Winning the Future Of Music
Entrepreneurial artists are in a good spot. Labels not so much.
The music industry is at a crucial point-in-time as the foundation of its future is being laid. Music artists can use digital tools and services to create, distribute and promote their work. This enables them to choose new, entrepreneurial approaches to many of the challenges that formerly constituted the raison d’être for music labels. This changes the dynamics within the industry.
The Key Change in Any Content Business
There is an overarching theme across all kinds of content in the digital era: The price to create and subsequently distribute any form of media has decreased significantly. As a result, there is a growing number of creators, competing for our attention. In music, the minimally required investment to produce an album has decreased from roughly $30,000 in the early 90's to $10,000 today, according to industry blogger and engineer Justin Colletti.
The real game changer is distribution though. In the world of physical media, it is the major challenge. Getting anything from newspapers to CDs into shelves around the globe is complicated. Mastering it is the ground on which media industry behemoths like record labels or publishers came to be.
However, the world is changing. Physical media’s market share is shrinking across category. In the music industry, the major labels made roughly 50 percent of their 2016 recorded music revenue from digital (streaming being responsible for the biggest chunk of that pie). While successful digital distribution is a challenge, it’s entirely different from the one traditional media companies excelled at.
Digital distribution, generally speaking, is the domain of platform companies that 1) manage to aggregate users at significant scale and 2) create tools that allow content owners to share it with the platform’s audience. The hard part in this business no longer is managing your (content) supply chain, logistics and your relationship with retailers. Instead, the challenge is to acquire the users and make them stay around. It’s an entirely different business. Hence, all relevant players are companies build for the internet era: Facebook, Google, Apple, Amazon, Netflix and Spotify to list the big ones.
This constitutes a challenge for any incumbent company that was built for the physical world. When a few companies own all the users and their attention, those become very influential — and critical for any attention-based business model.
Streaming Services Have a Hard Time Disrupting
However, as I detailed in my piece about the history of digital music, it’s easy to underestimate the staying power of the labels:
On the other hand, the label’s endurance is a reminder that disruption doesn’t come easily. Especially when challenging powerful incumbents. It’s one thing to reach for a market of small, isolated entities a la Uber. It’s another to attack large companies in concentrated markets — particularly if they own assets which are a) critical to your own business and b) not easily replicable.
The labels managed to preserve their position without innovating in any meaningful way. Instead, they simply leveraged said assets.
Those assets are the labels’ music catalogues. Because labels own the rights to most of the music users want, any music service is reliant upon them. Meanwhile, as streaming services increase their audiences (and percentage of revenue they create for the labels), their influence grows. This results in a delicate balancing act. Labels are still having the upper hand right now. The catalogues are their leverage. Most established streaming services likely wouldn’t aggressively push building their own catalogue.² But even if they would, it wouldn’t help them short-term.
Why? Because old music matters to users! According to figures compiled by MBW’s Tim Ingham, catalogue music¹ accounts for 62% of all US audio streams and 73.8% of video streams. Which, in a nutshell, means that most of the money in music isn’t made with new releases. As a result, signing artists wouldn’t be a quick-win. Building a money-making catalogue from scratch takes time and investment.³ (So would, by the way, building label-like services.)
That’s not to say streaming services won’t play a role in the future of music. They are essential. But they probably won’t have to aggressively push for change because another scenario exists. It is the grassroots scenario, if you will. In it, the most important actor is a group we didn’t look at so far. Yet, it might turn out to be the most relevant variable for deciding who will take the throne in the Game Of Songs eventually. Sure enough, I’m talking about the artists aka the people who actually create the music people love.
Artists Can Do More With Less
Most music industry analysis focuses on the big companies. Which isn’t really surprising. In the world of physical distribution, artists had little bargaining power. It was almost impossible to get in front of a sizable audience without the support of a big organization. That, however, is no longer the case. The internet and big platforms in particular allow anybody to build an audience and stay connected without needing nearly the same resources as before.
The distribution of digital music takes only a few clicks. While there are several distribution tools, DistroKid — whose Philip Kaplan has approached the problem as a technology challenge and thus built a very efficient business — is likely the gold-standard. For $20 a year, artists can get their music to all the relevant services from Spotify to Apple Music, from YouTube to iTunes.
The bigger challenge for artists, then, is growing their audience. Certainly the most critical ingredient is a solid product. But (and I suppose much to the dismay of some artists) that isn’t enough. Instead, it takes active marketing efforts to make sure people actually find the music. What I have written a few days ago about content in general applies to music as well:
… the internet has reduced distribution costs to (essentially) zero. Today’s challenge is discovery (from the user’s perspective) or attracting users (from the producer’s perspective).
The internet created that problem; it’s also part of the solution. While it is a lot of work to gain an audience, it doesn’t necessarily require huge financial investments if an artist can make those up with time and effort. Using social media and reaching out to specific communities-of-interest can move the needle for you.
Artists that have gone a long way in this fashion — and some of them still do — include: Lil Yachty, Jme, NEIKED, Chance the Rapper (who turned down $10 mio. offers to stay indie) or Major Lazer. And, just as importantly, some artists who formerly had label deals decided to go independent as well. Frank Ocean famously played a trick on Def Jam/Universal. He released an obscure visual album with his former label, only to release his proper album Blond the next day — on his own label Boys Don’t Cry.
