The state of the music industry pt.1: The file-sharing fallacy

Abstract

The advent of mass file-sharing is problematic for the music industry as it is forcing rapid evolution in how music for sale is distributed, yet the problem itself is exaggerated and surmountable. The truly insurmountable and largely unrecognized problem for the major labels is that as a result of file-sharing they have become increasingly dependent upon licensing catalogue and live revenue, yet are increasingly failing to produce artists with the necessary longevity to drive these areas of the industry. The internal structure and direction of their business models and the nature of their mass media platforms leave the majors ill equipped to tackle this issue, which issue necessitates change in the way major labels produce music. The short-term and ‘assembly’ minded approach of the major labels has left them unprepared to adapt to the new paradigm without radical structural overhaul. They must realize that in 2009, what is for good culture is now what is necessary for their businesses. Only by developing a long-term approach and a nurturing model of music production will they deliver catalogue with lasting value and the artists capable of succeeding those driving today’s live music industry.
All facts and quotes contained within this post have been carefully referenced and their sources are available upon request.

Introduction

This post aims to refute the received wisdom that file-sharing in itself constitutes a doomsday scenario for the music industry, and to highlight and discuss the causes and ramifications of the true problem; that the industry is struggling to produce artists with mass long-term appeal. The industry is equipped to adapt to the file-sharing issue, but will not be able to function without a monetisable product that is in demand. With the shrinking of the recorded music sales market, the major labels are increasingly reliant on catalogue licensing and live music revenue, yet the clock is ticking for both these sources. Due to copyright expiration, catalogue has a monetisable shelf-life, and the vast majority of the acts driving the live industry are ageing. Contemporary artists are increasingly unable to match the appeal of their predecessors and the major labels are not currently equipped to provide a solution to this problem as their practices are driven by large multi-national conglomerates that subject musical culture to reductive assembly line procedures. Such models deprive culture of its social power and articulation capabilities,reducing it to impotent decorative entertainment forms. Major labels must now restructure their music production practices along the creativity-centered lines of independents if they are to survive. They must recognise that only a long-term, nurturing approach to musical production will allow for the necessary conditions for the ongoing development of artists and catalogue with longevity.
Music is of fundamental importance to society as the dominant western cultural mode for the past century (film is dependent upon music), and our identities and essences (both personal and communal) are intimately related to it. Major labels have had huge control over formats, content and platforms – but the file-sharing phenomenon has provided a cultural space free from industry marketing influences that is effecting a paradigmatic shift in how music is being consumed. The results of this transition will profoundly affect the future of musical modes.

Several models have been proposed for the future of the music industry, and although I will refer to these, the discussion will be primarily concerned with the anti-cultural effects of the major labels’ practices and the opposing criteria upon which future forms should be modelled rather than with the peculiar forms of the potential models themselves. As 78% of the world’s music market is controlled by westernized late capital business conglomerates, the focus will be narrowed to the late capital western world and the popular music produced by its businesses. I will also contextualize contemporary popular music by considering the position of the music industry within ‘late capital’ consumer society, and how the industry dialectically interacts with society to affect musical culture.
Where I will discuss how the industry must refocus upon music with culturally articulate force, I will refer to examples from 1955 (the original youth movement of rock ‘n roll) up to the present day. However, when historicizing the file sharing issue it will also refer to crises that precede this date, from throughout the industry’s history.
File sharing has yet to be defined as a cultural phenomenon, but I aim to show how it has not only created a statistical sales problem, but has created an entirely novel cultural sphere, which the industry can choose to treat as a potential ally or, at its peril, continue to alienate. Previous studies have tended to focus upon business practices and sales statistics or alternatively the sociological make up of musical movements to explain musical culture. I will attempt to address this gap by showing explicitly how the music industry’s business practices interact with musical culture.I will not engage in the debate over whether or not the quality per se of popular music has deteriorated, as that is essentially a separate, albeit related musicological and more subjective debate. However, in explaining the industry’s failure to produce new popular artists it must discuss in depth how the structure of major record labels within a hyper-commercial environment has a detrimental effect upon musical creativity and diversity. This will include a section discussing how mass media and industry infrastructure disrupts and inverts the creative order of popular culture.

