Valley of darkness

The world of independent record labels and distribution was shaken last month by the bankruptcy of Valley Media. The fault lines of this sonic tremor lead to the tiny town of Woodland, where stacks of compact discs and other products remain locked in a darkened warehouse, away from their labels and fans.

Much of that inventory belonged to Distribution North America (DNA), a highly regarded and profitable distribution company for independent labels, as well as DNA’s newly developed second tier farm team, Emerge Distribution.

These two indie distribution companies—both of which are owned and housed by the Woodland-based entertainment powerhouse Valley Media—were the hope and saving grace of many small record labels, the means to get their music into the chain retail “Big Bs”: Borders, Best Buy and Barnes & Noble.

Michelle Haunold, the young sales manager for Emerge Distribution and owner of one of the labels that Emerge distributed, the hot rod punk label Gearhead Records, got socked with a triple whammy on November 16, a day dubbed “black Friday” by music folk.

She lost her job. She has so far been unable to extricate her own product from her former company. And, because she was sales director, she was responsible for bringing new indie labels under Valley’s umbrella.

“I’ve been in a complete state of shock, feeling incredibly responsible for putting people I care about in a position that, ultimately, I didn’t even know existed,” she said. “Then putting my own label in jeopardy and then on top of that, losing a job that I really liked.”

The plight of entities like DNA and people like Haunold is the human story behind the fall of Valley Media.

Rise and fall
Valley Media was created in 1981 by an indie record shop owner from Woodland named Barney Cohen. It grew over two decades into a national, award-winning “one stop,” a massive wholesale distributor of music, video, DVDs and games to retailers and e-commerce sites. Sizewise, think Goliath to DNA/Emerge’s David.

After climbing to the top of its industry, things changed. Six months ago, as Valley Media was suffering from bad investments in the movie distribution business and dot.com failures, its executives began serious negotiations to sell to their main competitor, Florida-based Alliance Entertainment Corporation (AEC). Terms were set to remove millions of dollars of bad debt. It seemed like a done deal, plain and simple: New owner, new life.

“Emerge labels were really starting to succeed,” Haunold bubbled. “DNA was letting us sell and promote to indie mom and pop stores. Bigger is not always better. The kind of music we had didn’t need to be in the big chains to succeed initially. Label owners were starting to figure out that their fans didn’t hang out in mall stores.”

Then came November 16. Valley CEO Peter Berger—a turn-around specialist who had arrived in April to try to save the company—called the nearly 200 faithful Valley staffers out onto the well-groomed indoor Green, once the familiar site of live band performances and monthly pro-active pronouncements.

Berger apologized for not getting the job done and for failing to successfully complete the merger with AEC, which fell apart after six months of negotiations on November 9 when AEC walked away from the deal.

It was as if Goliath, as he fell over in the valley, squashed little David dead on the way down.

“I firmly believe that to this day, all the DNA upper management thought this deal was going through,” noted a grim DNA national accounts sales representative, Scott Cameron. “The turnaround—how quickly this happened—was flabbergasting. We were all blown away. Within one week, you got DNA dismantled.”

Sealed warehouse
Haunold’s Gearhead Records inventory and that of other labels is sealed up in the warehouses of Valley Media, simply part of the assets of Valley Media. Combined, DNA/Emerge distributed 400 labels to retail outlets in the U.S. This represented, according to Alex Rogerson, ex-marketing manager of Emerge, “about 10 percent of the recorded music available in the United States.”

“DNA was in the black,” according to Haunold and confirmed by Valley’s filings with the Securities and Exchange Commission. “Money went to Valley and any time DNA wanted to pay one of their vendors they had to ask Valley for approval. This didn’t seem to be a problem up until right at the very end when Valley wasn’t getting any money from anybody except from DNA sales.”

As Valley’s deal with Alliance dragged out, Valley’s value in the music world began to diminish. Labels and studios became hesitant to ship their product to Valley for fear of not getting paid. Customers switched to Alliance and other one-stops to get their goods. Credit, cash flow and product began to dry up, leaving DNA as Valley’s main source of income.

Although Valley’s November 20 filing of Chapter 11 bankruptcy allows the company time to reorganize, few staffers, labels or industry pundits think this can happen. Last Monday, Berger announced that the sell-off of Valley’s $90-million dollars worth of assets has begun.

More layoffs of the remaining 550 staffers occurred on Friday. With Valley’s demise, it joins three other one-stops in one year who have gone under. And without one-stops, the tastemaker independent retailers, the ones who actually break new music and start bands off, will be in dire straits. And as they go, all of the music business could be in for trouble.

