The Corporate Takeover of Jay-Z

Photo: DAMIEN MEYER/AFP/Getty Images

Last month, in a move that many should have seen coming, hip-hop mogul Shawn Carter signaled the corporate takeover of Jay-Z Inc. when he sold the remainder of the franchise to concert promoter Live Nation. After years of building up the brand called Jay-Z, Carter is doing what any smart investor would do at this point: cashing in.

In the minds of his audience, rapper Jay-Z is the epitome of cool. “Jay’s just that dude—Period,” says Ryan Bence, 22, a senior at Arizona State University. “He is the Sinatra of our day. He’s who everyone wants to be.” Another fan, 21-year-old LaShonda Shepherd, a student at the University of Maryland, insists, “Jay is one of the few rappers now that still gives me chills. I listen to him, and I’m sucked in.” It’s that larger than life persona that has helped the entertainer gain such a devout following among hip-hop fans, and sell more than 33 million albums worldwide. But as he himself is quick to remind you, there is an important distinction between Shawn Carter and his braggadocios alter ego, Jay-Z the hip-hop star: while Shawn Carter is a businessman, Jay-Z is a business, man.

Over the years, Carter has successfully used Jay-Z’s influence as a hip-hop star to build a franchise of businesses that capitalize on the rapper’s popularity. “[Jay-Z] is a purveyor of quality and value,” says Robby Wells, chief strategy officer for Acme Content Co. “He adds value to the lives of his consumers—just like any trusted brand. Where he is different than a typical brand is that he has an extreme amount of highly valuable influence. He could easily stand on the merits of what he is famous for, but he has shot to extreme levels of success due to his influence.”

In fact, it was recognizing that influence early on in his career that ultimately lead to the creation of the Rocawear urban-apparel brand. When Carter noticed that a large portion of the audience attending his concerts were wearing ICEBERG—a clothing brand he was well-known to favor at the time—it occurred to him that his fans wanted to do more than just listen to his music. They wanted to live his lifestyle as well. Believing he had cachet as a trendsetter, Carter approached executives at the clothing company with the intention of securing an endorsement deal. But they declined his offer; ICEBERG’s loss in retrospect (“Sometimes you’ve gotta learn to live with regrets.”) That’s when he and then-partner Damon Dash decided to found Rocawear.

‘THE BLUEPRINT’

Jay-Z Inc. represents the business ventures built around Jay-Z the hip-hop star. What began with rapping, soon grew to include Rocafella records, Rocawear, and a host of endorsement deals and joint ventures. For the most part, all of these undertakings owe their success to Jay-Z’s influence as a hip-hop star. But after 12 years of building up the franchise, Carter has cashed in piece by piece.

In 2004, Carter and then-partners Damon Dash and Kareem “Biggs” Burke sold their remaining 50% stake of Rocafella records—including the label’s entire roster—to Island Def Jam Group for $10 million.

In 2005, Carter bought out Dash’s stake of Rocawear for $30 million. Then in 2007, sold the company to Iconix Brand Group for $204 million in cash, plus an additional $35 million in Iconix stock, contingent on whether Rocawear meets certain performance goals over the next few years. The deal is Iconix’s largest acquisition to date. And although Rocawear currently brings in over $700 million in global sales annually, Iconix believes—by expanding in China and Mexico—the company has the potential to become a $1 billion global brand—further outpacing competitors such as Sean John, which currently brings in between $500-525 million in sales annually.

But the coupe de grace that clinched the takeover of Jay-Z inc. occurred just recently,  when Live Nation struck a deal to secure the foundation of the franchise—Jay-Z the hip-hop star—in what’s tantamount to a business acquisition. Jay-Z, after all, is a business. And for Live Nation, he represents a tremendous growth opportunity. Up until now, the concert promoter’s central focus has been country music and pop acts such as Madonna and U2. But with Jay-Z, the company makes its first foray into the hip-hop marketplace.