Part 1 will assess exactly how damaging file-sharing has been. I will begin by placing the file-sharing issue into perspective by historicizing it to demonstrate how the music industry has proved itself to be highly adaptable. I will then show how it has dealt with piracy throughout its history and how it has adapted to successive format changes and competing media platforms. Part 1b will address how the industry has already offset file-sharing losses through increasing its performances in alternative revenue streams, and part 1c will discuss the most recent industry attempts to compensate for its losses.
Part 2 will demonstrate how the more fundamental issue is in fact the industry’s failure to provide new artists, citing the diminishing value of new catalogue and the popularity of ‘heritage’ acts. Part 3 will attempt to identify the reasons behind the major labels’ failure in this regard by examining the infrastructure of their business models and how they impact upon the music that is produced. Part 4 will expand upon part 3’s findings to place the industry in its social context in contemporary consumer society. I will discuss how music can function culturally for the benefit of society (drawing upon subcultural theory), and how the music industry’s practices have impacted upon musical culture in general, causing a cyclical effect which has dialectically weakened music’s cultural function. Here I will draw upon the somewhat dystopian perspectives of the political economy approaches of Baudrillard, Jameson and Adorno. Finally, part 5 will suggest progressive criteria for a healthier, sustainable model.


Part 1 – The File Sharing Fallacy

“Technology has destabilized us, it has hurt us….but now it’s going to take us to new heights” - Doug Morris, Chief executive of Vivendi-Universal Music Group

On Saturday the 5th of September 2009, The Times published a letter co-signed by the general secretaries of the TUC, the BECTU (the media and entertainment trade union), Equity and the Musician’s Union. In it they proclaim their support for the British Government’s proposals to work more closely with Internet Service Providers (ISPs) to prevent illegal file-sharing. They claim that ‘as many as 800,000 people work in the creative sector, and with piracy depriving businesses of up to 20% of their revenues every year, many workers will be at serious risk if action is not taken.’ The file-sharing issue, it appears, is a threat to the creative industries as a whole. Yet none of them have been as affected as the music industry, where MP3 and WMA copies of its product flow through file-sharing sites like water.
In 1996 global music sales were worth $39.8 billion, yet by 2001 had fallen by over $6 billion. That same year, for the first time since 1966, no album reached 5 million sales in the U.S. Tellingly, 2001 also saw the sales of blank CDs (which had been effectively useless to the consumer until circa 1998) outnumber recorded CDs for the first time. Consumers were now taking the lead in a new wave of technology–driven music copying as home computer owners became able to send, swap and download music files through basic internet access. After years of CD-driven ascendancy, the music industry was faced with a new nemesis that would rapidly alter how music is consumed and would decimate the business model of musical distribution via physical units. August 2009 showed an incredible 37.2% decrease in the US album market (the world’s largest) versus the same period in 2007.

This mass illegal downloading of music is widely regarded as having dealt a mortal blow (or more accurately, death by a trillion cuts) to the recorded music industry, and certainly the major labels enjoy playing the victim having been for so long cast as price-fixing villains. There are, however, other causal factors involved in the downturn - chiefly the end of the CD replacement cycle (where the public replaced their collections with CD versions) and ongoing recession. The ramifications of the effects of what has become commonly known as file-sharing upon the modes of musical consumption will have profound consequences, yet the major labels are managing well in dealing with its initial threat, even though illegal music downloading is still rife. File-sharing sites such as Limewire continue where Napster left off, providing internet users with the ability to share and own music for free. Recently, UK Music (an umbrella body representing the interests of British music businesses) claimed that 61% of 16- 24 year olds admit to downloading music through peer- to –peer networks, 86% admit to copying CDs for friends and 75% to uploading music to send to friends. UK music’s Chief executive, Feargal Sharkey (ironically of ‘Teenage Kicks’ fame) claims that this youth demographic understands very well the concept of intellectual property copyright, but that ‘They just don’t care’. There are legal services which do excellent business, chief amongst them iTunes - which in April 2008 surpassed Wal-Mart as the biggest retailer in the United States. Yet although iTunes alone has already sold well over 5 billion tracks, it is estimated that 500-600 million tracks are downloaded for free each week.