Whose product?
Yet there is still the open question of who really owns Valley’s assets. Just because its warehouse was filled with CDs, does that mean it owns them? Or do the artists and labels have some claim to them?

The only caveat that may rescue some of these labels from the Valley warehouse is if they had “consignment terms” in their contracts with DNA/Emerge. In theory at least, these labels’ product does not belong to Valley and thus could not be sold off to pay secured creditors, but instead must be returned to the rightful label owners at some point.

In fact, Haunold said Valley President Lew Garrett had assured her that she could pick up her product at the warehouse this week, but reversed himself on Tuesday when he was served with a “cease and desist” court order sought by the creditor’s committee, which is made up mostly of major labels. That order or its contents couldn’t be independently confirmed by press time.

The outlook is more bleak for regular “term payment” labels. Not only are they unlikely to get paid for sales of their creations during the big fourth quarter, when holiday sales move lots of product, but they could lose their inventory to the liquidators.

Yet there was one label that didn’t wait for the ownership issue to get sorted out by the lawyers and courts: Death Row Records, the legendary rap label run by founder/CEO “Suge” Knight, had just signed a multi-year exclusive with DNA in February 2001.

With high-profile releases from Snoop Doggy Dogg and the late Tupac Shakur ensuring brisk holiday sales, label representatives showed up at the Valley warehouse in Woodland just before the bankruptcy announcement and left with their entire product.

Reputation probably helped in the rescue effort. Knight was released from prison in early August 2001 after serving time since 1997 for probation violation after taking part in a fight at a Las Vegas hotel. Hours after the fight, rap star Tupac Shakur was shot to death in a drive-by attack as he rode in Knight’s car.

Death Row is already with a new distributor.

Venting frustrations
There was a lot of finger pointing when the deal with AEC went south, on both sides, according to ex-Valley staffers and industry wags, some of whom post lively dialogue on a Web site called “The Velvet Rope” (www.velvetrope.com).

They had noted rumors of Berger saying “they (Alliance) just wanted to bankrupt the company, so that they can eliminate all the debt and get the company at a fire sale price.” Others noted that Valley waited too long to ask for assistance from their own bank. There is no denying that the months it took to negotiate left Valley a far less valuable entity than it had been when negotiations began.

Neither Berger nor representatives of Alliance could be reached for comment.

As hard as the fall has been for Haunold, musicians are taking it even harder. There is one veteran of seven independent distribution demises and one-stop bankruptcies who pulls no punches.

“This is devastating to my label, Blue Rockit Records,” said Patrick Ford, the blues label owner, a musician and the brother of the legendary blues guitarist Robben Ford. “Are we here January or not? That’s where I am.”

Ford claims to have lost $42,000 when AEC filed for Chapter 11 bankruptcy five years ago. Seeking to avoid the same fate this time, Ford went to the Valley warehouse in an unsuccessful attempt to recover his merchandise. He said the artists end up paying for the mistakes of companies like Valley and AEC.

“They [AEC] got to rebuild, keep their jobs, keep their money, keep their cars and they are on top again now,” Ford said. “People like me, who were almost devastated, well, I didn’t get a penny that time, so I knew when this time came down it was going to be the same ballgame over again.”

Music in limbo
Was Valley’s downfall a chess game between two competing giants? Was it personalities, was it politics, was it ego? Was it simply cunning business? For Ford, it’s a moot point: “I’d just like to tell my Congress people and senators, ‘Hey, we’re bailing out the airlines and some of us little guys are getting ripped off down here. Who is gonna bail out the record companies?’ ”

Retailers say their sympathy also lies with the artists and small labels. “I’m worried about all those little labels—especially like Gillian Welch’s own Acony Records,” says Tower Records Broadway general manager, Keith Sutherland. “Time, the Revelator—that’s my favorite record of the year. How can she stand a hit like that? Will she get any of her inventory back? Probably not. It’s horrible.”

Haunold says she’s been devastated by the events of recent weeks: “Oh my God, there are gonna be lots of DNA/Emerge labels who may go under. For instance, this great little bluegrass label, DoobieShea, has the Dan Tyminski record.”

Tyminski is the real voice of George Clooney’s character as The Soggy Bottom Boys lead singer in the hit film Oh Brother Where Art Thou?, and a member of country/bluegrass star Alison Krauss’ platinum-selling band, Union Station. He just won the coveted Country Music Association Awards’ Single of the Year for “I Am A Man Of Constant Sorrow” and Album of the Year for the movie soundtrack.

“I called him up the day he won to congratulate him and to go over all our marketing efforts and asked for another 1,000 units of his album to be shipped here,” Haunold recalls. “This was one day before Valley announced all the layoffs. I didn’t know.”