K-Tel International, Inc.

views updated

K-Tel International, Inc.

2605 Fernbrook Lane North
Minneapolis, Minnesota 55447-4736
(612) 559-6888
Fax: (612) 559-6803
Web site: http://www.k-tel.com

Public Company
Employees: 171 (1996)
Sales: $71.99 million (1996)
Stock Exchanges: NASDAQ
SICs: 3652 Phonograph Records, Tapes, and Disks; 5064 Electrical Appliances, TV and Radio; 5084 Industrial Machinery and Equipment; 5099 Durable Goods, Not Elsewhere Classified

An international marketing and distribution company, K-tel International, Inc. sells housewares, gadgets, and packaged consumer music and video entertainment products. Many consumers immediately recognize the K-tel name from the companys original direct-response television ads peddling unusual consumer convenience products and music recordings. Nevertheless, the company also sells its products through foreign subsidiaries and licensees, directly to retail outletsincluding department stores, discount stores, gas stations, and convenience storesor through rack jobbers.

Philip Kives, Salesman

Philip Kives, K-tels founder, was a farmer in Saskatchewan, Canada, before becoming a door-to-door appliance salesman. During the 1950s, Kives began presenting his vacuum cleaners and other home appliances in more public venues such as fairs or the boardwalk in Atlantic City in order to expand his customer base. Wishing to reach an even greater number of consumers, in 1962 he and his brother Ted launched Syndicate Products Ltd. in the basement of his parents Winnipeg home. One of the companys early endeavors was a five-minute television commercial for Teflon-coated cookware. Kives fried an egg in a non-stick frying pan.

Early Television Ads of the 1960s

After that first commercial, K-tel went on to gain notoriety for hawking its products through low-budget television ads aired in off-peak hours. The ads took a hard-sell approach, directing consumers to go to local retail outlets to purchase advertised products or to order them through the mail. As Frank Jossi explained in Twin Cities Business Monthly, the company in particular became legendary for offering a fast tumble of words citing the benefits of miracle brushes that removed lint, The Fishin Magician, the incomparable Blitzhacker food chopper, and musical compilations of disco hits and polka classics. The ads were satirized by Johnny Carson and on Saturday Night Live, and K-tel became a household word as well as a new marketing term: to K-tel a product meant to advertise the product constantly on television.

The direct response TV ads came in 30-, 60-, 90-, or 120-second commercials that were very successful despite their unsophisticated approach. As Jossi noted: Although the commercials were so cheaply made and unsubtly written that they made kitsch history, they moved products. K-tel also issued longer 15- and 30-minute commercials, so the company was well prepared to explore infomercials in the early 1990s.

Consumer Convenience Products in the 1960s

Since that first television commercial, Kives successfully marketed an assortment of unusual consumer convenience productseverything from housewares to sporting goods and auto accessoriesin Canada and abroad. The cleverer the gadget, the better for K-tel, foras Kives once explained in Forbes People love a gimmick. It was that way twenty years ago; itll be that way twenty years from now. Notable products included the Scrappy Scrubber, Presquick Cigarette Dispenser, Golf Master for driving practice, EZ Tracer, and the Firm Flex exercise machine.

Trade shows were one source for new products to market, but more importantly inventors and overseas agents anxiously brought their often-oddball ideas to the company. So success came quickly for Kives. You cant imagine what it was like, Kives told Billboard. I was being paid $1,000 per year to work the family farm in Saskatchewan, the next thing Im on the boardwalk in Atlantic City, then Im on TV, and then in 1965 in five months I made a million dollars in Australia selling the Feathertouch Knife. All of a sudden, Im driving a Cadillac convertible, I was Big Time. From there I went to America and the record business.

Music Compilations in the 1960s and 1970s

In 1965, Kives launched a mail-order record business in Canada. He bought the rights to several country songs, plus a Bobby Darrin track, to produce a compilation of country hits that sold 180,000 copies through television ads. Kives followed 25 Country Hits with Groovy Greats, which he marketed in retail outlets as well as through television ads. In 1970 Kives started selling his cheaply produced music compilations in the U.S. marketplace. The next recording, 25 Polka Classics, sold more than 1 million copies through television ads in the United States.