The industry is undeniably in a state of structural transition, having reconfigured its business strategies (if not its models or direction) in the face of both recession and the changes in how music is being consumed. Yet these changes have taken the form of funding reshuffles rather than the necessary shift in how major labels conceive of their product. By increasing the branding and cross- promotion of their products they have betrayed a failure to recognise underlying issues that will become increasingly problematic into the future. Regarding file-sharing specifically, the main problem ihas been that the industry’s structure and business practices were heavily invested in a model where the bottom line is the sale and marketing of physical units. Yet both history and the fact that all major labels are now controlled by large international conglomerates with wide ranging media interests would suggest that, regarding the file-sharing issue, the industry is well equipped to make the transition. They have already taken great strides.

Of all industries, none could be more comfortable facing forecasts of its impending demise than the music industry. Time and time again, since inception, the music business has lurched from one (so called) crisis to another, yet has always emerged stronger. Neither world war, nor the advents of radio, television or mass illegal taping could prevent the industry from strengthening the position of its products in our hearts and on the stock market. It has managed a continuity unmatched by other businesses, always finding a solution - whether by expansion, consolidation, invention or litigation. It has a proven track record of uniquely capable adaptability, with every slump being followed by lucrative innovations and a return to dominance.

The music industry’s remarkable resilience has even allowed it to enjoy boom during recession. When, for example, the 1970-1 Wall Street crash saw investor interest drop, Warner was able to increase its music earnings by 25%. Even when world war threatened the industry it responded and learnt to thrive. World War 1 saw the opportunistic but financially necessary mass production of patriotic records, the industry cynically informing the public that, in a time of scant employment, the ‘buying of a single record is contributing a quota to the alleviation of unemployment terror.’ This success enabled the industry to be ready for World War 2, where the American industry actually increased its sales value from $44million to $109million despite being cut off from its European subsidiaries. The Great Depression was also surmountable, albeit in Britain only by mergers and consolidations. The two largest record businesses in the UK at the time (HMV and Columbia) saw their sales fall catastrophically and survived by (in the words of author Louis Barfe) ‘huddling together for warmth’ and merging for efficiency. This was the earliest British example of a continuous and natural process of centralization that has helped the industry increase its efficiency in controlling expenses and prices, thus allowing it to both make and save more money. The British music industry is currently experiencing the boom-during-recession phenomenon. 2008-2009 in the UK has seen a 13% increase in the value of the live music sector and a 4.7% increase in the overall value of the UK Music industry. During the same period ‘PRS for Music’ (which collects royalties and pays them out to composers and performers) reported a 14% rise in its revenues.

Piracy in various forms has in fact been a perennial issue. As far back as the 1895 the Publishers Association of America announced its war on piracy and intention to ‘ameliorate evils which may affect the trade’. Every town in the United States had a black market and laws were brought in to protect copyrights. Although copying recordings became a misdemeanour, its practice increased 163% in the 6 years after the law was passed. By the 1930’s, the bootleg trade had increased so much (up to 30% of returns were found to be counterfeit) that the ‘National Association of Performing Artists’ was formed especially to combat it. The ensuing decade was characterized by continuous complaints that piracy was responsible for declining profit. It was not until 1974 that the counterfeit market was brought to heel to the industry’s relative satisfaction (until then pirates had been able to employing a legal loophole which had allowed them to avoid harsh penalties by paying mechanical royalties to publishers). Yet the industry had not suffered enough to stop it becoming worth $1 billion by 1967, and between 1968-1972 alone had in fact doubled its sales in some formats.
Fast forward to the late 1970’s /early 1980’s to the ‘home taping’ issue, and there are many parallels that can be drawn with today’s file sharing problem. Industry giants such as Sony and Philips supplied the hardware to make it possible (and off-set their losses in the process). Sony benefited here from the Sony Walkman and its involvement in blank tape production, 150 million of which were sold in 1975 alone.Sony have today also offset file sharing revenue losses with sales of Sony manufactured blank CDs, CD burners and mp3 players, and according to the International Recording Media Association (IRMA), 3.7 billion blank CDs were sold in 2001. Yet taping was a cottage industry driven by consumers.As early as 1975, 23% of the US adult population were said to have illegally taped in the past year, and by the mid 1980’s the British Phonograph Industry (BPI) was claiming that the British music industry was losing £1 million per day through taping losses. Like today, taping caused the industry to fear for the future, but it could not afford (either financially or publicity-wise) mass litigation against its customers. Jay Berman current head of the IFPI (International Federation of Phonographic industries) concedes that now, as then, this makes it ‘much more difficult as an investigative issue.’ The industry has, however, pursued a few headline-grabbing cases so as to appear as ruthless as possible.

