The New, New Music Industry

Written by Guest Column
Thursday, February 15, 2007

The music business has been transforming before our eyes. Many players in the industry are struggling to survive amidst the tectonic shifts as the industry transforms itself for the digital age. And yet there has never been more demand for consuming music, and the ability to satifsy that demand, as there is today. The events of the past few weeks point to an acceleration of change that promises to make 2007 a landmark year in the music industry.

The Music Industry is Dead

The major music conglomerates, Universal Music, Sony BMG, Warner Music and EMI, are having to transform themselves and their business model. Theirs is a hit-driven, high-risk/high-reward business model, not unlike that of VCs, in which singles promoted through mainstream, offline outlets (mainly radio but also TV and print) spur the purchase of albums via physical retail stores. All aspects of this model are under duress:

Consumers have proven resentful of the 'bait and switch' in which they were made to purchase albums just to get the 1 or 2 songs that were good. The proliferation of digital music platforms, both legal and not, now enable consumers to only get the song(s) that they want. Offline outlets no longer move the needle as they once did. Terrestrial radio has been undergoing its own changes as a result of the landmark Telecommunications Act in 1996. There are now fewer music stations on the dial with tighter playlists and increased scrutiny of anything that smells of payola. As a result, it is harder to break an act on radio. MTV plays few music videos on its flagship TV properties, while print is proving increasingly irrelevant to the younger demographic — they're not exactly rushing to the stores to get the new Rolling Stone to determine what music to buy. The hits that do break are not proving as durable as they once were. More titles churned through Billboard's tops spot last year than ever before . Gold is the new Platinum. Illegal file sharing is rampant and has only continued to grow notwithstanding the legal and technological tactics that the majors have been executing. 1.5 Billion songs are available at any given time with estimates from Big Champagne of over a billion files being traded on a monthly basis. Of most concern is the removal of shelf space devoted to music products at retail stores. Tower's bankruptcy removed millions of square feet and property owners will look askance at music retailers looking for space. The last decade saw the rise of discount retailers, Target, Wal-Mart and Best Buy being the big 3, use cheaply priced CDs as a loss leader to drive foot traffic. This has been a successful strategy, however the question is how long these discount stores will continue to sustain this strategy. If they start devoting the space to other products — games, DVDs or even iPod and related accessories, it will hasten the demise of the CD-driven business model. As one executive at a major told me, 'if Wal-Mart removes just 8 less square feet per store to CDs, it's like losing 300 stores.' This will be a major story to watch in 2007. Indie labels are also having a hard time. Although their acts have tended to be more album-driven, the loss of Tower has been a shock to the system and there will likely be losses from the inventory and/or receivables with Tower. There are few other major retailers that carry a lot of these records and so the savvier indie labels are being forced to sell a greater % of their music digitally.
• All in all, the declining physical revenue is not enough to offset the growth of digital revenues. That is causing the major labels to scramble for alternative revenue sources such as licensing music videos and advertising (two areas in which my company, Brightcove, is working withthe labels). To spur the growth of digital further, they will also need to solve the interoperability issue, which many believe means selling their music without DRM. This has been in the news recently with Steve Jobs' letter and the rumors of EMI selling their music as MP3s. Being both the smallest major label and the one under the most financial stress, EMI may well have to take such risks. This will be the other major story to follow in 2007.

Long Live the Music Industry

And yet there has never been as much demand for music from consumers. They are voting with their ears, eyes, fingers and wallets. They want music at a reasonable price whenever they want and wherever they are.

The numbers around file sharing not only illustrate potential foregone sales (something that the industry continues to debate), but also pent-up demand for music. New mediums such as internet radio, podcasting and satellite radio are attracting tens of millions of end users. Billions of music videos are streamed every year on the Web. Who needs MTV when you can watch videos on-demand on the Web while chatting with your friends? The worldwide market for flash or hard-drive-based players was 140 Million units in '05. Add in music-capabile mobile phones and it's a much bigger pie. Already, ringtones are a multi-billion dollar market in the US. Mobile music promises to be an even bigger market if the operators and labels can figure out how to deliver music to consumers at a reasonable price. $2.50 per download + tax is not it.
• More people are buying instruments and related materials than ever before. Spurred by technologies to help people make and record music, the industry has doubled in the last decade to $7.5 B

And so we have an industry transforming itself before our very eyes. If you would have told someone in 1999 that, 5 years later, Apple would become one of the most powerful companies in the music business, they would have thought you crazy. The overall market will be bigger than it is today but spread out over more entities. The music industry of 2012 will be markedly different than the one we have today with new winners and losers. One thing's for sure — we will all be consuming more music.

CNN.com
Fri October 12, 2007

Are record labels dead?

LOS ANGELES, California (AP) -- Prince freed himself from record labels years ago. Paul McCartney, Radiohead and Nine Inch Nails have followed. Now the Material Girl appears to be kissing her big-name record company goodbye for a cool $120 million.