K-tel sold millions of records during the 1970s and became a leader in prerecorded music collections. The company bought the rights to use hit songs on its compilations, which K-tel produced and marketed when several of the included tracks were still in the Top Ten. Many consumers purchased the K-tel records because of their all-hit formats rather than artists original albums that might include less well-known material.

The company sold more than 100 musical compilationsspotlighting multiple artists with a shared themeacross all genres. K-tels biggest record was Hooked on Classics, which featured classical music in a disco beat. The series sold in excess of 15 million copies throughout the world since its introduction.

Expansion at Home and Abroad in the 1970s

Kives incorporated his company in 1968, the year he opened a U.S. office to market the Miracle Brush lint remover to U.S. consumers. The Miracle Brush ultimately sold 30 million units, giving Kives the courage and capital needed to market other wacky household gadgets via direct-response television marketing throughout the world.

Already active in Canada, Australia, and the United States, Kives began marketing to Europe in 1970. Music compilations there, however, were from native groupsnot the material sold in North America. At one point, up to 50 percent of the companys profits came from Europe, with 20 percent of total sales from Germany alone. The United Kingdom also generated large sales for K-tel.

In 1971 Kivess company went public under the name K-telan abbreviation of Kives Television. The business remained strong throughout the decade. In 1980, K-tel boasted $178 million in sales, with $30 million in cash-equivalent investments. K-tel employed 700 people throughout the world. Headquartered in lavish offices in Minnesota (complete with saunas and a racquetball court), the company began to diversify its operations. Kives invested in real estate and bought an oil and gas subsidiary. The company also purchased a direct-mail marketing firm, Candlelite, as another subsidiary.

Hard Times in the 1980s

In retrospect, these high-risk ventureseven the posh Minneapolis officeswere a mistake. We were flush with cash, Kives explained to Billboard, and we invested in areas we never should have entered. We bought [a] lot of real estate in oil country, and when the oil market crashed in the mid-80s, we were in serious trouble. But the biggest mistake we ever made was buying Candlelite Music, which was our downfall. We lost $18 million in one year with that company. Kives learned too late that Candlelite had been mismanaged, so he closed the company. The unfortunate real estate, oil, and gas investments cost the company another $7.8 million. Even the double-game cartridges developed for Atari by K-tels entertainment division cost the company $5.8 million owing to higher than anticipated startup costs.

Unable to capitalize on trends after disco, the K-tels music compilation output also began to decline during the early 1980s. In addition, specialty recording labelsfor example, Rhino Recordsbegan producing compilations that competed directly with K-tel products. MTV introduced its own rival compilations as well.

K-tel could not cover its payroll by late 1984, so Kives filed for bankruptcy. He used more than $3 million of his own money to keep operations afloat and sold all but the core business, including K-tels headquarters. Kives restructured the company in the late 1980s. He moved K-tel to simpler offices in Plymouth, Minnesota, concentrated on the sale of music compilations in North America, and added consumer products in the European market.

Company Perspectives:

K-tel seeks to maximize shareholder value by leveraging its core, unique entertainment and consumer convenience product lines, with proven retail and direct response marketing and promotion techniques to stimulate consumer demand for all of its products; while at the same time controlling internal costs to achieve strong returns on capital invested providing investors with consistent earnings appreciation.

Return to Music Compilations in the Late 1980s

K-tel returned to its strengthmarketing and selling prerecorded music, usually in compilation formatsafter its bout with bankruptcy, but the products were definitely not soundalikes like its earlier releases. K-tels sound quality now equaled that of other labels. Though K-tel improved the tinny sound of early compilations, its small budgets for cover art and packaging remained, as did the random selection of songs included on compilations. Best of Reggae, for instance, included Ziggy Marley but omitted Bob Marley. Nevertheless the company solidified its position as a leader in music compilations. John Michael, a buyer for Best Buy, told the Twin Cities Business Monthly that K-tels name stands out; it has great name recognition. I have not found I have to take their compilations out of the mix very often. They have strong products with a strong shelf life.

K-tel marketed its new compilations through point-of-purchase displays instead of the TV ads of the past. Television advertising in North America had become too expensive for the restructured company; instead the music compilations were sold through mass merchants, including Kmart and Wal-Mart stores.

