Pajamas Media

Record Companies, RIP

What if Elvis had MP3s and MySpace? A revolution is underway in the music business and only a few smart companies are likely to survive.

March 24, 2008 - by Charlie Martin

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Unless you’ve been around the music industry, it looks pretty straightforward, if perhaps not particularly honest. A record company picks out a performer, makes a record, promotes it, it sells millions of copies; the musicians make millions of dollars, go on tour, make another album, do drugs, have a major meltdown, go into rehab, clean themselves up, relapse, and end up another bad example on a E! Television biography or a reality TV show. In the mean time, dozens or hundreds of equally talented, equally attractive people work day jobs talking about French fries while dreaming of what it will be like when they are discovered.

But why? Why don’t more groups get discovered? Why is it such a crap shoot finding a contract? Are there reasons beyond sheer perversity and greed?

Well, let’s consider the economics of the record business, at least the twentieth century record business. Consider a relative newcomer, with a few local gigs that had done well enough, but not enough to let him stop working a day job. I don’t have anyone in particular in mind, but just to be specific, let’s call him “Elvis.” To make a record, he’s got to get studio time, which might cost a month’s wages or more; then, with a good manager, and good promotion, maybe he gets a contract with a major record company. (At this point, younger readers might want to go look at how analog, vinyl, traditional records were made. Go ahead, we’ll wait.)

“Elvis” goes to a recording studio with some backup musicians, and a couple of technical people, including one called the “producer” who actually has a lot to do with how the album finally turns out, and is really an artistic collaborator as much as a technician. The studio cost a lot of money to build; the musicians have families to feed too; the producer expects to be paid, and may get a cut of the sales as well. Once they’re done, the record company has spent some thousands of dollars just getting the master recordings. Then the master recording is turned into a master disk (this is why it’s called “cutting a record” — the master disk is literally cut into a metal plate using a specialized lathe) and vinyl records are pressed using the master. At the same time, album covers are designed, printed and manufactured; the albums are assembled.

All of this costs a lot up front, so the record company has to invest in a fairly large pressing to have a hope of making their investment back. What’s more, a free copy — a “demo disk” — is sent to every record store and radio station in the country, so they have to make a bigger run than you might otherwise expect. (I grew up in a music store about this time; we got demo copies of everything from Rusty Warren’s “racy” burlesque routines, to the Metropolitan Opera.)

So, before you sell a single album, the record company has made a pretty significant investment; their whole business consists of finding someone they can promote into selling a lot of records. They don’t all have to be blockbusters — “novelty” records, classical music, and other smaller-run records get made — but every record has to have a good chance of making back the original investment. “Smaller” records can’t be made with the same level of attention; the costs are just too great.

Out of a ten dollar album, the payment to the artists may be fifty cents. Record companies necessarily are organized around manufacturing and transporting physical disks all over the country; logistics and manufacturing are the dog, the musician is the (rather cropped) tail.

Which, by the way, should tell you just how much money the record companies made on Elvis.

Now, let’s come back to twenty-first century reality. A few months ago, Radiohead released an album, sans distribution deal, sans disks. Nothing but a download location on their website and a request that people who downloaded their music pay them whatever they think the music is worth. More than half of the downloads went for free, according to Forbes; on the remainder, Radiohead grossed between $6 and $10 million. “Sure,” you think, “but they would have made twice that if they’d been paid for all their downloads.” And that’s true, but it misses the point: even with a very good deal, going through a record company and going “double platinum” by selling two million copies, Radiohead might have grossed $2 million. After paying production costs and such, and after reserves for returns, they might have netted half that.

By giving their music away two thirds of the time the time, they may well have made ten times as much cash in hand.

Other artists are noticing this: Trent Reznor of Nine Inch Nails used a similar approach and grossed $1,6 million dollars in the first week, and $750,000 on sales of a special downloads and gift package combination alone.

At the other end of the spectrum, my nephew Scott, who is turning into an impressive guitar man indeed, has 400-odd friends on MySpace, and puts up tracks that he records on his Macintosh computer, using Garageband, with his guitar and a midi keyboard. Some of his MySpace friends are professional musicians from as far away as Brazil; others are extremely cute girls his age. (Why oh why don’t mathematicians get friends like that?)

