Today We Learn About: The Implications of Business on an Art Form

The music business is changing because the record business is changing. While touring, merchandising, and licensing continue to flourish, the sale of CD’s has diminished in recent years. While CD sales decrease, digital music retailers like iTunes, Napster, Rhapsody and eMusic set new revenue records almost yearly. Companies like Tunecore allow artists to become their own record label. A shift in revenue source, a focus on singles over album sales, the creation of new mediums for delivery, and the ease of Do-It-Yourself (DIY) distribution have drastically changed a landscape that for decades has relied on an unwavering business model. In changing times, a business model must change as well. Along with this shift in business model must come a shift in regard for the very art form that has driven the music industry forward since sheet music was sold from Tin Pan Alley. Likewise, a shift in regard for those who create this art must also take place.

The number of major record labels has been reduced to four. These four labels account for a majority of sales in the industry. Major record labels have ceased taking risks on young, unproven acts with legitimate talent like they have as recently as the signing of John Mayer. Filling the void left by this absence of risk-taking lies a group of independent labels that rely on talent, substance, hard work, passion, and ambition over image, record sales, and marketability. These two forces in an industry often intersect, but there are distinct differences in the way they conduct business, treat their artists, and draw up contracts. Exploring their similarities and differences could fill many volumes, but through an abbreviated explanation of each, paired with a breakdown of actual recording contracts along with a thoughtful analysis of the implications of each, we can gain a keen insight into the faults of the industry, and the steps that can be taken to right these wrongs.

Independent record labels (from here on forward, Indies) are owned and operated by individuals unaffiliated with Major record labels (Majors). An Indie will often have its records distributed through the distribution chain of a Major, but will be free to operate as the Indies deem fit. That is, all creative, business, and marketing decisions will be made independently. This distinction is akin to the difference between a Starbucks and a local coffee shop. Interactions between customers and employees is more personal, and more risks can be taken without massive fall out. For example, a local coffee shop can began offering vegan baked goods and if unsuccessful, the fallout would be minimal. For Starbucks to do the same, a major financial setback could result. The same is true with Indie labels. They have the ability to sign young acts without years of success, at minimal risk. Likewise, independent labels can offer employees and customers a unique experience that Majors cannot. This is important because maintaining relationships, customer and employee loyalty, and personalized service are cornerstones to maintaining a consumer driven business. In this respect, Indie labels have a leg up on Major labels.

It should be noted that in recent years, many formerly independent labels have been bought by Major labels. The formerly independent label usually maintains its staff, name, and roster, but forms a partnership with the Major label. The result is an Indie label that has distribution through a Major label, and the Majors ability to “upstream” acts from the Indie label which now carries the distinction of being a “Mini-Major.” To upstream an act means to essentially take the act from the Indie and incorporate it into the Major labels roster. This is similar to a baseball teams farm system, in that players, or acts, can get called up to the Majors. This is a good situation for all involved so long as the agreement between the Major and Indie is fair to all parties. The Indie gets major support in the form of distribution and money, and the Major gets the luxury of working with bands that have documented, proven success. A similar situation exists between labels and bands. Depending on the arrangement, beneficial terms can be reached that will satisfy the needs of all involved. Major label distribution is not uncommon for independent labels. In fact, ADA or Alternative Distribution Alliance is now the largest distribution organization in the country, sending music to digital and physical retailers nationwide.1 This organization is owned by Warner Brothers, and is thus a part of a Major label distribution chain.

As of this writing, there are four Major labels in operation. They are Sony/BMG, Universal Music Group, EMI, and Warner Music Group. Under these labels are a number of subsidiaries that account for a large majority of the record labels that are household names in the United States. Under Sony/BMG, one will find Arista, RCA, Columbia, and Jive Records. Universal Music Group is home to Geffen, Interscope, Island, Def Jam, and Motown. EMI consists of Capitol and BlueNote, amongst others. Finally, Atlantic, Rhino, Reprise and Sire are a part of Warner Music Group. The labels listed are a fraction of the labels that are affiliated with the Majors, and should not be considered a comprehensive list.

The four Major labels have been in the music industry in one form or another for many years, and have survived by means of acquisition and diversifying their business interests. All Major labels participate in a variety of industries outside of music including technology, film, theme parks, television, and internet utilities. This distinction from Indie labels is important in fully understanding what Majors may offer bands in terms of money, resources, marketing potential, etc. For example, there is an Aerosmith roller coaster at MGM Studios in Disney, and there have been Aerosmith video games prior to the release of Guitar Hero. This is not by coincidence. The diversified business interests of Major labels means that they can offer artists diverse services beyond a recording and marketing budget.

