As record sales plummet, major labels’ only hope may be themselves

By Elsa Butler and Katya Soldak

Although it is too early to say that the record industry has found its way out of decline, experts agree that labels, major or independent, are not going away. However, the only hope record industry employees have is themselves if they want the business to flourish again.

“In the beginning, it was one of the few industries that actually fought the wave of the Internet,” said Nina Webb, product manager at Sony BMG’s Columbia Records. “I think we were just in denial. We thought it was going to go away. Obviously that’s not going to happen.”

The record label industry has been going through a painful transition. Since 2001, record sales, the primary source of profit for labels, have fallen steadily. Management at these companies might have been slow to adapt to new sales possibilities, but they are now taking steps to adjust as fast quickly as they can. Major labels Warner Music Group, EMI, Sony BMG and Universal Music Group are adopting new business models such as selling digital downloads and ring tones and a new 360-degree profit sharing deal to ensure a future for themselves.

Although the Internet opened up new distribution channels for artists, who became increasingly autonomous as a result, many agree they will always need a label at some point in their careers.
            
“There are enough tools to distribute music yourself but it takes time,” said Gavin Haag, drummer for The Blacks. “A label isn’t necessary until you’re selling 50,000 records. Until then you can do it yourself.”

Haag is happy with his label, Tricycle Records, who booked them a gig at the 2008 South By Southwest, a major music festival in Austin, Texas, which he says would not have been possible without a label. “A label comes in handy if they believe in your product. They provide financial background for publicity and booking agents. They do the legwork.”

LIFE AFTER NAPSTER
The number-one reason that musicians and labels alike cite as the cause of the upheaval in the record business is the Internet and the advent of digital music. Now that file sharing is a cultural norm, the CD has become obsolete. Finally, record labels are experimenting with digital downloads.

Although CD sales dropped 12.9 percent in 2006, sales of digital music content rose 73 percent according to the Recording Industry Association of America’s annual report. Universal Music Group reported a 51 percent digital sales growth in January 2008.

“Right now it’s easy to say that the majors aren’t doing anything right, aren’t figuring out how to adjust to the changes in the marketplace,” said Touré, a music journalist and cultural critic. “The record business is still not sure how to use the Internet, which is astonishing because it’s not a new thing anymore.”

While the increase in digital content sales seems positive, its overall impact is as yet unclear and may be adverse, according to Warner Music Group’s 2007 annual report. They believe that if piracy continues and legitimate digital distribution channels fail to gain consumer acceptance, operational results could be harmed. They also believe that a plan for implementing ways to process royalties for these new revenue streams may be slow in coming, which would harm relationships with artists and brand identity.

Still, Warner reported that its digital sales through online and mobile platforms grew by 85 percent to $2.1 billion in 2007and that a total of 795 million single tracks were downloaded online up 89 percent from 2005. Digital sales in 2006 accounted for 11 percent of music sales, up from 2 percent in 2004. Labels face many hurdles in changing a business that has been run the same way for the past 50 years. Some companies have been able to make changes. “We adjust every day,” said Webb.

One innovative idea Columbia Records is jumping on is selling an album both as an old-fashioned vinyl record and a digital download, bypassing the CD entirely. Music fans are purchasing records again because the sound quality is higher than compressed digital files, but the MP3 is still popular because of its iPod portability. Contemporary artists like the Killers, Ryan Adams and the Brooklyn band, MGMT, have issued new releases on vinyl in addition to the CD and digital formats.

Another strategic step labels are taking is to implement what is called a 360-degree deal, where the company takes part of the sales from merchandise and concert ticket sales, an area typically managed and owned by the artists. Artists are fighting this new model; they don’t want to share profits that have traditionally gone straight into their pockets.

“The 360-degree deal is terrible,” said musician Raphael Cohen. “If label executives leave their friends and family for months on end to go on tour and sit in a van outside the venue until the show is over, then fine, they might be entitled to some touring revenue. But that’s not what happens.”

“Essentially, a label is a venture capitalist,” said Jen Mallory, Director of Digital Marketing at Columbia Records. “We give seed money to musicians to record an album, go on the road. We give them tour support, budget to do photo shoots and create album art and basically brand themselves.” They even arrange for bands to perform on television shows such as Letterman and Oprah.

“For record labels to only participate in revenue from CD sales after we have spent the money to build their brand doesn’t make sense in this market. It’s going to take a minute for traditional artists who have been in the business to accept it.”

“We’ll see who has to cave in first, broke artists who have a dream or the labels who are broke,” said Touré. “It’s difficult to say no to anything a label wants when you are nowhere and you believe you can be big but you just need to be known.”

GOING SOLO
Besides the digital downloads, labels are also battling inexpensive recording software and even cheaper online promotion used by artists. Musicians can record and mix their music on laptops with software that costs $500, then easily distribute it on social media sites like MySpace. Artists know that the traditional path—making a hit record with a big-name label—is not the only ticket to stardom and success. 

“MySpace is making a big impact,” said Touré. “It’s a massive portal that millions of teenagers pay very close attention to. Lots of bands are using it to put out new music and they are rising up through MySpace.”

Some do-it-yourself bands would say they are redefining the music industry and that the record labels are dead, but many agree that they are still very much in demand.

“You can’t make it on MySpace without anything else because you have to have some sort of distribution,” Touré said. “You need someone to print CDs and get them into stores and out to people. You’re going to need some record industry impact, some relationship at some level.”

Perhaps the new dream is to sign with a label and then get big enough to leave. Back to main Story page