He can record a professional sounding track in his bedroom at home, publish it on MySpace, and people the world over can hear it. On another MySpace page, an obscure young woman who turned to escorting is caught in a political scandal, and suddenly sells nearly a million downloads of one of her songs, at close to a dollar each.

The well-known artist end of the scale may not seem like much of a surprise: economically, it’s made sense for years for big-name artists to form their own distribution companies, if only because then the accountants work for the artists, not the record company. But the availability of Internet bandwidth and massively powerful home computers has changed the economics of music production and distribution so that a teenager in his bedroom can record, produce, and distribute music on a nearly even footing with the big name artists. It used to cost hundreds of thousands of dollars to produce a full album, after counting in studio time, mastering, and so forth; now a completely professional job can be done with a $2000 computer.

The record companies are still organized primarily around making and transporting physical disks, and make most of their profits on the media. (Think not? If the record company’s margin on an album is 20 percent, and the royalties are five percent, the profit on the physical media is three times what they pay the artist.) It’s not, and has never been, so much a “music industry” as it has been a “music packaging industry.”

In the mean time, the real world changed. It used to be that you didn’t worry about “piracy” because it would cost as much to make physical copies as it had cost the record company — the cost of entry was too great. Now, a CD can be burned for a few cents, and an album can be transmitted over the Internet for — well, my relatively expensive high-bandwidth cable modem service costs me two dollars a day; an album will download in a few seconds. Net cost? About six ten-thousandths of a dollar, $0.0006. It used to cost between two and three dollars an album just to get the product to a customer. Now, twenty for a penny.

Anyone who tells you they know how the Internet is going to change an industry is not very well informed, possibly a fool, and very likely trying to sell you something. But we can see the “shape” of the new music industry now, even if we don’t know the details. Physical CD sales have dropped tremendously; the record companies blame this on piracy, but Radiohead has shown people will still pay for music, just not packaging. iTunes is a major distributor; even more exciting, at least for musicians, companies like Pandora, Amie Street and Nimbit are making it possible for musicians to publish, promote, and distribute music completely free of the music-packaging industry.

There is a new business model coming, one that will be built around the musicians and their works; promoting them, getting them visibility, letting people know about them. It will be good for musicians themselves, and not just the big name acts: with a potential audience of billions of people, very small acts with a tiny tiny percentage of the potential audience will still make the artists more money then they could have made in day jobs.

It may take a few more years to destroy the current record companies, and of course some few may be able to remake themselves into real music companies. The music packaging industry, though, is dead. It’s just a matter of time.

Charlie Martin is a Colorado computer scientist and nearly-successful screenwriter who contributes to the Flares Into Darkness political blog as ‘Seneca the Younger,’ and blogs under his own name at the aggressively non-political Explorations blog.

25 Comments

John Samford:

It will be a good thing when the record industry folds it tent. As an industry, they are stifling creativity. America used to lead the world in music, now Eastern Europe is.

Mar 25, 2008 - 2:21 am Ken:

Good riddance!

John: How do you lead the world in something as subjective as music?

Mar 25, 2008 - 5:14 am dan:

Eastern Europe? It is?

Mar 25, 2008 - 5:39 am william:

It’s interesting to note when Elvis did start recording, it was with Sam Phillips an independent recording engineer. Sam Phillips was a little man, along with other recording entrepreneurs with the same spirit, taking on the big commercial labels. He pushed a lot of music that wasn’t considered mainstream and took a lot of chances to get it out in the public.

It was new and exciting for many radio and record listeners. However, even then, at the time of the beginnings of rock and roll, few people could make a real living playing music in the “popular” world.

This independent spirit again caught on in the 1990’s with the digital revolution.
It has its pros and cons. Since recording or making recordings is much more convenient with computers and laptops, this revolution has caused a glut of music all over the Internet. There doesn’t seem to be a filter on this type of production.

Many say the people will be the filter. That’s fine, but is it working?
There is also a potential audience of billions. Well the whole world is a potential audience I suppose, but is that really true?