Major labels get involved at a much different point in artists careers nowadays. For the purposes of this writing, we will discuss the band Four Year Strong. The band had phenomenal success on an independent label called I Surrender records, selling well over 35,000 records in 2008 alone. With this success, the band was picked up by Decaydance Records which eventually saw the band upstreamed to Universal/Motown. The band’s Universal/Motown debut was released on March 9, 2010 and has been well received. What makes this a shining example of Major label business practices, is the fact that even considering the proven success of the band with limited to no promotion, Universal/Motown released the bands record with no promotion and thus with little monetary investment. This shows that even with proven sales, Major labels are still hesitant to put money into acts that are not at a particular level in their career. Such statements can be made when we consider that Four Year Strong has done multiple global tours, selling merchandise at a good rate, while on an independent label. There is a lack of faith on the part of Major labels, as they get involved in an artists career much later than an Independent label would, and even when involved, take much smaller risks when it comes to money.

Money is the driving force behind Major record labels, and all labels on some level. This is a business, after all. Major labels worry about bottom lines almost as a rule, as evident by the limited risks they are willing to take. Because of this fact, Major labels have devised an alternate business model in response to falling record sales. This model centers around the exploitation of all revenue streams that an artist creates. These revenue streams include concert tickets, t-shirts, books, production credits, publishing and songwriting royalties, and all other income from entertainment sources. In what is known as a “360 Deal,” Major labels are able to make-up for “lost” profits that would otherwise be made from record sales. This will not be described as the driving force behind a 360 Deal, but this sort of contract was popularized at a time in the industry when record sales were faltering. There are those who proposed the business model beforehand, and with nobler intentions, but the record label as partner model is fairly new concept.

Major label 360 Deals lie in stark contrast to independent record label recording contracts. In a recent contract that I negotiated, the label requested two exclusive t-shirt designs. In return, I secured my act a healthy portion of album sales. The independent label that we were dealing with expressed an interest in the band, even though the band has spent a limited time touring, and selling records. Essentially, the Indie took a chance and signed a relatively unknown band, gave up a healthy portion of royalties, offered an advertising budget, label backing, and support from an established PR firm. In return the band was to fund the recording of their project. The expense was well worth the price, especially considering the fact that the Indie agreed to give up ownership of the Master Recordings after five years. The band is not required to give up any additional monies to the Indie label. Here we have the startling difference between an Indie and a Major.

The two contracts in comparison here embody drastically different approaches to the music business. How is it that one contract is so generous and the other so restrictive? The reasoning lies in the fact that the different companies regard music in a different light. Whereas Major labels saw a drop in album sales as a disastrous event brought on by piracy, Indies have continued to worry about putting out a quality product first and foremost. The fact that Major labels are willing to completely alter their approach to artist relations in the face of a changing industry is somewhat telling. Instead of acknowledging a new medium, in digital music distribution, these labels look elsewhere for their money. Indies have largely stuck to their roots, while making use of the clause granting rights to exclusive t-shirt designs in this case. But even this clause differs in the two contracts. The Indie reserves the right to design and produce two exclusive t-shirt designs. The artist is not responsible for the costs associated with the creation of these items. Meanwhile, in a 360 Deal, these costs are recoupable from artist royalties. This means that the artist must pay back the record label for all costs incurred in the production of these t-shirts. I have even seen contracts that require that 100% of advertising be recoupable through band royalties. This practice is somewhat common, and odd considering the fact that advertising benefits the label at least as much as the artist.

360 Deals and most Indie recording contracts differ in their granting of rights to the recording artist. By and large, a 360 Deal maintains these rights for the Major label while Indie labels leave these rights to the artist. The rights in question largely center around creativity, marketing, and questions of image. A Major label will regularly reserve the right to deny release of an album that they do not feel is commercially viable. This sort of provision is absent in many Indie contracts, as is a clause that grants the Major label final approval on all art associated with a release, track order of the release, and even which songs appear on the record. Indie labels do not traditionally reserve these rights.

The problem is not that 360 Deals are inherently bad, but that they have drastic implications for the music industry. First and foremost, these sorts of deals open doors to companies demanding a share in all of an artists revenue streams. This is a problem because most of an artists profits come from sources outside record sales, as has always been the case. By tapping into an artists main sources of revenue, Major labels are providing further evidence for the fact that they are not concerned with music as an art form.