Could U2 be next? Justin Timberlake? Coldplay? Do superstars even need traditional multiyear album contracts when CD sales are plummeting and fans are swiping tons of music for free online, or tuning in to their favorite bands via YouTube, MySpace and other Internet portals?

"There's a prevailing wisdom that many established acts don't need a record label anymore," said Bruce Flohr, an executive at Red Light Management, which represents artists such as Dave Matthews Band and Alanis Morrissette, and ATO Records, home to David Grey, Gomez and Crowded House, among others.

"This is the new frontier. This is the beginning of a new era for the music business," Flohr said.

Executives at the four major record labels would not comment on the record for this story. But several noted privately that their companies are still the best at artist development, promotion and physical distribution of their product -- something even big acts can't entirely do without.

The four majors are Warner Music Group Corp., Vivendi's Universal Music Group, EMI Group PLC, and Sony BMG Music Entertainment, a joint venture of Sony Corp. and Bertelsmann AG. They accounted for more than 88 percent of all U.S. music album sales this year.

Still, some headliners are becoming convinced they have the clout to change the rules.

Madonna is said to be close to signing a recording and touring deal with concert promoter Live Nation Inc. after turning down an offer from her longtime label at Warner Music Group Corp.

Under terms of the new 10-year deal, Madonna, 49, would receive a signing bonus of about $18 million and a roughly $17 million advance for each of three albums. Live Nation also would have to pay $50 million in cash and stock to promote each Madonna tour.

Warner Music just couldn't afford to pay that much to re-sign Madonna, Michael Savner, an analyst with Bank of America, said in a research note.

Meanwhile, Radiohead created a stir -- and plenty of publicity _ when the British rockers disclosed last week they would bypass signing a new deal with a record label and make their new album available online, letting fans decide how much they wanted to pay to download it.

Earlier this year, Paul McCartney signed with Hear Music, a startup label launched by coffee retailer Starbucks Corp. and Concord Music Group, rather than going to a major.

Even the Eagles are going it alone with their upcoming album, "Long Road Out of Eden." The group, which has sold more than 120 million albums worldwide, will release the album exclusively through Wal-Mart stores.

The trend had Nine Inch Nails frontman Trent Reznor exulting over being "free of any recording contract with any label" in a recent post on his Web site.

"I have been under recording contracts for 18 years and have watched the business radically mutate from one thing to something inherently very different, and it gives me great pleasure to be able to finally have a direct relationship with the audience as I see fit and appropriate," he wrote.

Music industry insiders say the bids for independence only make sense for the most popular acts or those with devout fans who fill concert seats, buy T-shirts and seek out their music.

"These artists are in the position to basically set their own rules and set their own course," said Ted Cohen, managing partner of media consulting firm Tag Strategic and a longtime record label executive.

Meanwhile, social-networking sites and Internet distribution are making it possible for lesser-known and unsigned bands to boost their profiles and sell CDs.

"The game used to be really simple," Flohr said. "You get your record played on radio, you get your face on Rolling Stone (magazine), and you get on 'Saturday Night Live.'

"Now, it's you put your video on YouTube, you get your MySpace page happening, you do your deal with Facebook, you tour ... all these things add up, hopefully, to a successful record."

Some established major acts are using the same tactics as their new albums post lackluster sales but their concert tours keep selling out.

The strategy doesn't help record companies. The industry has seen a 14 percent drop in the number of CDs sold in the U.S. compared with the same time last year, according to Nielsen SoundScan.

Sales of digital tracks online are up 46 percent over the same period, but have yet to offset the industry's losses during the past decade.

To adapt, the major labels are trying to cut deals with artists that go beyond album sales and encompass income from concert tickets, T-shirts, music publishing and other sources.

New bands with their eyes on superstardom still need the deep pockets of the major labels to pay for the promotion, marketing and distribution necessary to get heard above the din of countless other acts.

Even superstars can use the boost.

Take Prince. Famous for scribbling "slave" on his cheek during a bitter dispute with Warner Bros. Records in the early 1990s, he has released most of his music over the Internet during the past 10 years while striking CD distribution and marketing deals with different major labels to get copies of his albums in stores.

Radiohead has said they want to get their latest album in stores in a few months and are said to be shopping for a possible major label distribution deal, if not a multiple album contract.

And it's widely expected that Live Nation will have to strike a distribution deal with an established label to handle promotion and get Madonna's upcoming albums in stores.

In theory, that could lead Live Nation back to Warner Music, home of Warner Bros. Records, where Madonna signed as a new artist in 1984.

"It comes down to, do you need a label? Possibly not. Do you need the expertise that a label traditionally brought? Absolutely," Cohen said.

Despite the turmoil in the industry, the major record companies continue to exert considerable influence in the marketplace.

Major labels are not likely to disappear or become irrelevant, although the role they play might change as digital music overtakes CDs and other physical formats, Flohr said.

"I don't think this is the death of anything," Flohr said. "I actually think this is the rebirth of all of us."