In his 40 years in the music business, Navarre Corp. chairman Eric Paulson has built quite a reputation for himself.

He has been alternately described as visionary and entrepreneur, a super-slick salesman with a colorful personality and a hardnosed business executive, all rolled into one.

Indeed, Universal Music Group Distribution president Jim Urie says of Paulson, "He is a man's man, a successful entrepreneur, a successful family guy and successful at raising hell in between all of that."

Now on the eve of his 25th anniversary of starting Navarre, Paulson is stepping down from day-to-day activities as CEO but will remain chairman of the company he founded in 1983.

He also remains the second-largest shareholder with 1.9 million shares in the company.

Cary Deacon, a former retail executive who Paulson brought into the company, now assumes the CEO role, but says he looks forward to having Paulson's ongoing guidance and support with the company's board of directors.

In handing the day-to-day reigns to Deacon, Paulson is turning over the keys to a company that generates upwards of $700 million in annual revenue and employs 800 people, a far cry from his humble beginnings when he formed the company to fill a void by the departure of Pickwick from the music wholesale business.

Using money raised from mortgaging his house, Paulson built the company through visionary foresight, nerves of steel and sheer determination, his competitors and suppliers say.

"Eric could sell ice to the Eskimos," says Michael Catain, CEO of Navarre-distributed Liquid 8 Records. "In fact, I think he has."

To celebrate 24 years as CEO of Navarre, Paulson rang the Nasdaq bell at the close of trading on March 15.

What did Navarre look like when it started?

We started in 1983, and the initial business plan is in the company's archives. It describes a business that would be a music one-stop and a music indie distributor and a software distributor.

At that time personal computers were the Commodore 64 game machine and Timex Computers and the business world had just started to change to Wang Word Processors back in 1982.

If you were smart then, you had already (tossed) the typewriters, but there were still a lot of typewriters being used.

What made you diversify Navarre's product lines so early?

When I was at Pickwick, as senior VP/GM of Pickwick's distribution companies, one of my responsibilities was to diversify indie distribution and rackjobbing beyond music and we soon got into accessories and the video business.

Also, one of the things I started playing around with was computer software. At the time, there was a company on the West Coast called Softsel that became Merisel over the course of time, and its VP of sales, Rich Leonette, had formerly been VP of sales at the Pickwick record label.

An agreement was negotiated to put some of the major accounts into software. That was our first experience, back about 1981 or 1982.

How did you make the transition from Pickwick to Navarre?

Pickwick closed down its indie distribution wing in 1983, and that left a gaping hole. I saw the opportunity to design the company that I always wanted Pickwick to be. So that's what happened.

In the spring and summer of 1983, I worked on developing a business and plan and mortgaging everything I had to get a working capital line.

And you included software in Navarre's product mix.

I believed (software) would change the way we lived our lives at work and home and that somewhere the music industry and computer software would merge under some kind of convergence in technology.

I believed that we at Navarre, if we could get one foot planted in music retail and the other in the software environment, we could cross-pollinate not only the customers but the suppliers too.

Whether that came about because of great strategic thinking or blind luck is irrelevant, because it happened.

While you are still in indie distribution, along the way, you got out of selling major-label product.

We did, very quietly, shut it down, sold off inventory, paid off vendors and said, "Someday we will be back."

For a while there, you also shuffled your indie distribution structure and management.

As a company grows, it has different types of organization requirements. When a company grows from $100 million through $300 million through $600 million, it takes a different type of management skills to run the company throughout those phases.

So you have to look for the right combination of people so that you bring in new expertise but (also) find ways to hang on to people that have been with the company a long time so you can maintain the culture of the company.

It is especially hard to find executives who combine those skill sets and also have an understanding of the music business. It is all about providing the expertise for our size and complexity.

Along the way, Navarre has had some close calls but you always managed to come up smelling roses. How do you do that?

Everyone that has started companies has close calls, that is part of doing business. The sign of a good management team is how they handle business during difficult times. I remember when LIVE (Entertainment's) financial problems almost swallowed Navarre. I sold (the company) to LIVE for 22 months and bought it back in 1991 before they filed bankruptcy.