It has always been down to the means of the message and how much time one takes to get it out. It is my feeling with so much easy access to music; most people can’t be bothered to listen. Also, listening to music through the tiny speaker on a laptop or the inefficient computer speakers does nothing for the music. In many cases this whole digital revolution has severely lowered the standard of the listener, and music in general.
Along with this negative, there is an attitude more than ever, that musicians should play for free.

The innovative and experimental rock group Radiohead recently released a “free” digital download titled “Rainbows”. It was suppose to be a radical experiment, and to some proved the demise of record companies, because they did make money with a free release. Many people chose the option for the free download of this recording. A significant amount paid. Radiohead’s experiment in a “free” release didn’t prove much of anything however. They would not have made millions if they weren’t Radiohead.

The commercial companies producing recording are behind the “people” at this point, but will find away to recapture the market. We have to be honest here about one fact, unfortunately most people wait to be told what to listen to.

Sure you will have a success story once in awhile.
But, this idea that people on myspace or other places are going to really be noticed, or be able to quit their day job, is as random as it was in the days of Elvis. He walked into Sam Phillips studio to make a recording for his mother when he was 18 years of age.

Mar 25, 2008 - 8:25 am Marc "Smithers" Smitham:

William’s comments are right on. Speaking as an independent musician/composer/producer, I agree that there are pros and cons attached to the “new” music business paradigm.

On one hand, powerful and relatively inexpensive technology has given musicians the power to do their own recording and producing (myself included). On the other hand, anyone that has that technology can also abuse it. Creating music is not about the technology- that’s only a tool. Learning your instrument(s), developing an ear, and acquiring a sense of “taste” are crucial. I listen to a lot of music on the ‘net (my tastes are very eclectic), and there is a lot of junk out there- just because someone can create “beats” or remix something doesn’t necessarily make that someone a musician or producer. The song is everything. And production can make or break the song commercially. All that being said, there is also some really good music out there.

Radiohead is a great example to use in discussing the possibilities of the “new” model for the music industry and the internet. However, it has no basis in reality for thousands of independent musicians who did not first gain fame and fortune via the “old” business model. Established artists can do what Radiohead did easily- their customer base is already built in, and they have the money and contacts for the necessary promotion and marketing.

The main problem for the independent musician is the marketing and promotion. Now that there is such a huge abundance of music on the ‘net, how do you get someone to notice you and hear your music (and also buy it!)? If you are a DIY person like myself, you’ve got a long road to hoe. There is not enough time in a day to promote yourself and also continue to write, record, and produce your music. So where does that leave us independents? Guess what- you need to hire a promotion company, a web maintenance person to develop a web presence, someone to do the art design and packaging for your CD (if you go that route), CD duplication and packaging, etc., etc. Not counting the costs of the technology to produce a quality product (computer, audio converter, speakers, software, microphones, etc.), money still needs to be paid up front before you seriously sell any CD’s or downloads.

Don’t be fooled into thinking that anyone can make music on a computer and create a MySpace page and become a rich and famous artist. I seriously doubt that the article author’s nephew is producing “professional quality” tracks in his bedroom, and the only reason that “obscure young woman” sold any tracks was because of the political scandal (if it smells it sells).

The irony now is that MySpace Music and other sites have been taken over by the larger record labels who have staff that maintain their artists’ web presence, promotion and sales. MySpace even has their own record label and touring shows!

And so the struggle for the independent artist continues….but I still stubbornly maintain hope for a brighter future for all struggling artists.

Mar 25, 2008 - 12:20 pm Marc "Smithers" Smitham:

Excellent points, william

Mar 25, 2008 - 12:25 pm Charlie (Colorado):

William, Marc, thanks for coming by. I think on both of your points, it partly is an issue of what you consider “making a living.” Growing up in the music business, I saw a lot of musicians who were very good, who spent their entire lives working “day jobs” as music teachers, or selling shoes, or, frankly, selling musical instruments in our store so that they could afford to perform. A $10/hr day job only pays $20,500 a year. So, a musician who can get 20,000 downloads a year can begin to think about not needing a day job; a musician who doesn’t need a day job can start touring. This isn’t going to get them a Bentley, but it does give them a chance to avoid singing the “would you like fries with that” song.

