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Eric Garland: Seven Lessons from How Private Equity Wrecked Guitar Center

Yves here. We’ve been focusing on private equity abuses of investors because despite their undue deference to the PE firms, they do have leverage and the biggest set of investors, public pension funds, are subject to political pressure, particularly when caught out for being clueless, complicit, or outright criminal. But we have not lost sight of the fact that while investors lose from private equity misconduct, the much bigger losers are employees of private-equity owned firms, the communities in which they live, and taxpayers as a whole. As tax maven Lee Sheppard has written, “Private equity often seems like a tax reduction plan with an acquisition attached.”

And the negative impact of private equity is actually even greater than that.

We’ve featured Eric Garland’s previous pieces on Guitar Center, a case study of how a private equity firms (originally Bain Capital, now Ares Capital as a result of a restructuring when the company was on the verge of failure) run businesses into the ground for fun and profit.

Garland’s last post on Guitar Center (and he says this really is his last) is a wrapup of what he learned about business from this fiasco. Not private equity or business failures, but business generally.

Why would a private equity deal gone sour prove so instructive? It indirectly proves a pet theory of mine: that a lot of what is wrong with US management generally comes out of the leveraged buyout wave of the 1980s. It led directly to the vogue of treating companies as if their main, indeed sole duty, was to “maximize shareholder value” (which we’ve shown separately is a foolish goal, since trying to pursue it directly produces suboptimal results). Despite regular loud assertions that this is an obligation of boards and management, it is in fact a theory promoted by economists, notably Milton Friedman in the early 1970s, with virtually no legal foundation. That in turn has led to management short-termism, financialization of businesses, and the explosion of CEO pay at the expense of employees.

By Eric Garland, a writer and speaker who studies major trends and provides strategic and competitive analysis to executives from business and government agencies. Cross posted from his blog

As many of you know, I’ve been tracking the fate of Guitar Center for more than two years now, my mad, toothless Ahab against the White Whale of its private equity-blooded, retail Leviathan. When, oh when, shall it finally wash up bloated on the beach, a thousand harpoons from inconsequential bloggers, disgruntled former employees, and nonplussed customers festooning it from all sides as I drop acid and quote liberally from Chapter 42 and make a bonfire and paint my face with mud?

When can I stop pacing my kitchen, thinking madly of the crowning analytical piece I would sling as an epitaph about The Important Things I Learned From This Whole Affair?

When I can I finally shower and shave and stop obsessively checking on Guitar Center’s bonds just to see if I Was Really Right All Along, when as we all know, I could be composing all-bass remixes of Adele’s Hello and racking up major street cred on No Treble or TalkBass?

After all, aren’t the intel networks hot right now? Haven’t a bajillion people asked me for updates in way too unusual a timeframe? Aren’t Guitar Center’s secured bonds in the crapper again? Didn’t Guitar Center just ask all of its employees not to, like, sue them or anything uncool, but, like, totally arbitrate (thanks, broheim, no reason, LOLz!) I feel like Richard Dreyfuss sculpting mashed potatoes in Close Encounters of the Third Kind, freaking my family out and insisting This Means Something.

I then dispel these ideas by snorting some Robotussin and taking a brisk walk around the neighborhood, wondering if this phenomenon could possibly be identified in the DSM-5 manual or covered by insurance with a new ICD-10 code. My thoughts of grandiosity sort of melt away into the background of the current political economy, a psycho-circus exemplified by Sarah Palin endorsing Donald Trump for possession of the nuclear launch codes, the Fed getting ready to raise interest rates, St. Louis mourning the loss of the opportunity to spend $1 billion on a building for ten games a year, and the bizarre political tapestry of America in 2016. Calmed by the Robotussin hitting the blood-brain barrier, a soothing thought goes through my prefrontal cortex with the feeling of smoothing fine silk with your hand: Guitar Center is an illusion. There really isn’t a Guitar Center, and it doesn’t matter when you write a thinkpiece.

There is no end, only complex structured finance and press releases and a group hallucination.

There is no end and no beginning and change is all just change. All you can do is flow with it.

We are all Guitar Center.

