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.

What is the music business for?

Just recently I was at the Guardian's Changing Media Summit, listening to Feargal Sharkey talking about the music business.  Sharkey made his name as the lead vocalist of the 70s punk band The Undertones.  He noted how he had lived through 3-4 disruptive technologies (the move from vinyl to CD, the growth of the digital, the evolution of downloadable music, etc.), and is known as the man who crossed over from music to management (he now heads up UK Music, an umbrella body representing the interests of musicians, writers and other creatives in the music business).  Sharkey made the point that, regardless of the disruption, irrespective of the doom-mongering of the record labels, young people would continue to write, record and perform new and original music.  It really wasn't about the money.

The Undertones were signed to Sire Records, a label that was bought by Warner in the 1980s, and which in turn is in difficulties and is up for sale.  The question is, what does a record label do?  What is it for?  A useful term to consider at this point in 21st century is disintermediation.  This is a word that is used by experts commenting on what has happened to retailing in the internet era: airlines, car insurance, investments and many other sectors have disintermediated, that is to say, agencies and brokerages have ceased to become useful when consumers can buy directly from the provider online.

Originally a travel agent or insurance broker on the high street would have the subject knowledge to match our needs and wants with what was available on the market.  The intermediary would complete the paperwork, issue documentation, take payment and generally complete the transaction.  Now all of this is done online, direct between consumer and provider.

In the music business, from the middle part of the 20th century, record labels set up to exploit the new technological phenomenon that was the grammophone (EMI started business in 1931, for example).  As intermediaries, record labels provided the recording and production facilities for musical acts, financed the pressing and distribution of costly vinyl recordings, and managed the entire promotional effort of the acts they signed.

This particular branch of the creative industries did particularly well in the post-war years, riding the wave of pop music, rock, punk and later genres.  It was particularly good in developing relationships with the mass media, and as both sectors started to be undermined by the growth of the world wide web in the 1990s the mainstream media have been happy to champion the business in the face of what they see as unprecedented levels of piracy of the industry's intellectual property (see for example a recent example from Britain's Daily Mail).

But what we are witnessing is another example of disintermediation.  Recording studio time is no longer the preserve of the few: a band can book a fully-fledged digital studio from around £150 per day ($250), and is able to have a say in how the final tracks sound.  It is no longer necessary to get together complete albums of music (10-15 tracks) and have these pressed and distributed: instead a band can issue individual tracks as they are made, and 'monetize' these right away on iTunes or Amazon.  A band can build its own following on MySpace and Facebook, linking to gigs, social interaction and merchandising  - all functions originally handled by the record label.  The band and its fans can build its brand through co-opting fans in social media to spread the 'authentic' message.

Now the band can design and produce its own CDs and EPs for less than 75p each ($1.65) and distribute these via gigs and mail order.  Amazon and other online retailers will also distribute these.  Tour venues are bookable online.  Bands can handle their own publicity - often much better than a record label.  The Arctic Monkeys are a good example of a band whose debut album became the fastest selling album in British music history on the back of the band's own web-based promotional activity.  The Arctics were famous for their early hostility towards the music industry establishment.

What does a record label do nowadays?  They used to secure airtime on popular radio stations, but now these have fragmented into hyper-local media and online channels, and the mass audiences have gone.  Bands, if they put their minds to it, can handle the whole disintermediated package.   Both Warner Music and EMI are up for sale: but while the music industry bleats about technology and the insidious effect of online piracy, they need instead to ask themselves the fundamental question, 'What are we for?'