In order to produce its music compilations, K-tel maintained an extensive music master catalog that contained original recordings and re-recordings of material from the 1950s through the 1980s. K-tel music compilations included selections from the companys music master catalog or tracks licensed from third-party record companies. K-tel negotiated licensing agreements with record companies and publishers to acquire master and mechanical rights for material in K-tels music master catalog. Typically rights were granted for a specific use. K-tel paid royalties to copyright holders depending on the number of units sold. Generally the company offered copyright holders advances in order to obtain permission to use material. K-tel also licensed material from its music master catalog to others for flat fees or under royalty arrangements.

K-tel released its music compilations on various labels. The K-tel label produced the Hooked On series; pop oldies appeared on Dominion; Christian and gospel music were featured on the Arrival label, and the Kid-tel label released projects for children.

Meanwhile in Europe During the 1980s

In addition to returning to music compilations as its core business, K-tel changed leadership during the late 1980s. Kives took over K-tels European operations, and his nephew Mickey Elfenbein, a 25-year employee of the company, assumed responsibility for worldwide operations.

At this time, K-tel also began a direct response business in Europe, first in Germany then in France and Spain. K-tel started selling recorded music directly to consumers in Germany through local, within-country television stations. The company reached broader audiences, as well as received full retail markup through phone orders. (In North America, K-tel now sold mostly in stores.) Pan-European satellite television enabled the company to market products throughout Europe in various languages simultaneously and to utilize direct-response marketing. No longer in pan-European satellite television marketing at the end of the 1990s, K-tel still occasionally tested new products in Europe through the medium.

In about 1986 K-tel returned to selling consumer products in Canada, then in Europe and Australia. The company, for example, re-introduced the Veg-o-Matic, originally a product of Ronco, Inc., a competitor. Then, during the early 1990s, K-tel further increased its marketing of consumer convenience products in the United States, the United Kingdom, and Europe.

Changes in the 1990s

As the company settled into the 1990s, changes in leadership and areas of operation ensued to reduce the companys remaining debts. In 1993, Elfenbein was named president and chief executive officer while Kives retired in Winnipeg, although K-tels founder remained active writing scripts for commercials or negotiating deals for the company.

K-tel reactivated the ERA label, which was popular in the 1950s, as a reissue label for pop, in 1993. That year K-tel released 15 music compilations each month in all genres; for example, Rap: Straight Outta the Ghetto, Dumb Ditties, Bon Appetit (classical music for dining and entertaining), Disco-mania, and Todays Country Hits.

In 1993 K-tel also released the Brill Building box set, a collection of material by the legendary songwriters who worked at the Brill Building during the 1960s (for example, Neil Sedaka, Howard Greenfield, Ben E. King, Carole King, Gerry Griffin, Barry Mann, and Cynthia Weill). This compilation, which covered 1960 through 1965, chronicled an era in rock-and-roll history and the new sound it produced. Two years in the making, Brill Building comprised 74 songs on four CDs or cassettes, plus a 32-page booklet documenting the time period. The only tracks absent from the compilation belonged to Phil Spector, who would not license material. Bill Hallquist, manager of entertainment marketing for K-tel, told Billboard: I think because of the diversity of the package, its going to have a collectors appeal that will make it big in retailing accounts, and an oldies-compilation appeal that will be big at discount stores. Those are two separate customers, and I think were going to hit them both. Well received, Brill Building was heralded for packaging and content; for example, the compilation was nominated for an NAIRD award for packaging.

K-tel expanded its direct-to-consumer marketing efforts and began to divest its less profitable operations. K-tel successfully eliminated all debt in 1993, and the following year Business Week named the company one of its hot growth prospects owing to K-tel earnings increasing fourfold since 1990to $2.7 million.

K-tel vigorously defended its rights to material in its music master catalog in 1994. The companywith Chubby Checkersued Billy Case Productions, Red Dog Express, and White Dog Records for copyright infringement that year. K-tel won thousands of dollars in damages when courts ruled that Billy Carr, Marshall Sehorn, and their companies must stop selling and distributing records and must stop licensing and exploiting rights to tracks by artists from the 1950s included on their companies music compilations.

Divesting Unprofitable Operations in the 1990s

Despite its victories, in 1994 K-tel began selling its European music assets. For instance, the company licensed the K-tel name, its trademarks, and its owned music master catalog to a third party in Australia. K-tel also ceased operations in France and Spain, and by the end of 1995, K-tel restructured unprofitable operations in the United Kingdom and Germany as well, greatly decreasing convenience product marketing and sales in these countries. K-tel also closed its unprofitable operations in New Zealand, which relied heavily on consumer convenience products. Still, two-thirds of K-tels sales were coming from outside of the United States.

