Bloomberg on The Business of Beatlemania

July 6th, 1964 -- Ringo Starr, Paul McCartney, John Lennon (1940-1980), and George Harrison (1943-2001) of the Liverpudlian pop group The Beatles with their manager Brian Epstein (1935-1967) at the premiere of their first film "A Hard Day's Night."

This month marks the 50th anniversary of The Beatles' first album, 'Please Please Me'. A few weeks back I had written 10 Business Lessons from the Beatles over at Amazon's Money & Markets blog to commemorate the occasion and the amount of email I received was overwhelming. Something about this band and its legacy simply will not fade away - people remain endlessly fascinated with the Beatles and people of every generation eventually discover the music and the legend for themselves.

Business-wise, a lot of the what the band had done was utterly without precedent at the time. There were no such things as music videos or worldwide tours or bands branching out into artist management, merchandising, retailing or crossing over into film. The story of the Beatles also offered us plenty of cautionary examples - from cutting horrendous deals out of desperation to losing control of image and identity.

This week, we were treated to something truly special at Bloomberg.com - a full-blown interview with Peter Brown, the 75-year-old former business manager for the Beatles during their 1960's rise and break-up.  Brown was there for it all and, apart from his book, rarely talks about those days in the media. Eric Roston sat with him twice for this amazing piece...

    My main question for Brown: What was the Beatles’ business model?

    Looking back, two themes prevail: Doing whatever they could to get contracts, and doing whatever they could to make the most of tiny royalty percentages and avoid the U.K.’s "super-tax" on wealthy people.

    And the answer? There was no business model.

    "Everything we did was unknown territory," said Brown.

Please find time for the whole thing today, you will love it:

The Beatles vs. the Taxman: A Former Manager Recalls Yesterday 

The small, framed photograph might not strike visitors to Peter Brown's Manhattan home as noteworthy. It features indiscernible figures lounging about a grassy estate under a high sun. But those figures -- which include the four Beatles, their significant others, plus their personal assistant Neil Aspinall and Brown  -- are captured in repose at the peak of the band’s creativity and influence.

 

Rock and roll band "The Beatles" performs onstage at the Cavern Club in February 1961 in Liverpool, England. (L-R) George Harrison, Paul McCartney, Pete Best and John Lennon. Photographer: Michael Ochs Archives/Getty Images

 

The Beatles with music publisher Dick James in Studio 2 at Abbey Road in London, recording the single "She Loves You" on July 1, 1963. L-R Dick James, Paul McCartney, George Harrison, producer George Martin (in background), John Lennon (writing) and Ringo Starr. Photographer: Terry O'Neill/Getty Images

 

The Beatles proudly show off their MBE (Member of the Order of the British Empire) awards at a press reception held at the Saville Theatre after an Investiture at Buckingham Palace, London on October 26, 1965. Photographer: Central Press/Getty Images

 

The Beatles--clockwise from top left: Ringo Starr, George Harrison (1943-2001), John Lennon (1940-1980) and Paul McCartney promote their new album "Sergeant Pepper's Lonely Hearts Club Band." Photographer: John Pratt/Keystone/Getty Images

 

Peter Brown, former Beatles manager, attends the $500,000 Simulate A Better World Challenge Winner Celebration at Brasserie 8 1/2 on October 10, 2012 in New York City. Photographer: Ben Hider/Getty Images