Music-copying is, however, frequently innocuous and even in some regards beneficial to the music industry. In the 1980’s a Merril Lynch report found that home taping was in fact having a positive effect on the market, which was ‘likely to continue to grow exponentially as higher record processes combined with enhanced consumer technical capability of making high quality home recordings encourages such growth.’ Those found to do the lion’s share of home taping turned out to be those who were spending the most upon pre-recorded tapes. Today many people will use file-sharing sites to search for and sample music that they cannot obtain through iTunes or local shops, or even legal websites. Often file-sharing sites can be the only places where rare or live racks can be found as the industry has not provided access. A Harvard study recently found no correlation between downloads and sales of CDs when tracking the popularity of 680 bestsellers across file-sharing sites. The study concluded that it would take at least 5,000 downloads to equate to one sale.
Major label wealth, reach and ties with the establishment dating back to the 19th century allows them a somewhat privileged position that they exploit to their advantage. In the United States in particular, the Big 4 have been pushing for market regulation rights through political channels, moving explicitly into active participation in law enforcement. The 1998 digital millennium copyright act allows the Recording Industry Association of America (RIAA) to attain a subpoena against file-sharers upon suspicion, rather than pursue normal judicial process, where probable cause must be demonstrated. Approximately 75 subpoenas were being applied for per day by 2003, and ISPs have also been forced to hand over suspect details. The RIAA has also filed lawsuits against college students, in many cases successfully being awarded between $12,000 and $17,000. It spent $4 million in 2002 on ‘governmental relations projects’ and ‘federal legislative support’. In the same year the RIAA’s Political Action Committee spent a further $1,185,000 on politicial campaign contributions. Beneficiaries include US Senators such as Orrin Hatch, who has supported the RIAA’s draconian potential legislation for the remote destruction of suspects’ computers. 2003 saw the introduction of a US ‘Deterrence and Education’ act, which can impose a sentence of 3-6 years for a 2nd offence. The RIAA’s intent is perhaps best illustrated by the fact that they hired Bradley Buckles, the director of the Alcohol, Tobacco, Firearms and Explosives in 2003 to head its Anti-Piracy Unit, consisting of 4,800 employees and an $800 million budget. By donating over $200,000 to certain American police forces (such as the New York Police Department) and accompanying police and the secret service in raids, the RIAA has been accused of operating a privatised ‘pay- per –arrest’ system within public agencies.