The catch here is that no artist can do it truly independent (as in: alone). Time, the scarcest resource, is the limiting factor. Here is a list of some of the jobs that need to be taken care of:
- booking & tour management
- marketing, PR, radio & TV promotion
- video production
- ticket sales
- handling merchandising
- brand partnerships
- retail distribution (if applicable)
Even though digital tools made all of them simpler — or rather: more easily accessible — it’s too much for any one person to handle. However, the (major) label route is no longer the only viable option. There is a whole heap of specialized service providers that get the jobs done.
There are Alternatives to Labels These Days
As a result, there is hardly a norm anymore to how artists structure their business/contracts. Instead, you’ll find all kinds of setups ranging from 360 deals with major labels — where the label basically takes care and gets a cut of all revenue streams, including live — to complicated structures where a label might be involved but not in the traditional way. It might, for instance, handle distribution or marketing but only license (not own) the masters. In other cases, no proper label — defined as a business predicated on owning the rights to music — might be involved because the artist works with several specialized vendors.
The important part here is that there are alternatives to (major) labels. And those are increasingly capable to make good use of the emerging ecosystem of digital music. That’s significant. And it should possibly frighten the labels. Because it means artists have a choice. Thus, labels suddenly have to compete with a new class of businesses. It’s now their entire model that needs to be regarded as the preferred choice among artists.
One factor on which this competition for artists happens, are the terms offered to artists — and particularly the rights they retain. When your business, at its core, is about owning music, it would be problematic if a sizable number of artists were to keep the rights to their music. On the one hand it would change the economics of your business (long-term; for now you still have a valuable catalogue; but that does have a half-life period). On the other hand it would require you to change the self-conception of your organization: from world-class distributor and rights handler to world-class service provider for artists. I don’t know which one would be more challenging; both are pretty tough!
Why Labels Still Matter to Artists
The good news for the Big Three is that this change won’t happen over night. While researching this piece I talked to Falk Schacht, likely Germany’s best-known rap journalist and industry insider for 20+ years. He reminded me that being signed to a major label is still regarded as a signal of prestige by many artists. Plus, there are still tangible advantages for artists.
The first one: security. When artists sign, the label pays them an advance. While going DIY is the entrepreneurial approach to a music career, signing with labels is the risk-averse one. Further, labels provide the one-stop shop solution to all the jobs I listed above. That’s quite comfortable (at least in theory).
But there is one key thing industry insiders repeatedly bring up when asked about the value major labels provide: Their connections to radio people. Says Matt Colon, co-counder of Deckstar Management (emphasize mine):
The internet and social media have leveled the playing field enormously, so for most of my artists I only advise that we look to major labels if their music immediately lends itself to radio, i.e. pop-leaning. All that said, radio is still the key way to truly have a record go from a great song to a hit song, and major labels work radio better than anyone else.
Radio is still the dominant way how people discover music. Yes, streaming and it’s playlist-based approach to discovery is catching up. It has even created some proper hits own its own. But to have a serious international hit that everybody can hum along with, radio is supposedly still the way to go. Plus, it’s still regarded as culturally significant!
So, for artists to forgo major labels in big numbers, the digital music ecosystem must first prove capable of creating real success on a regular basis. If it does, artists might consider that path more frequently. If there is a reality where artists can keep the rights to their music and still reach a broad audience, they will definitely consider it.
Then again, Schacht brought another good point to my attention: Most artists are young adults with little business experience. I think its fair to assume that labels make a decent amount of their deals with people who care more about the prestige of the contract than its terms. Alternative career paths becoming commonplace might, therefore, take some additional time.
The Best Attention Broker Will Win
The music business, like most industries, is a system with several players. Thanks to the internet, they were dealt a new round of cards. Now, they are in the process of sorting out who’s gonna have the upper hand. Artists are definitely in a better position than they were ten years ago. Their choices now will determine how the industry structures itself around them.
For now, the old players keep each other afloat. They are intertwined in a way that secures their influence — see the point about radio and the labels. But in the end, it’s the consumers’ preferences and behaviors that matter. If those change, those who are best adapted to the new paradigm win. As Bob Lefsetz of The Lefsetz Letter fame stated recently:
“The issue is attention. If a label can get you that, go for it. As for distribution, you can do that yourself.“
Whoever will be best at getting artists the attention they crave, will win their business. It’s the artists who need to make sure that this rare time of reordering results in better terms for them. After all, they are the ones people want to spend their attention on. Which is an increasingly valuable asset.
The labels are aware. They try to adapt by building joint ventures with indies or looking for partnerships with companies build for the new reality of digital music. But the long-term threat to them is the acceptance of their rights-based business model eroding.
¹ The definition of catalogue music varies, depending on the data provider. Nielsen includes all songs released over 18 month ago. BuzzAngle meanwhile makes a distinction between catalogue —released over 78 weeks or 1.5 years ago — and deep catalogue which refers to all songs 3 years and older.
² Techcrunch recently reported, based on two unnamed sources, that Spotify did have talks about “record label-style deals with artists”. But having those talks isn’t the same as acting upon them — it’s basically due diligence. I’d consider actually following-through risky, even for Spotify. Particularly when a deal would involve high profile artists with expiring major deals. Labels wouldn’t like that. And they have the means for serious repercussions.
³ The alternative option: building a relevant catalogue quicker by acquisition. If we would hear about Spotify buying indie labels and their catalogues, I’d consider this a real declaration of war.
