required vigorous intervention from the state. (Greenspan himself would not fully understand the importance of this insight for some years to come.)

Doug Morris thought throwing the bootleggers in jail was an outstanding idea. He had, however, learned an entirely different lesson from the tape-trading era. You didn’t solve the problem of piracy by calling the cops. You solved it by putting out Thriller. In Morris’ view, it was Michael Jackson’s 1982 blockbuster that had really rescued the slumping industry—what had been missing wasn’t law enforcement but simply hits. The music industry had been out of touch with the needs of its fans, but Thriller reversed this, spurring a pop music renaissance. Morris had not been involved in its production, but, like all music executives, he held Thriller in a special place of acclaim. The album was the signature achievement of corporate cultural production, an immortal work of art that remained the bestselling album in history.

So when Morris read the deal prospectus and its warnings of a coming wave of CD bootlegging, he was not especially worried. It was something to watch out for, certainly, but unlikely to materially affect his bottom line. Morris believed consumers would continue to buy legitimate discs, just as long as he kept cranking out hits. Plus, post-merger, the company’s margins on those discs would be better than ever. PolyGram owned several large-scale CD manufacturing plants throughout America, including the big one, the Kings Mountain plant where All Eyez on Me had been pressed. Once Universal folded these plants into its own manufacturing and distribution network, overhead costs were projected to fall by nearly $300 million a year. (As ever, there were no plans to pass these savings along to the consumer.)

The deal prospectus listed other risks as well. There was the risk that consumers’ tastes would change—the risk that, in some apocalyptic scenario, people would stop buying so many Hanson albums. There was the risk that Universal would be outbid for artists—the risk that they wouldn’t sign Cash Money next time, or that Bon Jovi would defect to Sony. There was the risk of economic recession—a risk that the industry had historically weathered well, but one over which it had no control. And, more dangerous still, there was “key man” risk—the risk that Doug Morris might suffer a stroke or be hit by a falling piece of space debris.

But the biggest risk wasn’t mentioned at all. When the deal prospectus was made available to the public in November 1998, the buzz surrounding the Internet had become impossible to ignore. But somehow the executives of Seagram did not think the technology was worth analyzing at all. The prospectus for the PolyGram purchase did not mention the Internet, nor the nascent consumer broadband market. It did not mention the personal computer, nor recent advances in audio compression technology. It did not mention the possibility of streaming services, nor the potential for widespread file-sharing. And it did not mention the mp3.

CHAPTER 7

By 1996, following its early adoption of the mp3, Telos Systems controlled 70 percent of the North American market for digital sports broadcasting. Its primary competitor had opted for mp2 encoding, and Telos had routed them. There were now Zephyr boxes in nearly every major North American stadium, and many large-market radio and television stations as well. Voice-over artists began using Zephyrs to set up digital home recording booths, eliminating the need for expensive studio visits. The word “zephyr” had even become a verb, meaning “to stream digitally,” as in, “Can you zephyr me that interview with Pavel Bure?”