Now my first recommendation is do NOT substitute brand-name Robotussin for the Walgreens’ brand before writing; I don’t care what they say, those are not the same active ingredients. Second, there isn’t a specific DSM-5 diagnosis for this, but I am working with researchers at NIMH on studying my specific case to help future generations. Third, I’m not kidding, these are in fact my observations. With the number of people who have been fired, rightsized, swapped, or Encouraged to Flourish Elsewhere at Guitar Center, the company I’m writing about today isn’t the company I wrote about in 2013 except for the brand and the principal economic activity. Yes, the company does provide a Center in which to find many Guitars. Otherwise? The CEO who yelled at me on my Facebook page is gone. Executives who yelled at me behind the scenes? Elsewhere. The shocked employees who flamed my initial post? Many were laid off, and some even sent letters of apology to me, which was seriously gracious therefore they must all be bassists or something. Owners? Swapped out for bondholders holding the bag. Bondholders? Judging by the FINRA database, it’s not even the same companies holding the debt, necessarily. And as for the rest of the employees, let’s just say there is some turnover.

So what or who is Guitar Center? As the sweet Robo-buzzin’ subsides, this serious question gently embraces my mind, and the only answer I can formulate is that Guitar Center is literally an illusion that is still held by the good people of the musical instrument industry and the American consumer, operated by Standard American Corporate and Financial Management behind the scenes. It could be a flower shop, it could make auto parts, it could make apps for kids. It doesn’t matter. It’s just an opportunity to make some salary and billable hours and float some bonds for a few technocrats. The business model ain’t built for 2020 and beyond, and so at some point there will be another announcement of some importance. It will be couched in PR language and misinterpreted. That douchey writer guy…Eric Whatshisname will write another 2000-word piece (what the hell does he do all day, anyhow?) And life will go on.

Still, DAMMIT, I have my thinkpiece about what I’ve learned and I’m coming to the conclusion that there will not be One Seminal Event That Spells the End of Guitar Center So That Everybody Knows The Truth. So without further ado, apropos of nothing, here is my thinkpiece for no particular reason.

The 7 Things I Learned about Business from Guitar Center

Some background: I grew up working at my Dad’s farm store in Vermont and thus developed a lifelong commitment to Real Business. We sold cow shit, so complex explanations were considered suspect. If anything, the post-post-postmodern tale of takeovers and debt structures and endless growth and fantasy has only served to reinforce my old fashioned belief in simple principles of business management. Here are a few observations.

1. Public relations is no replacement for a business model

I need to give a shout out to lifelong keyboardist and CEO Bob Berman of Instrumart who taught me a lesson I’ve never forgotten on the day I left his employ to go do fancy consultin’:

Yo Eric, have fun using big words, but never forget what business really is: Buy Low, Sell High, Collect Early, Pay Late. Have fun with the Harvard Business School guys, but never forget what business really is.”

From the first days of my contact with Guitar Center executives, it was clear that the last couple years have been a public relations play. Every time something bad happens in a financial sense, they dispatch their PR and marketing to shout down any conclusions you might make. Take one look at the books, and the story tells itself. PR and branding and message discipline – it’s good for a business, it really is. But if you’re not taking less money out of the drawer than you put in every day, it doesn’t exactly matter. At some point, your business needs to be fundamentally sound and profitable.

2. Complex financial structures are no replacement for a business model

Back in the go-go 1990s, when you could get a job from the newspaper and college cost 70% less than it does now and when American business management actually looked smart, one dreamed of hooking up with VCs and angel investors and Wall Street financiers to Make Something Big Happen. After all, we had just won the Cold War, we were making money hand over fist, and our complex financial techniques were the envy of the world. Well, it’s 2016 now and the newspapers are out of business, it’s a quarter million for that degree in Underwater Basketweaving, and American finance just looks shady much of the time. Small business people have been convincing to ooh and aah and cower at the mention of Billions of Dollars and Very Sophisticated Dealings, but they shouldn’t. In my practice as a competitive analyst, the more complex the financial structure, the weaker the business model.

You know what isn’t sophisticated, but really works great? Buy Low, Sell High, Collect Early, Pay Late. Avoid debt. Avoid entanglements. Pay your people and your vendors and your taxes. It’s so simple it sounds stupid, but it ain’t stupid.

