Music Think Tank - MTT Open

Hi it's Dan Freeman from Comandante Zero. A couple of months ago as we were looking to finance our record, I did a bunch of research into the current state of the industry and tried to figure out where it was going. I put together this piece for our blog and Ariel Hyatt suggested that I share it here. So here it is. Btw, if anyone wants to read more about this topic, I included a whole bunch of links at the bottom of the post. Enjoy.

The business model of the major labels (I refer to the 4 who are still standing - Warner Music Group, EMI, Sony and the Universal Music Group) essentially dates back to the mid-20th century. The record labels had full control over physical distribution, meaning that they sold records the way Proctor and Gamble sells shampoo: a record would be recorded, mastered and then physically distributed to stores around the world. Essentially the only way for an artist (say the Beatles) to have their album sold at your local record store was to enter into a recording contract with one of these major labels. The labels would take on the job of fronting the money for the living costs of the band while they made this record, the recording/studio costs of the record, the mastering costs of the record, the artwork design, the promotional costs of the record - including getting it to radio stations (and in some cases using payola to get them to play it) and finally the costs of physically shipping the records to stores around the world so that the consumer could buy them.

While the record company did a tremendous amount for the artist - it came at an often terrible price. (see more about this in the discussion of how much this model sucked) Record companies in many cases exercised significant control over the artistic content of the record - driving everything toward commercial radio hits. They owned the recordings - forever - and anything that displeased the labels sense of what would sell could be, on often was, shelved. Even worse for the artist was the fact that it trapped the artist into a modern-day sharecropping system. All of the money that the label paid out for the recording costs, living expenses, mastering costs, artwork and even at time promotion, was recoupable from the artist’s royalties - meaning it was essentially a loan. What made this even worse for the artists was that the royalties represented only 12% - 13% of 90% of the retail cost of the record. So to give an example, derived from Steve Albini’s famous 1993 article describing typical record company practices - A band would be picked up off an indie label and signed to a major label. The major label would pay the indie label $50,000 - to be recouped from the band’s royalties. The band would be given an advance of $250,000 by the major label. The record company would hire a producer with an advance of $50,000 and who would be promised 3% of the royalties. Furthermore $25,000 for the royalties would be used to pay for publicity and promotion.

Then the day would come when the record would be released and in Albini’s article, he talks about what happened if the band sold 250,000 copies of a CD at $12.00 a piece. $12.00 x 250,000 meant that $3,000,000 was made from this record. From that the artist got a total of $351,000. (90% of 3,000,000 is $2,700,000 and 13% of that is $351,000) Of this $351,000, $50,000 would be paid to the label to cover them for the initial expense of buying the band from the indie label, $250,000 would be taken out to cover the advance given on living and recording costs, $25,000 would be removed to cover the costs of promotion, and $40,000 would be removed to pay the producer. (The producer made $10,000 or 3% of $351,000, so the rest of his advance was deducted from the artist royalties). All of this meant that the band would have to pay back $365,000 worth of expenses leaving them $14,000 in debt to the record company!

In the meantime, the record company, would receive the wholesale price of all of the records sold. If the wholesale price of a $12.00 CD was $6.50, the gross income of the record company would be $1,625,000. From this money, $351,000 would go to pay artist royalties (as we’ve previously seen) $14,000 would go to pay back what the band’s royalties could not pay. $550,000 (or $2.20 per record) would go to the costs of manufacturing, packaging and distributing the CDs) so the record profit would emerge with a net profit of $710,000

So in summary, a record deal often meant that an artist who sold hundreds of thousands of records was left in debt while the record company ended up with a substantial profit.

Beginning in the late 90’s three technological developments have combined to devastate this business model. Firstly the advent of file sharing. Napster created the idea that music in the form of mp3’s could easily be acquired freely over the internet. Moreover, instead of paying $12 - $18 for an entire CD which could contain only two or three good tracks, millions of folks realized that these two or three tracks could be downloaded completely free off the internet. Even though the RIAA, the lobbying arm of the labels, got the courts to shut down Napster in late 2001, it could not erase the notion from people’s minds - especially the computer saavy gen x and y folks - that music was not something that you paid premium prices for, and it was available on demand. Limewire and others simply replaced Napster. The second blow to this system was the Apple ipod. Introduced in late 2001, it create a simple, reasonably priced device that could carry entire record collections on a small portable machine. Finally the third blow was the Apple itunes store. File sharing, although convenient, often resulted in poor sounding mp3’s. Many buyers were willing to pay .99 cents for a track as long as it sounded decent, and Apple made it so easy to do this.

The results of these technological changes have been severe on the old business model and will probably permanently alter an industry created in the 1920’s with the advent of records. Essentially, from the early - mid 20th century, the record labels made money by controlling the business of distributing and selling a physical product that contained music, be it records, tapes or CDs. Now anyone with a computer could grab almost every recorded piece of music released by the record companies and even pay absolutely nothing for it if they desired. Furthermore, record companies counted on a lot of the extra profits that they made by jacking up the price of albums to as high as $18.99 in the late 90’s. Now consumers, when they did pay for the music, were often downloading single tracks. In 2000 U.S. consumers bought 785.1 million albums. In 2006 they bought 588.2 million albums - and that includes downloaded albums. They results of this paradigm shift have been felt throughout the industry. Giant Records stores like Tower Records and 2700 smaller stores have vanished since 2003 leaving non-music stores like Wal-Mart as the largest CD sellers. 5,000 record employees have been fired or quit and whereas in 1997 there were six major labels, only four are left.

So, how has this affected musicians? On the positive side, bands like Nine Inch Nails and Radiohead have opted out of the record company system in order to sell music and some artists, like Trent Reznor, have been experimenting with new models of selling recorded music. To be able to record, unfettered by record company executives who often knew little about music except what their own ears told them was a ‘hit’ and to sell directly to your listeners is a far better option. Furthermore, the system that left the artist heavily indebted to the company and unable even to control ownership of their own art, is better off destroyed. On the negative side, the structure that was in place that would take and artist and invest in their career and pay for their early recordings has significantly shrunk. Anyone can record a tune onto Garageband and throw it online essentially for nothing. However, to get a really good sound in a recording studio, hire professional musicians, print and master a CD, promote yourself and your music and organize tour support - this still requires a financial investment.

Hence, our decision to launch ‘The Indie Way‘ project to finance the ‘Slouching Toward Babylon’ LP. We have essentially built ourselves a website and our essentially taking in donations for our record as we are in the process of recording it. We're looking to raise 50K to cover all costs and have recently gotten non-profit status as well by partnering with Art For Progress a New York City Arts Organization. This model may fail too, but we are currently blogging constantly and really recording all aspects of it so at least the record of how we went about it will be there and people can study it and learn from it.