When I sold them Navarre, we were heading to $100 million and what we bought back was a company that was under $20 million in annual revenue. So we had the distinct pleasure of starting the company twice. I bought it back on Oct. 4, 1991 and restarted it in January 1991.

All the software and computer (business) was gone and all that was left was the one-stop and indie distribution business. We built it back up so we could go public in 1994.

What's your opinion of the current state of the music industry?

There is a tremendous transition going on, causing the larger (supplier) companies to consolidate. Two things are forcing it: certainly the digital revolution and also the continued consolidation at retail.

The shift of consumer traffic patterns at retail to the big boxes has left the industry's highway littered with the carcasses of specialty chains, from Tower to Spec's, Camelot, Wherehouse, Strawberries and beyond.

With the demise of music catalog stores, the business has shifted back to new releases, which means it becomes more important to sustain new-release velocity throughout the year, instead of lumping it all into the fourth quarter. With the mass merchandisers taking a more aggressive role in the merchandising of music, I would tell you that for our business to look forward, you have to look back.

Look back in what way?

The major music companies should become creators and marketers of content. The sales distribution and physical fulfillment should go to indie companies.

Why does Universal Music Group need to have its own distribution today? They already are eliminating physical fulfillment to companies like Entertainment Distribution Corp.

Why don't they go one step further back to the 1960s before WEA (Distribution and the branch system) was born when they used [independent] distribution?
Back then, (distribution) was a creative industry, not a blue collar, box-picking industry.

What's the advantage to that?

Today's music retailer has a broad base of interactive entertainment products, in many cases both soft and hard lines.

Distributors need to provide retailers with cost savings and whether that is cross-docking, data synchronization, shelf-ready product or multiple sellers being delivered in the same box directly to stores, and they need to provide those services in an assortment of ways to the merchant.

The music distribution companies of today cannot provide the economies of scale that will truly help the retailer take costs out and improve profitability.
But retailers don't have the systems to receive product multiple invoices in one box.

They haven't designed those systems because there is nobody that can provide those services to them.

But if it could be done so it can happen at the retail location in a variety of ways, think of the cost savings and how it will change the way we do business. That is where this industry should be going.

What type of distribution company would be able to do this?

I think such a company would have to be big enough to makes a difference to the retailers, maybe doing $1 billion a year in multiple product lines with Best Buy.

It would help (retail) build systems that drive profitability through efficiency, not because (merchants) are buying at a lower cost. The lowest price is not necessarily the lowest cost.

It all comes back to these four (major) companies who have been wagging the dog. They should revert back to being creative companies, driving the business through the creation of content compelling enough that the consumer wants to buy it.

Can you comment on the state of the computer software and videogame businesses?

Those businesses are very interesting because they work on different dynamics and profit margins. Software returns are handled completely different, with markdowns in the field and some price protection. It is so much more profitable than music.

In videogames, there are no returns or (product) dating. Videogames are driven by hit product and catalog product either reverts to budget or closeout. So with fewer SKUs and a smaller footprint, you can drive huge revenues, especially as a new technology approaches the marketplace.

You also participate in DVD as a distributor and creator.

We are the largest provider of anime through FUNimation, which we acquired in 2005. It has the FUNimation television channel.

We have BCI, that is a licensor of anime and niche product documentaries. We also have our own software publishing company called Encore, which provides software of every kind to a whole array of games like the Hasbro line or the brand-new Monopoly game or all those card games. It is the fifth-largest (line) in that industry, whether we license or own the software.

Getting back to music, how will digital affect your distribution business. Will physical product disappear?

Not in my life. But at my age that is somewhat limited (laughs). I think somewhere the balance will be determined where physical co-exists with digital, although physical may change form, and digital and physical (formats) will co-promote each other.

What other executives in the music industry, past or present, have impressed you?

Clive Davis has certainly proven to be a formidable creator in our business. On the distribution side, (WEA Distribution executive) Henry Droz set a standard that is pretty difficult to beat.

But that is our business. It is (in fact) two distinctly different businesses and you have to balance them together.