The Future of the Music Industry

I have always wanted to own and operate an indie record label.  Of course, as is my usual luck, I’m thinking about doing this at a time when the whole concept of the record label as a business model is in question. 

Recent articles on the music industry have asked whether record labels will continue to survive in the face of digital distribution, piracy and the trend of established acts (and some new ones) eschewing contracts with record labels to go it alone and take their music directly to retailers (traditional or online) or directly to consumers via the internet.  You can read a couple of those articles here and here.

It’s popular to bash the labels (especially the majors) and to celebrate their apparently imminent demise.  For me, there is no pleasure in seeing people get laid off and large companies go bankrupt in any industry.  But I also dispute the idea that labels (in general) have been a bad thing for music.  There have been bad labels, of course, just as there have been bad companies in any industry; labels that have garnered a well-deserved evil reputation, that have elevated avarice over artistry and have sought to squeeze as much monetary gain as possible from each artist before moving on to the next unsuspecting victim.  Such companies are, however, in the minority.  Without record labels recording and promoting music, we would never have heard of most of the artists that we now recognize as music legends. 

In my (admittedly limited) experience, most people that are in the music business are there because they love music and want to be involved in the business of making it and selling it.  They want to make money at it, just like everyone wants to make money from their business, and there’s nothing wrong with that.  Publishers should make money printing books, studios should make money filming movies, and record labels should make money recording music, as long as the artists in these creative fields also make money and flourish.

I read an interesting question about this issue in Rolling Stone: 

How is it that the people that make the product of music are going bankrupt, while the use of the product is skyrocketing?

It’s true.  While the labels are busy dying, recorded music is more popular than ever.  The above question was asked by Jeff Kwatinetz, CEO of management company the Firm, and it’s a good one.  His answer is obvious: “The model is wrong.”  Which begs the question: what is the right model for the music business in the future?  Obviously, there is a lot of money to be made from sales of recorded music.  People are always going to want to own recordings.  They are not just going to settle for listening to music on the radio or on their computer or even live in a club (although there will continue to be roles for those outlets in the industry).  They want to own it.  Given that fact, there is going to be a role for companies that contract with artists to record and sell their music in a format that people can own and use in their homes, their cars and their portable music players.  The trick is in producing the recording in a format that people will want to buy, at a price that people will actually pay.

 Artists can, of course, increasingly record their music themselves with equipment that is ever cheaper and more portable.  But high quality sound production, engineering and mixing still make a difference in the end product, the recording, and those high-end recording services still require a front-end investment that is beyond the capability of most artists working on their own (well-established artists being the obvious exception). 

There are also other investments, such as music videos, to the extent that they continue to be made.  The better videos all have high-end production quality, which again require a significant investment by someone; marketing, of recorded music in stores (to the extent that physical copies continue to be commercially viable–and yes, as of now people are still buying CDs, though that market continues to shrink), on radio and TV, in print and online. 

Labels have traditonally been the entities that invested the funds for these big-ticket items, with their contracts stipulating that they would be paid back through sales of the recorded music and would also get a percentage of the profits after the costs were recouped.  This was fine when everyone was buying vinyl discs or cassettes or CDs, but now that music sales are increasingly moving to digital files that can be downloaded online, the profit margins for recorded music have shrunk to miniscule levels, and labels are having trouble making money on their product.  

In order to continue to be profitable, labels wll have to expand into other areas, for example:

Concert tours have often traditionally been low-budget affairs, with the label having little input either financially or otherwise and the artists reaping most of the profit from sales of tickets.  Labels could open up new profit centers by partnering with the artists to create better produced concert tours (on the order of, say, Fall Out Boy’s recent “Honda Civic” sponsored tour).  With money from the label for venues, sets, publicity, and marketing, you could see higher quality concerts in better venues with better merchandise and correspondingly higher profits for everyone. 

Merchandise has traditionally been sold by the artists at their concerts and the design of and profits from these products have therefore traditionally belonged to the artists.  The label could provide money for higher quality designs and products, and a greater diversity of products as well.  Of course, whether anyone will actually buy a Fall Out Boy lunchbox, or a Pete Yorn action figure remains to be seen.  

Licensing is becoming increasingly important as music continues to play a large part in advertising, movies, television shows, retail stores, restaurants, video games, websites. 

It would still be the label’s responsibility to create the recorded format and distribute, market, promote and police it; but by expanding into these other areas and making them profitable, labels could increase opportunities for profit for themselves and the artists.  In this way, record labels will become more like venture capital companies that choose artists to invest in, then partner with these artists in everything they do to help them become successful.  Following this model will still require a substantial risk on the part of the record label, and indie labels are not going to have enough money to fund many expensive up-front costs, but by partnering with the artists in all aspects of their career, there is a better chance that everyone will make enough money to keep the industry going. 

The answer is not for record labels to disappear, because (Radiohead notwithstanding) artists generally do not have the money, the expertise or the desire (in most cases) to become businessmen or retailers of their own music.  They just want to create music, and they should be able to cncentrate on that.  The labels should evolve into all-purpose business partners that ensure the profitability and success of the artists they invest in.  What’s evil about that?

By the way, the name of my label is Mountain Dog Records.  We’re open for business.

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8 Responses

  1. […] blog MCQESQ entitled The Future of the Music Industry.  You read the article in its entirety here, and it is well worth the effort.  It attempts with acute perception and finesse to dispel the […]

  2. […] MCQESQ entitled The Future of the Music Industry.  You can read the article in its entirety here, and it is well worth the effort.  It attempts with acute perception and finesse to dispel the […]

  3. […] MCQESQ entitled The Future of the Music Industry.  You can read the article in its entirety here, and it is well worth the effort.  It attempts with acute perception and finesse to dispel the […]

  4. Have you seen the documentary called Before the Music Dies? It’s interesting. I think every music fan should watch it.

    http://www.beforethemusicdies.com/

    Do you know anything about Dave Matthews’ record label?

    One thing someone in that doc points out is that the music industry got bloated when CDs came out. Vinyl and casettes became obsolete, and most people replaced their music collection with CDs. That created a big boom in the industry that was not sustainable.

  5. Susan: Thanks for the link, that looks like a very good film to see. It looks like there are no screenings in SLC currently, but I will watch it somehow in the very near future.

    I am a fan of DMB, but I don’t know anything about their label and couldn’t find out anything on their website. Apparently, the film speaks highly of their label as a model for the industry.

    I think the point you make in your last paragraph is certainly correct, but the reason the problem is accellerating is that peple are not even buying CDs of new bands or new albums anymore. They’re buying music “by the song” instead of in albums in large measure, and the $.99 downloads are not creating enough profit margin to go around in the existing business model.

  6. The movie is out on DVD now, definitely check it out.

  7. Does anyone have idea of how much one of the “biggest established artists” can earn (percentually over their gross revenue) with product sales (i.e. shirts, caps, etc…)?

  8. Raphael: I don’t have a percentage for you, but all artists earn much more, by percentage, from merchandise sales and tours than they do from album sales in most situations. That is because the record label that paid to produce the album must recoup it’s costs from album sales before the band can see any of the profits.

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