To acquire Jay-Z, Live Nation ponied up a pay package worth $150 million—It’s highest to date. The terms of the deal include $5 million a year for five years to cover overhead for Roc Nation, plus $25 million for any investments or acquisitions. Carter will also receive an initial payment and general advance totaling $50 million, $10 million an album for a minimum of 3 albums, and $20 million for some licensing and publishing rights.

Live Nation plans to recoup that money from music sales, licensing, touring, sponsorships and endorsement deals. Already, Jay-Z’s twenty-eight date Live Nation sponsored “Heart of The City” tour—featuring singer Mary J. Blige—is expected to gross upwards of $33 million. But Roc Nation—a joint venture between Carter and Live Nation—is how the concert promoter really stands to benefit from the deal. Essentially, Live Nation plans to build a franchise of businesses around Jay-Z, similar to how Carter built various enterprises around the hip-hop star. Michael Kohl, the Chairman of Live Nation, even revealed to the New York Times, “What he’s done has kind of mirrored what we want to do and where we think we’re going.” Roc Nation will share revenue with Live Nation, and act as the umbrella for Carter’s outside business endeavors. Thus far, those ventures include music publishing, a record label, talent management and consulting.

The 10-year agreement goes into full effect when Jay-Z fulfills his obligation of one more studio album for Def Jam, which he is expected to complete this year.

‘STOCK AT AN ALL-TIME HIGH. PERFECT TIME TO SAY GOODBYE’

Carter’s deal with Live Nation could not have come at a more opportune time for several reasons. Since late 2000, traditional music sales have diminished significantly, due to digital downloads and illegal file sharing. By contrast, music consumption and production are at an all-time high, thanks to increased access for fans and lower barriers to entry for artists. For record labels, the challenge has been creating a new business model for an industry that currently relies heavily on CD sales for revenue. But so far, there has been little success. And that has fueled speculation about the future of traditional record labels. Meanwhile, a company like Live Nation represents a new direction for the music business. Instead of relying solely on album sales for revenue, Live Nation emphasizes live performances, endorsement deals and merchandising.

The financial benefits from this type of arrangement can also outweigh a traditional record contract. As Jay-Z himself has acknowledged, he earns more from his outside business ventures than he does from music sales: “Roc-a-wear, eighty mill in like eighteen months/You could bullshit wit rap if you want.” But music is important because it is the foundation of the Jay-Z lifestyle brand. “The ability to capitalize on his windfall, music, will always be the springboard [that Carter uses] to leverage the Jay-Z brand into future ventures,” says Ikenna Achi, portfolio analyst for a New York City hedge fund.

For that reason, Carter employs a loss leader strategy, even more fitting now that album sales have declined. Similar to how a company like Nintendo sells Wii consoles at a loss to stimulate the sale of video games—which have a high profit margin—Carter uses music to sell more profitable lifestyle products, such as concert tickets, clothing, and even laptops. Even when you disregard other aspects of his agreement with Live Nation, at $10 million an album—about five times the amount he has earned in royalties from “Kingdom Come”—Jay-Z stands to make more from this deal than he did while under Def Jam. And he won’t have to sell more albums to do it.

‘FORGET THIS RAP SH*T. I NEED A NEW HUSTLE’

Market researchers estimate that the hip-hop demographic represents roughly 37 million 12 to 34-year-olds who account for nearly $600 billion in yearly purchasing power. (And that’s just in the U.S.) More than any other group, hip-hop consumers love to spend (especially on luxury items), and they increasingly influence the buying trends amongst their friends and older consumers. While that should be great news for advertisers, a major hurdle is that corporate America generally has trouble speaking the language of the hip-hop consumer. It’s a problem Carter and long-time friend Steve Stoute hope to solve with their latest business venture, Translation Advertising (hence the name.) But the task won’t be easy. More than any other genre of music, hip-hop is constantly changing and evolving, which means new trends are always originating spontaneously. A few years ago, no one could’ve imagined that hip-hop would someday embrace skateboard culture, much less ostentatious fashion trends made popular during the 80s. But it has, and more than ever before, the dynamics that determine what’s cool in the genre are shared between artists and fans; each influencing the other to some degree.

