The acquisition by Sony Music UK of label distribution and services company Essential, formerly part of the Cooking Vinyl Group, was the result of a 14-month negotiation process.
Essential and Sony UK’s RED have now been merged to form the new London-based company Red Essential – which is set for international expansion in the coming months.
MBW understands that Sony was attracted to the deal by Essential’s reputation for reliability amongst its clients, as well as a sales and label distribution platform that trumped RED’s existing equivalent in the UK.
Also of interest to the major, of course, was the fact that an acquisition of Essential would deliver a single percentage point of UK distribution market share into Sony’s grasp; a small but valuable asset for a company hungry to close the gap on market leader Universal.
Yet the benefits from the deal for Cooking Vinyl and its roster – which including The Prodigy, Billy Bragg and Marilyn Manson – are also highly significant, Cooking Vinyl CEO Martin Goldschmidt tells MBW.
He calls the Essential sale “a big strategic move” for his 30-year-old label, which now finds itself a preferred partner of Sony Music Entertainment worldwide.
“What hasn’t really emerged about this deal is what Cooking Vinyl get out of it,” Goldschmidt explains.
“Obviously, we get the financial benefit of the sale as well as a far stronger route to market – and we’ll be integrally involved in helping [Red Essential] set up its network worldwide.
“IT used to be about majors buying independent labels for their A&R – now we’ve got [RED] doing some A&R for us.”
“It’s quite an innovative deal. It used to be about the majors buying independent labels for their A&R – now we’ve got [Red] doing some A&R for us.”
Cooking Vinyl has committed to using Sony’s distribution system in France, Germany and the US as part of the Essential deal, and will decide if it goes through the major in other territories on a case-by-case basis.
“With Red, we’re going to build an amazing route to market for independent artists and labels globally, which puts Cooking Vinyl in a great position,” says Goldschmidt.
“Red is already the best game in town for independent label distribution in the US and we want to help them grow that reputation in the UK and further across the world.”
Goldschmidt acknowledges that – boost to CV’s market power aside – there were other reasons why the time was right to sell Essential.
Although he proudly points out that the Essential business, smartly run by MD Mike Chadwick, posted a small profit every year since 2006, the company’s margins were tight – and getting tighter.
According to Essential Music & Marketing Ltd’s last available accounts, the firm turned over £12.5m in 2014 but posted a net profit under £100k.
The pressure in a crowded marketplace was getting intense.
“It’s very competitive out there,” says Goldschmidt. “Essential was doing well – making money when many people [in label services] are losing money. But eventually, they were going to outrun us.”
Goldschmidt is not only referring to the major labels’ increasing presence in the UK/European label services sector, but also rivals backed by tens of millions of dollars in private equity – companies which don’t have to worry about turning an immediate profit in order to grow.
Kobalt Label Services, for example, posted a £4.4m loss in 2014, up from a £1.98m loss in 2013. (Kobalt’s publishing company was profitable in 2014 to the tune of £2.37m.)
“Essential was making money in label services when many are losing money. But eventually, they were going to outrun us.”
“The services world is naturally tough as you don’t own any of the assets, and now the market is consolidating,” observes Goldschmidt.
“We’d been approached by pretty much everyone to [buy Essential]. That doesn’t apply to Caroline International, I should say, who we get on with very well.
“The reason for us to go with Sony RED was because they really needed Essential to grow – and that gave our staff real security.
“Sony needed everyone in our building to make Red Essential work, which is a real compliment.”
As for Cooking Vinyl, Goldschmidt has already used some of the profit from the Essential sale to set up a new office in the US, run – appropriately enough – by former Sony RED veteran Howie Gabriel.
“Cooking Vinyl now has a completely a unique business model,” says Goldschmidt. “How many labels remain 100% independent but can say they have this kind of strong relationship with a major?
He adds: “We’re going to use some of the rest of the sale money to set up some more exciting things very soon. Watch this space.”Music Business Worldwide