The file-sharing issue combines a piracy issue with the threat of new technology and musical format beyond the industry’s control. New technologies have alarmed the industry many times, yet the major labels have always found a way to thrive off them. When radio began to affect sales in the mid-1920’s many manufacturers believed that the end of the business was at hand, yet radio was to quickly become their most important ally in promoting new products. Between 1921-1930 The American Society of Authors, Composers and Publishers (ASCAP) increased its music licensing revenue from $250,000 to $2million and radio became (according to music business historian Russell Sanjek) ‘the chief soapbox on which American business could make its honey-coated appeals to the broad base of consumers.’ Jukeboxes were also feared until RCA realized they had helped effect a 300% increases in business, the ‘jukebox effect’ being credited with an additional 1.22million sales per month. Television gave the industry perhaps its biggest fright of all (as it feared the visual medium may render audio-only obsolete), yet by 1953 television was the main income source for both major American royalty collection bodies, ASCAP and BMI.
File-sharing is a result of the format change to digital file storage without physical copy form - a change which has engendered new modes of consumption.The industry does not see it in these terms as it is not in control. If it had had a more progressive view, it could have turned the change in to a positive, profitable one rather than alienate its customer base by resisting their new found freedoms. A historical perspective could also have led the industry in a more productive direction.
Format succession has in fact been the most reliable boost to the music industry as new developments have reliably created replacement cycles. Major labels historically used their economic dominance in gaining ‘something-for-nothing’ with continual format updating, which not only forces sales of its new hardware (by making new releases available exclusively in the new format and through promises of a qualitative leap that renders its predecessors obsolete), but also forces the resale of its catalogue to those who have already purchased the same content. In 1942, When Capitol began to offer records playing at all 3 speeds (45, 33 and 78 rpm) its sales increased from 192,000 units to 18 million by 1948. The stereo replacement cycle (beginning in 1961) allowed the major labels to push the LP format and was ideally placed to ‘make the counterculture pay.’
The music industry plays down the fact that it has suffered enormously from its failure to provide for the end of the last great industry-led format change. The end of the CD replacement cycle is a huge factor in the contemporary drop in sales. The invention of the CD was in fact premised on an assumption that baby boomers would be likely to replace their vinyl collections with CDs, and indeed they became the music industry’s fastest growing customer group with over-35 year olds accounting for 35% of sales by 1999. In author Mark Coleman’s words, this boom that ‘stimulated the music business like nothing before or since’ was doomed to end in a particularly painful bust. When the album market began to decline in the late 1970’s, the Sony/Philips format CD provided an enduring (20 year plus) cash cow. By releasing new titles on CD only, it forced sales of players and CDs. In 1983, only 0.8 million CDs were sold in the USA. 288 million were sold in 1990. The cycle now appears to have run its course with most baby boomers having completed their re- purchasing, and the industry had simply failed to prepare for this.
Having been in control of formats for so long, it would not have occurred to them that the next format change would be implemented by the public.


1b. How the industry has already compensated


The file sharing ‘issue’ has being tackled, economically at least, in a variety of ways.
The fact that all major record labels are now subsidiaries of international conglomerates has served to increase their adaptive powers and make them, to a certain extent, recession proof. Since record sales have lapsed, they have taken full advantage of the myriad of interconnected media interests and mechanisms available to them to kick-start compensatory activity in alternative revenue streams. Whereas an independent label’s financial health and growth is dependent upon the reception of their artists in the narrow range of platforms realistically available to them, majors have many options.
The ‘big 4’ music industry giants consust of Sony (until recently Sony BMG), Time-Warner, Vivendi-Universal and EMI. Together they control 78% of the world market, with the remaining 22% consisting of thousands of smaller labels. Even though, for example, music sales fell globally by 7.6% in 2003 (to $32 billion) the actual stock of most of the ‘big four’ parents rose during the same period. Time Warner’s stock rose 37% from the previous year, whilst the parent company of Universal Music, Vivendi enjoyed a stock increase of 51%.
Publishing and performance royalties from catalogue exploitation (chiefly from radio and television) for now remain a growth area, and thus constitute the chief alternative revenue stream for the majors. The US royalty collection group BMI recorded record ‘big 4’ revenue in 2004, and averaged a 9% growth from 1995-2004 (the steepest period of record sales decline). In 1986 BMI publishing revenue stood at $186 million, yet had risen to $637 million by 2004.In August 2009 it reached an all-time high of $907 million.
In an increasingly commercialized world, consumption is ubiquitous, and major labels are aiming to take employ every facet of their multi-media interests in publicizing their wares. Vertical integration enables major labels to create a market for its chosen promotions, as gatekeeping resistance and advertising costs are negligible where an artist can be cross-promoted in magazines, websites, television shows and film soundtracks entirely ‘in house’. A growing number ‘co-branding’ (or ‘synchronization’) enterprises illustrate a trend towards further concentration of industry control and power. Commercials are the main area of synchronization, as a company can advertise more than one product at the same time (more exposure for less investment) and tie them together in positive mutual associations. Synchronization grew 20% in the year 2000-2001 alone. Macy Gray’s (Epic) and Aerosmith’s (Columbia) music have both been recently used in US commercials for Sony electronic products, filmed on Sony equipment in Sony studios. In 2004 Sony was able to use 11 different versions of the Spiderman 2 soundtrack in order to promote different acts in different countries. EMI has a deal with ‘American Idol’ where the performers must choose songs from its catalogue, which has accounted for millions of sales of EMI catalogue, and American Idol also has a deal with Coca-Cola where its judges drink from cups bearing the Coca-Cola logo. EMI also license their music to Coca-Cola for free download offers. In the words of Richard ‘the man who turned down the Beatles’ Rowe (now ironically of Sony/ATV publishing which owns the bulk of their catalogue); “we are, as much as anything, in the film, television and advertising business these days.”
Ring tones are key for the future, and a $3.5 billion industry. They operate as an audio fashion statement on one’s phone where people will pay $2/3 dollars for a 30 second tone, yet will steal a 99c download rather than buy the full original recording from iTunes. Many phones have a cross- promotional function, such as the Sony Ericsson phones that come ‘pre-loaded’ with Sony music content. Ringtones are exceptionally popular in Asia. In China, 70% of adults are estimated to listen to music on their mobile phones at least once a month, compared to 27% in the UK and 10% in the USA. In the first half of 2009 alone, China Mobile announced over $1 billion in Caller Ringback Tone (CRBT) revenues, up 10% on the same period in 2008.