3. Be Nice

If you want to know the long-lasting impact of treating people poorly, write a viral blog post and see who comes out of the woodwork with stories. Employees, vendors, customers – human beings – they all remember how they are treated, especially when someone has power or influence over them. Nobody likes to be dismissed or told they are weak or unimportant or lesser than. Therefore, the past, present, and future of any business enterprise lives and dies by its culture. If that culture is supportive of individuals and organizations, then it will have an impact well into the future. The same is true for cultures that fail to meet those standards. Eventually, this turns into results you can quantify in either direction.

4. Bankruptcy Looks Different for Big Companies Than Small Ones

One thing I kept hearing this past year was “well, you said End of Guitar Center, and they’re still here.” Yup, true. And how many of your businesses could stand for an investor to walk away from hundreds of millions and then proclaim that the company had an “improved capital structure?” How much would Wall Street be willing to step up to buy your junk bonds after that kind of trouble? How many times could you take a “haircut” on “an overweight debt structure” as opposed to your bank just calling in your line of credit and your spouse leaving you for the babysitter/pool boy and you packing your remaining stuff into your used Hyundai?

Radio Shack – named after radios for Christ, and still somehow alive in the 21st century – was on the way out for years, seemingly untouchable by unsolvable problems. Why? Size, scale, complex debt. There was much maneuvering, much unraveling to be done before it got Officially Declared Bankrupt. When you’re a little guy, you’re just cooked. When you owe the bank a million, it’s your problem, but if you owe them $100 million, it’s the bank’s problem. So make sure you don’t confuse the financial dynamics of huge companies with normal businesses that do weird stuff like remain fiscally solvent and pay down debt and stuff.

5. Incrementalism and Lack of Strategic Vision is an Endemic Problem Among Executives

It is human nature to think that the current moment is somehow Normal and that a major change on the horizon is by definition Extreme. Sometimes, believing in the status quo is the radical position, despite the social support for the current normalcy. In reality, the statistically normal situation for the musical instrument industry is that occasionally large companies enter the industry with plans of empire building and they find out that in fact this is an industry run by obsessive freaks who care about weird shit like germanium transistor overdrives and Neve consoles – whatever the hell those are – and who don’t really care what the numbers say on the books. Therefore, it is more normal for dominant, corporate-backed players to rise and fall on a regular than it is for them to remain influential permanently, even though the consensus of industry leaders arrived at the opposite conclusion. Sometimes, though, it’s revolution that is more likely. Leaders need to be ready for all eventualities, not just the comforting ones.

6. The Musical Instrument Industry is Special

It turns out that it has been a long-standing tradition for executives to arrive in the musical instrument industry and claim that knowledge of advance MBA techniques are equal to or greater than knowledge of the specific business vertical. And true enough, if you’re an executive for FedEx and responsible for a massive logistics chain, maybe popping over to Cardinal Health, with a similar enormous scope and logistical issues, might be a good fit. Not so with industries run by people who can name Eric Johnson’s battery preference and why, or those who know how to actually pronounce “Moog.” In musical instruments, the map is not the terrain. You better know your shit or your credibility is toast – and your business decisions might be toastier.

Fact is, musical instruments are a terrible business to be in. Constantly shrinking margin, shifting consumer tastes, working with musicians in a business context.

The bass player from your old band, but actually running a company. Think about that.

But for those of us who love it, we couldn’t care less. And that’s why not every MBA will get what’s going on here. However, if they want to stay they should pick up an instrument and join a band. Any band. It will all make sense in time.

7. A Business is Made up of Quality People – and Nothing Else

As I stated above, there has been such a massive overhaul of people at Guitar Center that I am speaking in general about a cultural dynamic which emerged and not about individuals because I’m not sure that most of the staff who made Guitar Center what it was – a pretty cool company, by the way – are even still involved in the operation of the business. Many, many talented professionals in the MI business have gone on to prominent positions at other companies. If there is a problem anywhere in Guitar Center, it has been the unstaunchable bleeding of cultural memory and organizational knowledge and specialized skill as people have walked out the door. And as previously mentioned, you either know what Alnico or PAF stands for, or you don’t. It turns out that the old HR aphorism, “This company’s greatest asset is its people,” actually means something. And this isn’t even to insult the current staff of Guitar Center who have a pretty tough job every day as near as I can figure – but the people no longer with the company still matter. In fact, when we get beyond all the corporate and financial nonsense, not only do they still matter, but hopefully, they are still among us. God does not create you a drummer or vocalist or bassist or bassoonist only to suddenly take it away. Chances are you’re in this life for good. Soon enough, it will probably be revealed that what remains of the company is a service mark and some patents and some logos and some bond payments to be made. Really, that’s just a structure for people from our (most beloved) industry to work together.