Certainly, someone who sells at Radiohead’s scale needs a more substantial infrastructure, but again, consider the costs of that infrastructure versus a traditional record company: you can build a very substantial web presence with $100,000. But, again, the real power here isn’t for a Radiohead, it’s for a small group or an individual. And whether you think Scott has a professional sound or not, we can be certain that professional quality cuts are being made with desktop computers, because it’s already being done.

Mar 25, 2008 - 1:19 pm william:

Thanks Marc,
Likewise to you… I enjoyed your comment….. and Charlie your article is excellent. I did appreciate your article!!
Your other blogs look very interesting!

Mar 25, 2008 - 5:48 pm Ben-David:

Physical production is replaced on the Internect with the Filtering and Ranking function.

People turn to search engines and reliable websites to filter the enormous options for them. People definitely do not have the time to uncover small artists by themselves.

So there will be Internet tastemakers, and independent artists will have to work to get their attention. This is already happening in other areas of e-commerce - people take courses in how to increase their ranking on Google, and other aspects of self-promotion.

But it is still much more open to the small musician.

Mar 26, 2008 - 2:15 am RiverC:

Well, hopefully ‘concerns’ will develop that will group musicians together much like record companies. An example of this is OCRemix. (Overclocked Remix) Most of the music is free, but if you want the best stuff grouped together and/or on disc you have to pay. Worth it? Sure. Beats wading through the thousands of tracks. But it doesn’t prevent a erstwhile poor person from enjoying the music.

Mar 26, 2008 - 8:29 am Mike:

This might have been a compelling newsworthy piece in 2002, but why is PJM publishing now? Seriously.

Mar 29, 2008 - 1:27 pm Cliff:

As a music collector I have only one problem with the new model…mp3 sound quality sucks compared to .wav files. I listen to myspace music and mp3’s for the first taste. If the music seems worthy I buy the disc for the quality. I have a nice sounds system and sometimes like to turn it up loud which cause mp3’s to crack as though the speakers are broke.
Just my two cents.
Cliff out

Mar 29, 2008 - 9:40 pm Bozoer Rebbe:

Cliff, considering how good cheap electronics has gotten in terms of sound quality, it’s a shame the source material is so poor. I tell people that if their mp3 player has a FM tuner, to compare the sound quality between the tuner and the digital files. Even the heavily modified (compressed etc.) commercial FM stations sound better than mp3s.

Unfortunately, the huge commercial success of downloaded mp3s has stalled need for lossless compression schemes. There is the FLAC method, but that only reduces the size of the wav files by about 25%. Perhaps as the cost of bandwidth and storage comes down compression won’t be needed.

As far as the future of the music industry is concerned, one problem with cutting out the middlemen is that some of those middlemen, like Sam Phillips, Leonard & Phil Chess, and George Martin, brought their own considerable talents to the music. As bad as the record biz has been, it has, after all, produced some great, great music. Artists can be self indulgent and a thoughtful producer can push them to be creative. Likewise, artists can be clueless about marketing, promotion, order fulfillment, merchandising, etc. and it’s nice to have people with those skills involved in the process.

Way back when, and the system had its flaws for sure, there was something called an A&R man. Artists & repertoire. They developed young artists, figured out which demos would work well with them, and tried to cultivate a marketable product. Sometimes the system worked and sometimes it didn’t. The successes are our musical heritage.

Aretha Franklin is a towering artist and her talent was known when she was a young girl singing in her father’s church. Columbia tried to make her into a lounge singer and that failed. It took the vision of Atlantic’s Ahmet Ertegun and Jerry Wexler to “put her back in church”. Wexler set her down at a piano, had her run through the song and then he built the arrangements around those basic takes. Without Wexler’s sensitivity and taste, would Aretha have turned out the same? Ironic considering the title, but one of her signature songs, You Make Me Feel Like A Natural Woman, was written by Carol King specifically for Aretha at Wexler’s request. It was Wexler who came up with the title lyric. King was still working in the Brill Building at that time, if I’m not mistaken.

Sure, the internet allows you to have a mom & pop store on the busiest intersection in the world, but in addition to talent it helps to have creative and hard working folks in your corner.