The picture was taken in July 1967 at Kingsley Hill, the country home of manager Brian Epstein in Sussex. The album Sgt. Pepper's Lonely Hearts Club Band had been released six weeks earlier. The single "All You Need Is Love," which the band had performed live three weeks earlier during the first global television broadcast via satellite, would be released in the U.S. within days.
The Beatles and their inner circle gathered for the weekend of July 15 to begin planning what to do with their wealth and their future, a rare undocumented moment in the band’s biography. The photograph shows a moment of tranquility, just before the storm clouds gathered. They would soon become aware of the many shortcomings of deals that had nonetheless made them rich. The band’s management agreement with Epstein was itself due to expire toward the end of the year. That increasingly weighed on him, though there was little reason to suspect they would drop him.
After its release on June 1, 1967, " 'Pepper’ had kind of exploded the world, and Brian was very conscious they had to have a plan for the future," recalled Brown, Epstein's assistant and friend, and later an executive of the Beatles’ company, Apple Corps. Ltd. "One of the problems was this enormous amount of money" in back royalties they were to get from EMI "and what should they do with it to avoid paying taxes -- prohibitive taxes -- on it." 
The boys never got down to business that weekend. "I think they were proud of what they'd done, and it was a very special moment," said Brown, 75. It was meant to be a "a quiet weekend."
Within six weeks of snapping the photograph, Epstein, who had catapulted the Beatles from a popular, rambunctious Liverpool foursome to towering global celebrity, had died of an accidental drug overdose, at the age of 32. The act he had discovered was left rudderless; they knew virtually nothing about their own business affairs.
Brown, who is chairman and CEO of the strategic communications firm BLJ Worldwide, described his role in the Beatles empire in The Love You Make: An Insider’s Story of the Beatles, the bestselling 1983 tell-all he published with journalist Steven Gaines: "I supervised and conducted all of their business affairs, from getting their signatures on contracts to getting them out of jail. I helped marry and divorce them. On my desk was a red phone to which only they had the phone number, and locked in a desk drawer I kept their passports."
Brown had granted an exclusive interview to mark the 50th anniversary of the start of the Beatles recording career. The album Please Please Me was released on March 22, 1963. He and I met twice, in October and January.
My main question for Brown: What was the Beatles’ business model? 
Looking back, two themes prevail: Doing whatever they could to get contracts, and doing whatever they could to make the most of tiny royalty percentages and avoid the U.K.’s "super-tax" on wealthy people.
And the answer? There was no business model. 
"Everything we did was unknown territory," said Brown. His measured speech suggested an elder statesman. "What Brian did was unknown territory."

In the Beginning

Rock and roll band "The Beatles" performs onstage at the Cavern Club in February 1961 in Liverpool, England. (L-R) George Harrison, Paul McCartney, Pete Best and John Lennon. Photographer: Michael Ochs Archives/Getty Images

Young merchant seamen who sailed from Liverpool, a port city of about 745,000 people in 1961, brought back firsthand encounters with popular culture abroad. "They used to come to America on the ships," Brown said. "So they heard rock and roll. They heard rhythm and blues. They heard country music. The knowledge that Liverpool had of the contemporary music scene in America was unique."
As manager of the record store his family owned, NEMS, Epstein catered to these relatively sophisticated tastes. Brown worked in the record department of a store across from Epstein's. The two became friendly, grabbing morning coffee at "elevenses," supper at night. Brown's employer had recently put him through a two-year business degree, an investment that still didn't move him to stay with the organization. He joined NEMS when Epstein offered him a 30 percent raise, plus commissions.
As legend and biographers have it, in October 1961, a customer dropped by the store to ask if they had a single, "My Bonnie," by the singer Tony Sheridan (who died in February), with a local band called the Beatles backing him. There were two more requests in the next couple of days. Epstein walked over at lunchtime on Nov. 9 to see their set at the dim, crowded Cavern Club. 
"They smoked as they played and they ate and talked and pretended to hit each other," Epstein wrote in his 1964 autobiography, A Cellarful of Noise. "They turned their backs on the audience and shouted at them and laughed at private jokes." But they also gave off a "magnetism" that held sway over the crowd and himself. Instinctively, he ordered 200 copies of "My Bonnie" for his store.
Even then, Beatlemania was under way. The Beatles’ original drummer, Pete Best, put the beginning of the craze at Dec. 17, 1960, at the Casbah Coffee Club, which his mother had opened the previous year. "This was the first time the Beatles had played in Liverpool, seeing the audiences switch on to what we were doing," Best said in an email. "Rapturous applause and screaming girls. Every show becoming bigger than the last one was wonderful."
Propelled back for several visits -- "part sexual, part showman," as Brown and Gaines wrote -- Epstein decided he could manage them.