I suspect that the real members of the MI community will see each other again, sorta like when you’re putting together bands in the same town. Hey, everybody always needs a bassist. You know, unless you’re an MBA who never cared for the biz in the first place, in which case, all good – maybe PetSmart is hiring execs?

Moving Forward

I’m looking forward in 2016 to writing a whole lot more about the musical instrument business because there are inspiring new ideas and business models and OMG PRODUCTS. There is turbulence and shakeup, but that actually is completely normal. Technological disruption does that to industries, and it’s completely natural that mobile Internet and killer computing power and new consumers would result in new vistas for all retail, but especially musical instruments. After all, damn near every phone now includes the capacity to record music digitally that would have cost tens of thousands of dollars just twenty years ago. Something had to give. And the people of the musical instrument industry are showing themselves to be remarkably resilient in the face of it all.

So let’s rock.

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37 comments

  1. Ivy

    Your article made me recall an old music line: They only know three chords.
    Doubt that there was much truth at Guitar Center.

  2. David

    Is there an easy way or place to follow PE bonds? Threr has been a lot written about energy debt but not much about PE lately.Good point on assets. I was going to point out manufacturing but look at Apple all those are contracted or overseas so all we get for our 19 trillion stock market cap are people and intellectual property.

  3. Tom Figueiredo

    I’m a guitar player (among other things), and have bought musical gear from Guitar Center many times over the years. A good friend of mine worked there for years as well. From my point of view it had been a pretty good place to shop. They will match anyone’s price, have a good variety of top brands, and they always had a knowledgeable staff. They were a corporation with lots of stores, and I always felt better buying from smaller outfits, but they were close, convenient, had good prices so they always got some of my business.
    I read about the takeover and felt a sense of foreboding for the employees, and the store. My friend who used to work there said things were getting bad for the people who still work there. I noticed a new bunch of employees who did not know what an Alnico PAF is or a germanium transistor for that matter. I would have to explain things to them so they would understand what I wanted because they had no clue. They even had one guy who knew how to tune a guitar. That is now a service you see. In the old days if you didn’t know how to tune a guitar they would show you how, and sell you a tuning fork, or an electronic tuner to go with your new guitar. Now they want you to bring your guitar in so they can change your strings, tune your guitar and charge you $10.00 plus the cost of the strings. I am very knowledgeable about instruments, and electronics. I have been studying, and playing, fixing stuff for years. When I want to purchase something I do my homework, and know what I want before I buy. I know the price I am willing to pay so I don’t need a knowledgeable sales staff. I feel sorry for people just starting out who go there expecting a good experience. The last time I was there, a couple of months ago I didn’t even bother with the young idiots who were now working at a fast food chain known as guitar center. I found an employee who had been there for years and talked to him for a few minutes. He said he was leaving as soon as he could find another job. One of the reasons many musicians got jobs there was the discount on equipment they got, as well as payment plans so they didn’t need a lot of cash up front. They were never really well paid but the perks, and commissions helped. Now all that is gone. It’s low wages, no more payment plans, or discounts on gear. The guy told me he sold $20,000 in gear the previous month and got a $150.00 commission. I won’t go there now unless it’s an emergency, or I need something that other local merchants don’t have, and can’t wait for shipping from another vendor. I bought a new guitar this year, a $2,000 Gibson Les Paul Standard. I did not go to Guitar Center. I felt better buying it online from a retailer in New york (I’m in California). They had a great sales staff. They knew exactly what I wanted, and why.

    1. Lord Koos

      Wow, you have had much different experience than I have with GC. I was a pro musician most of my life until the bottom dropped out of that… in the Seattle area the stores are invariably staffed with people just out of high school who know very little about anything, including music gear, and this has been the case for some years. I don’t think I’ve ever met a knowledgeable GC employee. I avoid the place like the plague, although very occasionally a sale or convenience will get me in the door.

      I do know this, if GC fails, it may well take Fender and Gibson with it.