The big four labels now also frequently cooperate to maintain economic dominance. By sticking together labels are able to consolidate control and to both make and save more money (the Bertelsmann’s (BMG)/Sony merger was expected to save the newly merged company an estimated $300-360 million annually). The rise of online advertising for independent artists has resulted in the majors closing ranks to protect their power, and they often decide prices together. Sony for example, defined rates for ring tones and DVD rates in conjunction with EMI, and before its 2004 merger with BMG it co-owned ‘Columbia House Record Club’ (a publishing venture) with AOL Time Warner. The big 4 now litigate as a group in their often successful attempts to shut down websites hosting file-sharing platforms and to force ISPS to report users’ details.
All these advantages demonstrate how the conglomerates’ economic stranglehold on the industry appears unbreakable for the foreseeable future. All four operate in over 50countries, (Sony in 60) and still largely control what is promoted or rejected by the powerful platforms of commercial radio and television. When in 2000, independent labels made up 71.1% of all album releases, it was the majors who accounted for 83.4% of all sales.Yet the industry still plays the martyr. As Louis Barfe states, the industry’s official position is thus ‘at best a grotesque oversimplification of the real state of affairs and at worst a sickening piece of moral blackmail.’



1c. How The Industry is Compensating


Industry expert Don Passman believes that control of a significant portion of the music accessed through the internet is still well within the grasp of the major labels despite having lost valuable ground through their reluctance to accept the inevitability of the consumption mode paradigm shift. It may take decades to gain the level of control they may have achieved initially had they had the foresight to purchase Napster and to put its model to work rather than to resist it and to alienate their customers. This crucial error has resulted in profound consequences. By positioning themselves in opposition to their potential customers they made it unnecessarily difficult for themselves to win ‘hearts and minds’. The attempts to criminalize downloaders quite possibly exacerbated the problem, both contributing to an ‘us vs. them’ mentality against corporate big business and highlighting how the youth (in particular) might go about scoring points against them. Even more dangerously, whilst the majors dragged their heels, a new generation of potential customers became accustomed to a musical culture of free access and will not be easily persuaded to change their ways. Yet Passman believes that piracy will be at least minimized (if not marginalized) if the industry can offer a service that is high quality, easy to use and reasonably priced as “most people will follow the path of least resistance”. Peter Mandleson, the British Secretary of State for Business, Innovation and Skills concurs: ‘Provide customers with a good quality, cheap, safe and efficient experience and they will ditch illegal downloading’. In fact there are several models that are currently being floated, which can be divided into ‘licensing’ models (where catalogue access is rented and content streamed) or download services which give ownership and allow transference from computers to other devices (such as the standard digital music route from iTunes to computer to iPod).
The success of iTunes (over 5 billion tracks sold and counting) and other purchasing site has not been sufficient for the industry, who believe that they can monetize the activities of a much larger slice of the 16-24 year old demographic if they can offer ‘an all you can eat’ download service. 78% of respondents to a UK Music poll would not be prepared to pay for a streaming service (presumably for cultural reasons, as they had grown accustomed to portable ownership). Universal and Virgin Media announced in June that they will be launching an unlimited download and streaming service, allowing subscribers to help themselves for £10-15 per month. UK Music’s chief executive Feargal Sharkey makes an attempt to appeal to youth ‘hearts and minds’ by drawing attention to how much artists suffer through the file sharing process. Artists want to make the “music they love and take it out to the world without having to live in poverty in the process, I think that’s the part we need to make some people sensitive to” he claims. Sharkey should be well informed. He is an ex-artist now heading a pressure group of British music businesses (the aforementioned UKMusic) who will earn up to 88% of download revenue, typically leaving only 12% to the artists (at present, although this model is under revision). One has to suspect that the file-sharing majority consider themselves to already have an unlimited service – for free.