Mar 30, 2008 - 11:10 am Charlie (Colorado):

Bozoer (God how I envy you that cognomen), the thing is that I don’t think the Sam Phillips’s and George Martins are going to be lost to this; if anything, I suspect they’ll have greater power than they did. George Martin, Alan Parsons, and others, I suspect, will turn out to be the impresarios who will turn musicians into recortdings that get played.

Let me recommend Jeff Price’s article today in the HuffPo.

Mar 31, 2008 - 9:58 am Neo-andertal:

Sorry I’ll be sticking with CD’s for now. That is until mp3 goes to an industry lossless standard, hard drives go over a few terabytes, and I can get an electronic copy of liner notes pictures and other information.

I’m at the other extreme end of the market. The over 35 year and an old long term collector. For people like me, CD’s still offer by far the cheapest, quickest, and most satisfying way of buying music. I agree that MP3 sales will take over much of first run music sales. There will always be a sizable second market that entails something a little more permanent than MP3 format. Sure, I use electronic formats for playlists but there still is no substitute for archival copies. I don’t poo on everything new but 85 percent of what I listen to is from before 1983. Much of the more recent stuff is either Jazz or Classical.

The popular music industry isn’t killing itself. It had already done that decades ago and lives on in a much diminished state, jazz declined a little earlier, classical a little later and more gradually. The rapid decline happened back in the late 70’s and early 80’s. You won’t see that in album sales though until you look at the stupendous number of great musical artists that existed between WWII and 1983.

From what I have seen the music industry pre 70’s was quite a bit different than it’s modern form. The people in the industry at the time grew up with the record industry before it was big money. They were enthusiasts as much as businessmen. You had to be sharp to turn a consistent profit. Even the big record companies only made a profit off of only part of their product. The rest of the artists would fill out a catalog and in time could pay for themselves in rereleases. Production also became much more expensive in the late 70’s and 80’s too. After the Beatles high production values became paramount. Musicians constructed rather than played music, and purchasing expensive new equipment every few years for minimal technical improvements became the norm.

Now the industry has turned on its head. You can make decent recordings with fairly inexpensive equipment and distribute it very cheaply. The problem now is not as many musicians have the chops. Too many of the people using the cheaper production equipment are very limited amateurs and the bean counters in the companies are still strictly bean counters.

Don’t get me wrong. Good music will always be a big deal. Many of us are old enough to lament the passing of a cultural golden age though. What you are talking about is a rather remarkable change in marketing distribution, and format of the end product. It is fascinating but I’m not sure how much it changes the creative process.

Mar 31, 2008 - 2:37 pm Kevin R.C. O'Brien:

The music industry is always changing. At the turn of the last century, it was the business of selling sheet music and every family had someone who could play piano or a stringed instrument, usually mandolin.

Then came radio, and everyone could hear music played by “professional” musicians. Apart from the big-name bandleaders and featured singers/soloists, of course, they barely got by.

Along with the growth of radio came the distribution of records, but it didn’t really take off until the 33 1/3 RPM long-playing record let them put 20+ minutes on a side of a disc.

You had, as others have observed, niche and non-mainstream players who suddenly bloomed into public consciousness, but barriers to entry were always very high.

The technical demands of the vinyl LP were frustrating. You lost a lot at both ends of the audio spectrum. Mastering engineers would roll off your bass and the filters would assassinate your upper harmonics… and the first time you heard the record, vice the master tapes through studio monitors, it sounded so flat and lifeless and dull.

I am old enough to remember agonizing over what running order to put your cuts in, to make radio stations listen beyond the first cut and then to leave both side one and side two with a positive impression of your act. I’m also old enough to regret the absence of a 1′ square of record jacket for self-expression.

I believe that the enforced discipline of those limitations made for more interesting music. The radio wouldn’t play your cut if it was too long, so you had to get in, grab their attention, say your piece and get out in three minutes. Most artists today take longer to communicate less — they’re very self-indulgent by our (dated) standards.

The CD created new technical possibilities, and new limitations, which the industry was very slow to come to terms with, let alone exploit. Digital downloading has only increased that dichotomy between technical promise and industrial inertia. The larger something is, the more resistant it is to changing direction… the major-label cartel is so consolidated now that will probably need really swingeing losses to wake up.

Apr 4, 2008 - 9:31 am