Tuesday 3 May 2011

Music piracy and the investment drought

For several years now Britain's music industry has been obsessed with the problem of illegal downloading.  Last December the BPI, the trade body representing all the major record labels as well as many independents, produced an authoritative report, 'Digital Music Nation 2010'.  Based on research by two respected market research companies, the report painted a picture of a burgeoning new, vibrant digital music sector in the UK.  But the real story - made clear in BPI press releases - was about music piracy.  In fact, variants on the word 'illegal' appear in the report more than 70 times.

We have looked at the arguments about illegal downloading in earlier posts, noting that the industry can't always be trusted with the facts.  But while one of the arguments was about piracy destroying jobs, the BPI also stressed the impact on investment.  Looking at the word count again, variants on the word invest, investment, investor, etc. crop up 30 times in this report.  The BPI identifies two main problems: firstly that outside investors will take their cash to sectors where this kind of theft is not endemic; and secondly that record companies themselves will be unable to continue to invest in supporting new musical talent.

This latter point was made by Andrew Lloyd Webber who told a House of Lords debate that music piracy in Britain was undermining the industry to such an extent that in ten years it would be unlikely that a band such as the Beatles would emerge (reported in the Daily Telegraph).  More recently the Daily Mail's Business Editor described how before rampant piracy there was "cash to invest in new performers and to keep the creative juices flowing by paying good royalties to established singers, orchestras and musicians".  Now, though, illegal downloading "has made it all but impossible to sustain heavy investment in new artists."

As has been noted earlier, EMI's new focus on business and profits when private equity group Terra Firma acquired the firm in 2007, was followed quickly by the departure of Radiohead, The Rolling Stones, Paul McCartney, Queen and Pink Floyd.

But what does "heavy investment in new artists" consist of?

When a record label 'discovers' a new act they will attempt to 'sign' them.  Typically this involves offering a sum of money in exchange for the band signing a contract.  What many bands don't realize is that this cash is an advance on future album, touring and single sales.  The record label's costs in putting the band in the studio, in recording, editing, pressing, distributing, marketing... the list goes on... invariably go against the band's account on the debit side.  Now they owe the record label for the original advance, plus a whole raft of costs (perhaps even the "flowers and fruit" lavished by EMI's management?) associated with getting them airplay.

The record label will argue - with some justification - that their investment is in the production values added to the recordings, in the marketing expertise that will get the new band airplay, in the strategic insights which will identify market segments that the band would never have been aware of.  With luck sales will flood in and in time royalties will have finally overtaken costs, and the band will finally really start earning.

More likely, though, it will be time to make the second album - more costs, more expenses.  It was no surprise that many of EMI's major acts walked - these lucky individuals were in credit and could afford to take their business elsewhere.  The majority of musical acts have no choice: they are heavily in debt to their record company and are committed to putting out a new album every two years or so.

What other industry has this approach to 'investment' in new business assets?  Almost all of the risk is borne by the artists, not the record label.  It is like supermarket giant Tesco telling a farmer that he must bear the cost of supplying produce, packaging it, distributing it, paying all of Tesco's overheads - and that in time the farmer might start to get some revenue of his own.  The only equivalent I can think of is the book publishing sector.

Both music and publishing seem to have a business model where elements of commercial risk are skewed towards the artist rather than the company.  In the cases of both music and publishing there are now digital alternatives: artists no longer need the sort of support mechanisms that were offered in the 20th century.
 
A few musicians such as Paul McCartney and Radiohead have been able to break out of this cycle of debt as their products have had international success.  Most, though, have little choice.  In genres such as folk and jazz, musicians remain in debt to their record labels all their working lives.