Catalogue licensing over the internet appears to be the mode of consumption that the industry will adopt and has found a model acceptable to the big 4 catalogue owners with ‘Spotify’, a Swedish website which became available in Britain in 2008, where it has quickly amassed over 2 million users. Record labels and artists have welcomed it as an alternative to piracy. It allows free on-demand high quality streaming of several million tracks licensed from all of the big 4 (although certain blockbuster artists such as The Beatles and Led Zeppelin have so far refused to allow their material to be included). Free users will have their song choices occasionally interrupted by advertisements, or can silence them by paying a £9.99 monthly fee and becoming a ‘premium’ user.
In July 2009 Spotify announced the creation of an iPhone application (or ‘App’) for their service, which having been recently accepted by Apple inc. meaning that Spotify is now mobile. Users are no longer required to be at their PCs to avail of the service, and a temporary storage system (‘cacheing’) allows for a continuous service if the user is on the underground (for example) and unable to access the internet. However, users must have first subscribed to the premium service, paying £120 per year on top of the cost of owning an iPhone. Due to its high cost and the fact that both Virgin and HMV have recently closed their music streaming services, Murad Ahmed (the technology correspondent of The Times) believes that the industry is anxious, although hopeful that this will fare better as ‘the record companies, desperate for any legal online music services to work, simply cannot allow it to fail.’ Very recently (August 2009) it has been announced that, as part of their respective licensing deals, the big 4 had been allowed to buy Spotify stock at knockdown prices. Sony own 5.8%, Universal Music 4.8%, Warner 3.8% and EMI 1.9%

As the most reliable growth area of the industry, live music has become increasingly crucial to artists’ incomes, and now, with ‘360o’ deals becoming standard practice, the major labels are also beginning to enjoy its benefits as a reliable source of revenue. An established artist can command a 90/10% split of ticket sales with venues and also command 70% of the merchandizing revenue. Tours are frequently sponsored, providing free promotion and lowering marketing costs (such as the iPod deal with U2, which provided mutually beneficial promotion although money did not change hands), and artists are often guaranteed 100 million dollars or more. For example, only 5 shows at a 20,000 seater amphitheatre will typically generate $10 million, plus escrow account interest as the sales will usually have been made several months before. Currently the main revenue source for larger acts, there has been a curious flip in the relation between record releases and concerts. Jeff Dorenfeld (Associate Professor of Music Business and Management at Berklee College) points out that whereas once “artists used to tour to sell records, now many will give away records to sell concert tickets” (as Prince did at his recent residency at the London O2 arena, and also Radiohead through their website). Dorenfeld believes that it will soon become commonplace to receive a free CD with the purchase of a stadium ticket, and indeed, stadium support acts already frequently send free MP3’s of their latest tracks by e-mail to ticket purchasers ( as The Answer recently did when supporting AC/DC at Wembley stadium).
360o deals have recently become the standard model when major labels sign new acts. Historically major deals grant first-time artists a 9-14% cut of profits (after studio and merchandising expenses have been met). Today, they will also demand a share of live revenue (often circa 35%), merchandising, image rights and publishing. In the words of Jason Flom (CEO of Capitol Music Group), ‘basically we want to pay less and get more rights.’ The assumption behind this strategy is that labels, (although they had never previously considered themselves deserving) should share in other revenue sources as they are largely responsible for a particular artists success in the first place, having launched them. As ‘breaking’ an act in today’s saturated market is expensive and difficult, if successful the label’s marketing abilities should be rewarded with a cut of all ensuing revenue streams. If the ‘blockbuster’ artists continue to earn the majority of their money from live touring and seem increasingly likely to treat their recordings as flyers, then into the future live music will become a prime revenue source of labels too.