‘A Tough Contract’

Record executives didn’t share Epstein’s vision. Decca Records President Dick Rowe would become infamous for passing on the Beatles after they auditioned, on the assumption that guitar bands were on their way out. Later Beatles biographers have exonerated him, given the state of the band’s act in 1962. As a consolation prize, George Harrison later suggested Rowe look into a band in London he liked called the Rolling Stones, according to The Beatles by Bob Spitz.
George Martin of EMI’s Parlophone label saw how much work they needed. "I wasn’t particularly knocked out by what [Brian] played for me. I didn’t think a great deal of the songs or the singers. But I did think they produced an interesting sound," Martin told journalist Hunter Davies. 
He was willing to sign them, but not with their current lineup -- namely with drummer Pete Best, who he felt wasn’t "regular enough" and didn’t "give the right kind of sound." Epstein fired Best and hired Ringo Starr (Richard Starkey), making them, respectively, the unluckiest and luckiest drummers in the history of humans hitting things with sticks. 
Martin’s offer to Epstein was standard for the time -- and accordingly not a strong bet on the band’s future success. "It was a tough contract," Martin wrote in his 1979 book, All You Need Is Ears. In the first year, with an option to renew, it required that the band deliver two double-sided singles, for which the four musicians split three-quarters of a penny among them for every sale, while Epstein got 25 percent of a penny. Despite their tiny royalty percentages -- 18.75 percent of a penny per Beatle per sale -- they sold enough records within a year to become wealthy, about 6 million pounds (about $16.7 million) worth. 
EMI’s profits shot up 80 percent. Beatlemania spread.

Taking Stock

Since Lennon and McCartney were writing their own songs, they needed a music publisher, which owns song copyrights and pays composers their royalties. Dick James Music set up a company, called Northern Songs, after the composers’ northern English origins, to publish these compositions. DJM owned 50 percent of the company, Lennon and McCartney were given 20 percent each, and Epstein’s management company, NEMS Enterprises, took 10 percent. 
Brown said there was nothing wrong with it. But all things being equal, as he and Gaines wrote, "in literal terms, Brian signed over to Dick James 50 percent of Lennon-McCartney’s publishing fees for nothing. It made him wealthy beyond imagination in eighteen months."
These deals, and the others, and the lawsuits, that came after them, structured the Beatles' lifetime income -- and not necessarily happily. "We were desperate to get a deal," Paul McCartney said in the official compendium The Beatles Anthology, published in 2000. "Brian did do some lousy deals and he put us into long-term slave contracts which I am still dealing with. For 'Yesterday,' which I wrote totally on my own, without John's or anyone's help, I am on 15%." 
Brown declined to discuss individual band members.
The top rate for British taxpayers in the mid-1960s reached 83 percent. The wealthiest among them paid a 15 percent super-tax on top of that, pushing taxes as high as 98 percent. The pain came out in the band's music. George Harrison opened his 1966 song "Taxman": 
Let me tell you how it will be.  That’s one for you, 19 for me... Should 5 percent appear too small,  Be thankful I don’t take it all.
As Lennon and McCartney racked up hits with their compositions in 1963 and 1964 -- "Please Please Me," "From Me to You," "I Want to Hold Your Hand," "She Loves You," to name a few -- and money started pouring in, it became clear that the songwriting profits would be siphoned away to the U.K.’s treasury if something wasn't done.
"They were the most famous people in the world, and they were making a lot of money, but they were not seeing any of it," Brown said. "So capital gains was the obvious route to go."
The London financial community wasn’t quite sure what to make of a company whose only assets were the songwriting potential of two Liverpudlian twentysomethings. Still, the profits looked good, and in February 1965 the London Stock Exchange quietly hosted the initial public offering of Northern Songs Ltd. 
Five million shares were offered. Lennon and McCartney each received 15 percent, which was worth $640,000 at the time, according to The Love You Make. Dick James and his partner received almost $1.7 million worth. Harrison and Starr were awarded small percentages. Fans, many of them American, bought  shares to get a piece of the Beatles. 
Lennon and McCartney have never owned the Beatles song catalog outright. Today, music-publishing rights rest with Sony/ATV, a joint venture between Sony Corp. and the estate of Michael Jackson. The Beatles’ recorded music is owned by Vivendi's Universal Music Group, which purchased EMI last fall.