  4. Paul Tioxon

    Okay, you seem to imply that there is some sort of fancy MBA in your background, or else you wouldn’t know the 7 secrets of business our corporate masters don’t want us to know. Well, I can see right through you because the real secret to the Guitar Centers success, even though you personally plotted their doom by using the tweet of death is the fact that even though they lost more money on every guitar, replacement strings and MOOG thingies they sold, they MADE UP FOR THE LOSSES WITH HIGH VOLUME! That’s why they built an empire of stores, so that at the end of the day the sheer scale of their enterprise would ride the waves of an ocean of red ink all around them like some Super Tanker, Super Tanker Guitar Center, an unsinkable behemoth looking down at the puny waves crashing upon her hull! And the mighty volume of sales cancelling out all of that red ink. Betcha didn’t learn that one in fancy MBA joints?

    1. lyman alpha blob

      Bwahahahahaha!!! +1000!

      Accountant here and when I confronted a former boss about the losses he was racking up by selling below cost, I actually got the volume argument in response. Not sure how that guy even tied his own shoes in the morning…

  5. david

    “maximize shareholder value” means the subject entity is designed for Extraction

    floating bonds with questionable or phony metrics, equity, loans of various description is a study of Hemingway’s book – The Old Man and the Sea – by the time the boat reached shore The Fish was stripped of all flesh and a mere skeleton and nothing for anyone to see – asset and cash flow stripping is the objective – the word “Guitar” exists to provide diversion.

    If there was no assets, products, goods or services to be sold by a “name”- and just names to be sold to investors and investors who bought the colored charts and graphs in presentations on that basis – bankers would sell it

  6. Mark

    wonder if Eric has heard the tune “Hey Grandma” by the band Moby Grape

    “Well, I got high this time
    (Pow, pow, pow)
    Well, I got high this time
    (Pow, pow, pow)
    Well, I got high this time ’round, this time ’round

    Everything is upside down, upside down
    ‘Cause your looking good
    You’re looking so good
    You’re sure looking good

    Robitussin make me feel so fine
    Robitussin and Elderberry wine”

    also….. if you need to be taught how to tune a guitar, you probably shouldn’t be trying to play it.

    1. redleg

      If you don’t know how to tune a guitar, you need to practice more, not stop.
      It can be argued that Joni Mitchell, for example, can’t tune her guitar “properly” but she sure can play. Which fits with some of the author’s points- specialization doesn’t fit into a generic management plan.

  7. shhh

    @ Tom Figueiredo. Try Wild West Guitars in LA. They still do it the old fashioned way and have a fantastic collection.

    As far as GC goes, I’ve dropped well over $100k there over the years. I used to be on a first name basis with the Managers. For years I had a sales guy that worked with me to find gear that suited my needs. He was always, genuinely, happy to see me and I was always happy to help him put food on his table by way of fat commissions.

    Last time I went there ( and I do mean “last time”) I hadn’t stopped by for about two months. Only two guys were left whom I knew. They couldn’t work deals anymore. The didn’t know or care. They had no life experience, specialized knowledge or reason to give two shits. More desultory than a Starbucks barista.

    Somehow “price matching” became deal making, replaced bargaining and building long term relationships.

    Now I shop elsewhere and my local music store get most of the ~25-50k a year I spend on music gear while GC’s DSO stretches ever further over the horizon.

  8. Left in Wisconsin

    It indirectly proves a pet theory of mine: that a lot of what is wrong with US management generally comes out of the leveraged buyout wave of the 1980s.

    I agree 100%. I lived the 1980s LBO wave – from under the water. After trying, and mostly failing, for a decade to keep alive small mfrs so that skilled workers could continue to make a modest living and even maybe make it to retirement (not that those pension plans exist anymore), when their new owners had absolutely no interest in keeping the business alive, when their only interest was extracting all the value they good before they auctioned off the machinery, I got out. But I was, and still remain, astounded that this is a viable business model.

    20 some years later, it is evident that it, while it may be a viable business model (private equity, not Guitar Center), it’s not a viable economic model for a country. But the fact that this is still considered a “fringe” opinion is telling.

  9. Roquentin

    These guitar center posts have probably been my favorite series on this blog, ever. I’m sad to see it go.

  10. Roquentin

    I almost forgot, golden quotes like this pretty much sum up our entire financial epoch:

    “When you owe the bank a million, it’s your problem, but if you owe them $100 million, it’s the bank’s problem.”