In 1995 K-tel increased its retail sales of consumer convenience products, selling to wholesalers and retailers in conjunction with television ads. That year consumer convenience products accounted for 40 percent of companys consolidated net sales. The following year, though, consumer convenience products contributed only 25 percent of the companys consolidated net sales, with most consumer convenience products sold in the U.S. retail market. (Consumer convenience products in 1996 evolved into the Micro-Chip, which made fat-free potato chips in microwave ovens, and the Micro-Roast, a device for roasting in microwave ovens.)

The company established a new subsidiary, K-tel Direct Media and Marketing, in 1996 and planned to expand into other marketsperhaps Russia or Southeast Asia. Elfenbein separated from K-tel that year, taking with him the majority of stock in Simitar Entertainment, a K-tel company. Kives retained control of K-tel, and senior vice president David Weiner replaced Elfenbein as president of the company. Weiners long-term strategy for K-tel included redirecting the companys focus from consumer products to its U.S. entertainment business. To this end, K-tel entered the home video market with reality-based and childrens animated programs in 1997. Lou Scheimer Productionsproducer of Fat Albert and the Cosby Kids, He-Man, and She-Ra animationsacquired childrens and family videos for K-tel. The first five titles scheduled for release in 1997 were reanimations of programs from Scandinavia, Hungary, and Spain.

Earlier K-tel introduced special themed videos as a companion product line to its music compilations. Themes included fitness, sports, and motor sport-action stunts. K-tel marketed and distributed the videos through foreign subsidiaries, in particular in the United Kingdom. The company also purchased these videos from third-party production companies.

Looking Forward from 1997

The image of the company remained hip and kitschy in 1997, but K-tel was a far different company from the one filing for bankruptcy in 1984. According to an annual report: K-tels music product development and marketing expertise have been the backbone of its past success and will be the focal point for future growth as the company moves into the next millennium. K-tel looks forward to strengthening its reputation as an innovative, worldwide marketing and distribution leader.

Principal Subsidiaries

Dominion Entertainment, Inc.; Dominion Vertriebs GmBH (Germany); E-Direct, Inc.; K-tel Direct, Inc.; K-tel Entertainment, Inc. (formerly ERA International Ltd.; Canada); K-tel Entertainment, Inc. (England); K-tel, Inc.; K-tel International Finland OY; K-tel International S.R.L. (France); K-tel Ireland Limited; K-tel Pty. Ltd. (Australia); U.S. Distribution Services, Inc.; K-tel Direct Media and Marketing.

Further Reading

Applefield, Catherine, New Boxed Set Collects Songs of Brill Building, Billboard, November 6, 1993, pp. 61-63.

Boxing Day, Entertainment Weekly, December 3, 1993, p. 70.

Britt, Bruce, New Look at K-tel, LA Life Weekend Daily News, February 5, 1993.

Burns, Greg, Sweet Music for a Frenetic Marketer, Business Week, May 23, 1994.

Facts and Figures for the Week, NIMA International, November 25, 1996.

Henderson, Richard, It Started with Teflon-Coated Frying Pans, Billboard, March 8, 1997, p. K4.

Jossi, Frank, Record-o-Matic, Twin Cities Business Monthly, October 1994, pp. 92-96.

K-tel Tunes in to Infomercials, Business Week, October 19, 1993.

Moylan, Martin J., Smarter K-tel Requires Patience, Analyst Notes, St. Paul Pioneer Press, November 15, 1993.

Of Special Interest: K-tel to Emphasize Video over Vegematic, Video Week, January 13, 1997.

Palmeri, Christopher, Veg-O-Matic Does Europe, Forbes, March 15, 1993, pp. 114-16.

Pollack, Marc, K-tel Broadens Operations Through Western Europe, The Hollywood Reporter (international edition), November 16, 1993.

Pride, Dominic, K-tel Checker Win Suit to Control Dominion Masters, Billboard, February 26, 1994, pp. 13, 83.

Vital Reissues: Brill Building, Billboard, May 15, 1993.

Weiner Head of K-tel International, The Hollywood Reporter, October 15, 1996.

Weiner Promoted to President of K-tel, R&R, October 22, 1996.

Charity Anne Dorgan