That said, the hip-hop landscape is very different today than it was during the late 90s, when Jay-Z first rose to prominence. “It’s getting more segmented,” says Mick Boogie, a well-known Ohio-based deejay. “However, you have to remember that back in the day, it was kind of like that as well. East coast people weren’t listening to gangster rap, and crips in Cali weren’t listening to De La Soul.  Then in the late 90s, it all kind of merged into commercial versus underground.” In recent years, technology has given hip-hop fans unprecedented access to the kind of content they can listen to. As a result, various new subcultures and sub-genres have emerged: backpack rap, crunk music, snap music, ring tone rap, hyphy, and, most recently, hipster hip-hop. But whether or not the addition of these groups is a good thing is still up for debate. “Personally, I don’t mind the differences and variety,” says Boogie. “Hipster hip-hop is some of the only progressive music out at this point.”

The music is not the only part of the culture that has changed drastically in recent years. Hip-hop fashion has also gone through a metamorphosis. “When Rocawear made its debut in the late 90′s, it was aligned with the sound of the era,” says Simone “Boss Lady” Kapsalides, content manager for urban clothing retailer DrJays.com “New York rap was an unequaled force on the charts, and flashy street tales were the order of the day. The clothes had to match the music, so from leather bomber jackets to oversized shirts and baggy jeans, it was all about reflecting the style of the inner city.” But now, in order to keep pace with changes in the culture, “Rocawear is adjusting to the evolution of the street-wear market. Their upcoming Fall/Holiday 2008 collection is cleaner, less logo-driven and geared towards a consumer who no longer feels the need to pay homage to a particular brand,” says Kapsalides.

While most rappers of the late 90s have been unable to weather the shifting tastes of hip-hop fans, Jay-Z has sought to remain relevant by maturing with his audience. ”The 25 and over hip-hop crowd, which is a large crowd now, can’t identify with other rappers from our youth because they never matured with their music,” says Haysoos, 30, half of the hip-hop duo Wade Waters. “Their music never matured. Jay-Z’s music has matured, and his image has matured along with his audience.” But by doing so, Jay-Z also runs the risk of alienating younger fans, who are still in their teens.

Hip-hop, after-all, is a youth dominated culture. That’s a fact that has not eluded even Jay-Z. He was once quoted saying, “There is nothing hot about a 45-year-old rapper.” It’s also one of the reasons why Rocawear recruited Chris Brown and Ciara to be the face of its current advertising campaign.

At 38-years-old, Jay-Z is well past the age where he can easily relate to the average teenage fan, as indicated by the lukewarm reception to his 2006 post retirement album, “Kingdom Come.” (Good credit—one of the mature themes discussed on the album—is probably not what fans in their teens are thinking about.) Instead, it’s rappers such as Lil’ Wayne—who are closer to their age range—that young hip-hop fans seem to identify with these days. “I thought the rap battle between Cam’ron and Jay-Z was really indicative of the generation gap,” says Haysoos. “Dipset, for the early 2000s, represented the youth. And they actually made fun of Jay-Z for his style. Just because he didn’t let his pants sag or wear hats with du-rags underneath them. They actually tried to make fun of him for that. And his response was, ‘You’ve gotta be kidding me!’”

As time goes on, it’s inevitable that Jay-Z will have little influence over the youth demographic that made Jay-Z Inc. such a profitable enterprise. Because as one senior financial industry executive, who declined to be identified, frankly put it, “Hip-hop is famous for killing its idols. Kids are anti-establishment. Now Jay-Z is the establishment.” But Carter, for his part, is a futurist, says Boogie. “He sees what’s going to happen before it does.” Consequently, it should come as no surprise that he would choose to cash in on the franchise, while it still has some value.

