A Cautionary Tale: How Stax Records Went Bust

Photo credit: Ron Cogswell CC BY 2.0

RareSoulBy RareSoul.com

[M]emphis, Tennessee based record label Stax was forced into bankruptcy this week  (December 19, 1975).
Big issues with the business began to surface in May of 1968, when owner Jim Stewart refused to re-sign a distribution deal with Atlantic Records and terminated the agreement after Atlantic was sold to Warner Bros – Seven Arts.
Atlantic had sold itself to Warner Bros – Seven Arts for $17.5 million and the sale activated a clause which automatically called for the re-negotiation of the deal with Stax, which had produced numerous hits for Atlantic from 1961 until the sale, in 1967.
At first, Jim Stewart attempted to negotiate with Atlantic and Warner Bros – Seven Arts, in hopes of receiving a better distribution deal.
Warner Bros – Seven Arts wanted to buy Stax for $2 million, but Stewart felt the asking price was too low for a label that had produced hit artists.

Jim Stewart was soon shocked beyond belief, when he found out that the original deal he struck with Atlantic was not a simple distribution deal – it actually gave Atlantic the ownership over all of Stax’s masters.

 Jim Stewart, the co-owner of Stax, explains how he lost his masters to Atlantic

“Even though they did no financing of Stax whatsoever, the contract stipulated that the Masters would be owned by Atlantic and not by Stax,” Jim Stewart said in the book “Soulsville U.S.A.: The Story of Stax Records.”
“It was tough to swallow,” Jim Stewart said. “It was a serious mistake that I made. They obviously did not have the right or deserve [ the Masters] because they hadn’t paid for them. They never paid for a session. Atlantic Records, I think, had a total investment of $5000 in Stax Records. That was for the purchase of the Rufus and Carla Masters in 1960. For that they got the distribution rights from 1960 through 1967!”
As a result of the turmoil, as well as unsuccessful negotiations with MCA, MGM, and ABC, Stax was sold to Gulf & Western for $4.3 million, thanks to a deal arranged by legendary music executive Clarence Avant.
Stax had no back catalog and started rebuilding their roster of artists, as well as their publishing catalog.
Under the leadership of new label boss Al Bell, Stax started flooding the market with new releases from a variety of artists, including Isaac Hayes, The Mad Lads, The Dramatics and The Staple Singers.

[S]tax was forced into bankruptcy not because of its roster, or poor sales, but due to a restrictive distribution deal with CBS Records.
In 1972, Stax President/owner Al Bell entered into a distribution agreement with CBS Records and it’s then head, Clive Davis.
But Davis was fired shortly after signing the agreement with Stax for Payola, after being indicted with Kenny Gamble and Leon Huff.
The Memphis-based record label never had success dealing with the new group of executives that were running CBS Records after Davis’ departure.
The new guard at CBS felt that Clive Davis’ deal with Stax was a bad one that lost CBS money.
A group of new consultants reviewed the contract and felt that there were problems with the economics of the deal with Stax.
CBS attempted to change the agreement to a standard Production and Distribution deal, but Al Bell and Stax were not interested in changing the terms of the deal.
CBS allegedly refused to distribute Stax product and in essence, treated the company like a competitor.
At the time of Stax issues with CBS, the company was fighting off pending lawsuits from Isaac Hayes and producer Don Davis over royalties, as well as the Union Planters bank, which was owed almost $3 million in back loans to Stax.
This, coupled with the squeeze put on by CBS in failing to distribute Stax product, allegedly for its own, forced the label into bankruptcy.
Stax, which once counted artists like Carla Thomas, Rufus Thomas, Otis Redding, Sam & Dave, Booker T. and The MG’s, The Bar Kays and Wilson Pickett as artists on the label, was officially done.

When the doors to Stax’s offices were finally padlocked on December 19, the label had $304.59 in the bank.