    It’s all right there, the logic of the financial crisis, the bailouts, TARP, how the bursting of the real estate bubble was handled, the legal fraud in foreclosure filings. When the dollar amount is high enough the institution is at risk rather than who they lent to, so the entire ballgame changes. It’s not even the same sport.

  11. RUKidding

    Thanks for the post. I know nothing about musical instruments, guitars or otherwise, but I have friends who are still playing in bands. They’ve confirmed similar experiences with GC. Too bad.

    the post is insightful, as it applies across many fields.

    It’s the usual crapification of everything for some perceived profit/short term gain for the Fat Cats… to the detriment of everyone else.

    I am working with an alternative health care professional in determining what, exactly, better quality supplements to use. As an aging boomer who can no longer remain in denial, I am aware that good quality supplements are a “must.” The professional has informed me that she buys from specific sources, mostly from Europe at this time, bc the supplement business in the USA has mostly all been bought out by PE… and the products have been crapified.

    And so it goes.

  12. Sluggaux

    My wife worked in the supplier side of the MI for years. Through her, I’ve driven Bob Moog around and hung out with Becker and Fagan in the studio. Les Paul once did a product intro for her at Iridium.

    When I told her about this article, she laughed — even back in the ’80’s Guitar Center was always about “making up the losses on volume.” They NEVER paid on time, but ALWAYS threatened to cut you off if you squawked about shipping the next order when you hadn’t been paid for the previous two. That’s what you can do when your business model is selling the Dream to every wanna-be in town.

    The business was the perfect target for Bain. All the lenders and bond-holders — who will NEVER be repaid — wanted to be in the band…

  13. RMO

    What is it with the musical instrument business and MBA’s? They’ve provided my favorite examples of very successful businesses which have been devastated by the introduction of management who held MBA’s from very prestigious schools. Fender was bought by CBS and quickly lost many of the people who built the company and that was followed by a slow decline almost to the point of death. Norlin (including Gibson and Moog) lost vast quantities of money. Moog did die, Gibson nearly did. I’ve never dealt with Guitar Center myself. Actually, I don’t know if the ever entered the Canadian market. The two big players here in my experience provide pretty good service and knowledgeable employees. In the Vancouver area we’re also fortunate enough to still have a number of smaller independent stores that seem to be doing alright too. A friend of mine ran one for years that focused on vintage gear. Ultimately what led him to retire was that the rent was raised high enough that he just decided to retire. To give you an idea just how bad the rent issue was, he was in the same building as one of the stores owned by the company that’s the 800 pound gorilla in Canadian musical instrument retail and even they found the rent was too high. As far as I can tell, it seems like they finally bought a large chunk of land outright and built their own facility.

    1. digi_owl

      Best i can tell, MBAs tries to run everything like a widget factory. Raw materials in vs units shipped etc.

      Musical instruments are likely never to be a volume thing, as the customer is by its very nature limited.

      End result is a epic culture clash.

  14. Barry

    An example supporting # 7. A Business is Made up of Quality People

    A percussionist friend of mine, fresh from training under Charles Dowd at OSU, wanted to buy a vibraphone. I went with him to Reno. In the first store we went to (I forget the name), he was trying one out when the owner of the store walked by. My friend asked him about the ‘action’ on the instrument. The owner said it was ‘fine until you started banging on it.’

    Then we went to Bizarre Guitar, where my friend spent $3000 on a new vibraphone.

  15. Phil

    “If there is a problem anywhere in Guitar Center, it has been the unstaunchable bleeding of cultural memory and organizational knowledge and specialized skill as people have walked out the door.”

    Maybe. GIven my experience in the sector, that quote is just a touch too hagiographic.

    I once worked for a few very large music instrument manufacturing companies (who shall go nameless, aside from the fact that they (and still are) were based in Japan); GC was their biggest customer. The place was run by a bunch of rough and tumble guys from Westlake, CA. Very old school; they knew how to spot a deal and how to buy low and sell high, in volume. They knew how to crush the smaller, local, independent competition in every one of their markets (the little independent stores that were run by ex-musicians who cared about music, but didn’t know squat about how to run a business).

    Eventually, due to the sheer stupidity and shortsightedness of most large music instrument manufacturers, GC made it to the big time; they controlled the market. GC did to many music instrument manufacturers what Sears did decades ago to Kenmore; they bought in such large volume that their suppliers became dependent on them to the point where GC was calling the shots – like Walmart with its suppliers.