When Major labels freely and openly recognize the devaluation of the art form that they have based their business on, they begin to put themselves on a course from which they may never be able to deviate. Majors have also put themselves in an additional precarious position. By replacing revenue from record sales with outside income streams, they have removed the need to address the situation of falling record sales. In other words, by applying a band-aid they no longer need to focus on the wound. Unfortunately, such an approach will surely cause the wound to grow infected. The situation of falling record sales revenue should be addressed. After all, the music business is nothing without the music. The industry is moving towards a place where the music is worth nothing, but Major labels will never comfortably give music away. Nor is such a decision wise. It should be noted that by “worth nothing,” I only mean to point out that music is not what a fan buys into, even at this point in the life of the music industry. Fans largely buy into an experience that is enhanced by music, but not the music exclusively. The music has become the soundtrack to a greater, more interactive purpose. Fans buy into a community, they want to feel as if they have a hand in the success of an artist or band. Fans enjoy the feeling of sharing new music with other like-minded individuals, they enjoy seeing a live concert, or chatting online with their favorite bands. Musicians are elevated to a god-like status by fans, to the point where fans will often forget that their favorite artist is human and capable of mistakes of bad days. A commitment to recognizing these tenancies will serve the music industry well.

Major labels have created a quandary. They have devalued their main commodity, yet do not embrace or recognize this fact, ignoring that music is no longer something that can be held. Music is now an intangible digital file that is freely available for download, given away with the purchase of a t-shirt, and treated as secondary to revenue garnered from live performance and radio play. These facts, like a 360 Deal, are not inherently detrimental on their own. They become a problem when they are paired with a Major labels refusal to take the extra steps to solve the problem of why music is valued in such a manner. Solving a problem such as the devaluation of music as an art form will not be easy. Offering a solution is difficult, but identifying likely causes proves to be less so. Major labels have ignored fan demands for quality product, ignored improved delivery methods, ignored developing technology, and embraced a business model that furthers a problem instead of solving it. By ignoring such matters until it is much too late, Major labels have put the industry in a precarious position. For the most part, Indie labels have continued to conduct business as usual. There have certainly been cases that illustrate otherwise, but Indie labels are not taking a portion of an artists performance fee or merchandising on the whole.

While the particular contracts discussed in this essay should not be viewed as the norm, it should also be noted that there is not “correct” contract for a band or artist. There are benefits and detriments to both parties in all instances. Indie label contracts are great for a band or artist that is interested in maintaining their rights, working hard to promote their band, and leveraging their connections within the music industry. In exchange for less rights regarding their music, promotion, and marketing, a band can sign a 360 Deal with a Major which will put the band in a position to capitalize on the vast network and man power that comes with signing to a Major label. There is a chance that the label will not put very man power into a band, but this is a risk that a band takes when they begin a relationship with a Major label. This problem is less prevalent in Indie relationships. The benefits in a label signing a 360 Deal are numerous and clear. There is additional revenue from which to capitalize. This is the disadvantage for Indies, as they are missing out on this revenue. Major labels a disadvantaged in that they must employ additional workers to facilitate the business practices that are required in signing 360 Deals. If the label decides not to hire the necessary staff, the artist suffers.

Independent record label recording contracts and modern major label 360 contracts are quite dissimilar both in language and scope, and in their implications for artists rights. Independent labels regard music as art form whereas major labels view it as a digital or intangible piece of a tangible marketing scheme. The evolution of this idea and how this view has been adopted by some independent and major labels as the industry standard is a topic that will face harsh criticism for years to come. As is natural in times of transition, there will be supporters and detractors of Indie label recording contracts and Major label 360 Deals. No party will be correct, as there are definite pros and cons to each arrangement. The importance lies in discussing these differing arrangements and reflecting on their implications. A shift in revenue streams has had a measurable effect on the business model of major record labels as well as that of independent label and this development has led to the current state of the music industry. Technology has altered an entire industry as technology usually does, unfortunately in this case the industry has reacted by paying less attention to the medium that sustains it, and began looking for alternate forms of revenue. Time will tell if this approach will be costly, but a very strong case can be made for the consideration of long term implications over short term profits.

1Alternative Distribution Alliance, Homepage, <http://ada-music.com/>. April 21, 2010.

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