On the Road

The Beatles' first movie, A Hard Day’s Night, showed the band coping with the demands of Beatlemania in their native Britain. The second picture, Help!, went on location to Austria and the Bahamas, both because it was an adventure spoof and because working abroad they could avoid taxes. 
Beatles tours were exercises in chaos. There was no infrastructure or services in place to support this scale of enterprise. They needed their own chartered planes. They played stadiums with tiny speakers. 
When the group traveled to Munich, Essen and Hamburg, in 1966, "the German government gave us the royal train," Brown said, "the train which had been built for Queen Elizabeth’s tour of Germany, like, five years beforehand." That situation set off a spat over "who was getting the queen's bed," Brown laughed.
"Who got it?" I asked.
"John."
For Epstein, chaos was opportunity. "It became clear to Brian that if he and the boys were going to grab any money at all in what might be just a few fleeting moments of great prosperity, he had better grab it in cash, and cash meant touring," Brown and Gaines wrote. Epstein felt justified collecting paper bags of cash because of the river of money the Beatles were sending into the treasury through taxes on royalties, they wrote.
Chaos also meant lost opportunities. NEMS ended up initially giving away 90 percent of merchandise-licensing income to an American middleman, resulting in a catastrophic loss of income for the Beatles. That loss would be reduced through lawsuits, but by the time the controversy settled down, Beatlemania had peaked and the drama had scared off would-be manufacturing partners.
"Brian agreed that that was the worst thing he ever did," Brown said. 
Fandom was far from universal. "The attention they were getting wasn't always positive, because there was the Frank Sinatra generation saying, 'Who the ---- are these people?' " Brown said. 
Beatles backlash grew serious on the 1966 tour, when the band hit a trifecta of difficulties. A perceived snub of Imelda Marcos, the Philippine president’s wife, made them personae non grata in the Philippines, requiring a hair-raising escape in which the band members needed to be protected from Philippine security who were threatening them with guns and wooden clubs at the Manila airport, Brown and Gaines wrote. A right-wing Japanese group threatened violence at a concert. In the U.S., comments made by Lennon to a British journalist that the Beatles were "more popular than Jesus now" set off record-burning protests.
"We never really said it very much" in The Love You Make, Brown said, but "there was a very great nervousness about somebody getting shot when they were onstage."

And in the End

The Beatles performed their last scheduled concert on Aug. 29, 1966, at San Francisco’s Candlestick Park. The end of touring meant less need for constant management. 
Brown frequently escaped to the country, leaving Epstein behind, often in an unsettled state. Plagued by depression and drug use, Epstein had spent part of May 1967 in a hospital breaking a cycle of insomnia and stimulant use, according to The Love You Make. The previous year Epstein had attempted suicide, according to the book.
"I had persuaded Brian to buy this house in the country because I was worried about his drug intake," Brown said, surprised that Epstein went for it. Epstein loved the one that Brown picked out, an 18th-century house in Sussex, and bought it just months before his death on Aug. 27, 1967. 
After Epstein’s death, Brown took on even greater duties as a top executive and helped the Beatles form and launch Apple Corps Ltd. He continued to oversee more than just the Beatles' professional matters, through the band's ultimate break-up in April 1970. He witnessed McCartney and Linda Eastman’s wedding in March 1969. Eight days later he was best man at John Lennon and Yoko Ono’s wedding, for which he is immortalized in the song "The Ballad of John and Yoko":
Peter Brown called to say ‘You can make it okay, You can get married In Gibraltar, near Spain...
In the half-century since the album Please Please Me was released, the Beatles have never been far from the popular culture. Their simple lyrics, original melodies and tight harmony stand as a kind of universal musical language -- hence the title of All You Need Is Ears -- and have kept music scholars busy for decades. Their songs, and antics, banged up against British tax policy, cold war politics and American religion. Beyond that, the band’s "promotion of the English language around the world is one of their most substantial, and least documented, achievements," the late music critic Ian MacDonald wrote in his 1994 book, Revolution in the Head: The Beatles and the 1960s. 
On the way to the first of my two interviews with Brown, I passed a young family on the sidewalk. The smallest among them, a boy, maybe 8 years old, wore a Beatles T-shirt. I asked Brown why events in England in the early 1960s should have an impact on what American children wore in 2012. He said he asks people that himself. 
"Did you show them? Did you tell them? No. They find it on their own," Brown said. "It's an amazing phenomenon that 50 years later, kids find them.
Correction: The original version of this article said Peter Brown is 74, based on information from an aide to Brown. He is 75.