“Return on investment is king,” says Achi. “The best investors understand when the return they want is no longer available in an investment. The sale of the various brands by [Carter] is impressive because he was able to cash out of investments arguably towards the end of the rapid growth period of each operation. Thus, he is now able to roll his money into other ventures that, I can only assume, he sees similar or higher returns in. Cashing out is always a good idea when you find a buyer willing to pay the value you place on an item. The boiler is always realizing that fair value.”

In any case, Carter still has some say in how the brands are represented. So besides making him richer, the takeover of Jay-Z Inc. will probably do little to sully the legacy of the franchise. For instance, as part of his deal with Iconix, Carter currently oversees all product development, marketing, and licensing for Rocawear. So far, he has already approved a licensing agreement between Rocawear and fragrance producer Elizabeth Arden. And not only that, Carter also retains ownership of the Rocafella name, given to him during negotiations to head Def Jam in 2005. Talk about having your cake and eating it too.

Looking towards the future, Carter’s current portfolio of business interests—which include the New Jersey Nets, 40/40 Club, beauty care line Carol’s Daughter, J hotels, Scion, LLC., and Translation Advertising—all seem to transcend the youth-driven hip-hop market. And that is to say, it’s unlikely the services provided by a firm like Translation Advertising are intended for fickle young hip-hop fans. By cashing in on the Jay-Z inc. franchise, Carter looks to make the transition from hip-hop star to a business celebrity, much like Rupert Murdoch, Donald Trump, Warren Buffet, and Magic Johnson.

’30 SOMETHING’

Earlier this year, representatives from some of the top Fortune 500 firms descended on New Orleans, Louisiana for the NBA’s All-Star Weekend. But they weren’t there to see high-flying dunks or to watch three-point shootouts. Instead, they were there for a rather peculiar purpose: to break bread (literally) with Carter and his BFF, LeBron James. The pair were hosting their second annual “Two Kings Dinner,” an affair that brought together prominent business executives, entertainers, and athletes for the ultimate networking soiree. “There was definitely a lot of money in that room,” recalls Boogie, who was on call to deejay the event’s after party.

After years of dominating the music industry, Carter now has his sights set on Madison Avenue. And his business dealings away from the mic have already garnered him a new level of admiration among fans who grew up listening to Jay-Z reminisce about his coke-dealing past. “No one respects drug money. It doesn’t matter how much money you have,” says Haysoos. “You can go into certain places, and they won’t respect you. Now, Jay-Z has turned that dirty money into money that everybody respects. And I think the guy who goes to work and sits in a cubicle all day, still has dreams of being wealthy and powerful. He can identify more with Jay-Z than with a T.I. or a Shawty Lo. They talk about wealth and blowing it on things we wouldn’t spend it on, whereas Jay-Z talks about IPOs and money market accounts. He is speaking our language.”

Now that his influence extends to an older demographic of hip-hop fans, Carter has begun building a new franchise of businesses—which currently include the 40/40 Club and J Hotels—tailored towards this audience. For instance, while Rocawear was originally intended to target young hip-hop consumers, the Shawn Carter Collection—Carter’s new luxury brand set to launch later this year—will consist of age-appropriate items intended for a more mature clientele.

Without question, very few entertainers have been able to brand themselves on the level that Jay-Z has, much less cash in on that brand while arguably still at a high point in their career. Even while living in Brooklyn’s notorious Marcy Projects, Carter’s business acumen—perhaps even more than his rhyming skills—is what truly set him apart from his peers, much like today. But Carter’s evolution from small-time drug dealer to international hip-hop star to celebrity businessman demonstrates more than just shrewd business sense, contends Haysoos. It reveals the desire for respect. “Respect is not just limited to your boys. It’s not just limited to your block. You want universal respect, and that’s what Jay-Z has now.”