    Sure, GC used to have a lot of ex-musician geeks who got great discounts on gear and who could make a living, if they hustled. That said, GC was *never* a paragon of treating its employees very well;they were always expendable; there was always some musician geek who needed a “cool job” at GC. Even that is all over now.

    What investors in the music instrument sector don’t get is that no matter how large the company, the customers see each company (or retailer) as a boutique business.

    I could write a book about this sector; it’s a fascinating story of passion, invention, extreme managerial dysfunction, *mostly* disdain for customers, and (especially on the electronic instrument side) a massive lost opportunity by electronic music instrument manufacturers who never understood what it meant to make instruments that “just worked”.

    1. Arliss

      “I could write a book….”

      Me too but mine would focus on the companies who elected to stay small and continue to thrive. The truly boutique, truly handcrafted, truly custom shops that are everywhere. Sure, lots of opportunities have been lost but I’m floored every year by the rise of new opportunities and new ideas. Have you heard the loss-less cables that have finally gone commercial in the past couple of years.? When a cable is winning the NAMM Best New Product award it’s really an incredible thing. This year I heard a new wireless pack that I guarantee you will be floored by once it gets more widely distributed. All industries evolve. All industries go through phases. If you don’t think the mid-sized MI manufacturers haven’t been paying attention to what has happened to their larger ken when exogenic forces become involved you are just wrong. People see Fender and Gibson and Moog and they take note.

  16. Knute Rife

    This reminds of what happened to Black Chandelier, a fashion and decor designer/retailer. Had no business going public, but the owner was a creative naif and a textbook mark for our local IPO sharks. Went public at the end of the joyride, and busted in an instant when the merry-go-round broke down. Wasn’t big enough for anyone to save. And I can say from lots of sad experience that Lesson 4 nails it.

  17. Thomas Burg

    Great Post!

    It goes very much in line with a great book I read a couple of years back called “Managers not MBAs”. The book explains, in depths, why so many Harvard educated managers turn out to be a disaster.

    The only thing they excel at is to sell their failure as success :-(

    More see http://www.mintzberg.org/books/managers-not-mbas

  18. Rob Lewis

    Almost spit my coffee at “people who can name Eric Johnson’s battery preference and why”—to which I might add “and will debate endlessly the virtues of the ‘brown’ sound of one brand of antique vacuum tube vs. the ‘chimey’ tones of another (when the original tube designer would count it a success if the tube had no identifiable sound at all)”.

    Great stuff!

  19. WorldBLee

    For the other musicians in this thread, this video on who owns all the various guitar brands may be interesting. It doesn’t cover the financial shenanigans that have enabled certain brands to be passed around multiple times but if you’ve followed the Guitar Center story you’ll be familiar with some of the PE implications. And if you’re just a guitar nerd like me, you may want to know just who controls some of your favorite brands and/or manufacturers out there: https://www.youtube.com/watch?v=cqV-hJeRIBc

  20. Arliss

    So in the 87,000 people at NAMM this year you and I were probably ships passing in the night. I was trapped in my booth, which is comparable to being a goldfish enduring thousands upon thousands of people tapping on the glass of my fishbowl, while I suspect you were out running free in the wilds of the convention center and beyond. One of the divisions of Guitar Center is a customer of ours and the past two years have been interesting. They have been paying right on time, ordering more efficiently and the buyer responsible for our line actually knows something about our (very narrow niche) product. Everything may be falling down around Guitar Center’s ears but employed musicians (and all the employees are musicians) are an astonishingly tolerant species. I do think the MI industry is different. Having worked in other industries, in manufacturing management, I find that MI companies are, generally, more functionally supportive of one another within the ecosystem. As an example, years ago my company suddenly started to have huge problems with the way the lacquer was going down on our instruments. We did everything we knew to do (and we are not a young company so we know a lot.) Nothing worked. Ultimately, we started to call the owners of our competitors and found that, yes, they were having the same finish failures. Next we placed a conference call to the finish manufacturer who, after some hassle, finally put one of their chemists on the phone. Guess what, they had changed their formula. Our collective call caused them to change back. That would not have happened in aerospace. MI is different and Guitar Center is one of the few true giants. I don’t know how much longer they can hang on but I do know that their being in MI will be to their advantage in this fight.

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