The End of the Record Label as we Know It

Well, a little bit of travel and then the family getting whacked by what seems like every seasonal virus breeding in the air has sideline me for the last several weeks.

In that time there has been a number of doom and gloom reports and articles on the state of the record industry. None of it is all that surprising. The Yankee Group kicked it off in early January with their report The Rise of Digital Music Means the Demise of the Record Label
From the press release:

"digital revenue (online and mobile) is growing, but is insufficient to offset declining CD sales. Over the course of the next several years, Yankee Group anticipates that music industry revenue will begin to stabilize in the US, though at a lower level than previously seen. By the end of 2007, digital music revenue in the US grew to $1.98 billion, and will reach $5.34 billion by 2012. However, artists will increasingly keep the lion’s share of this revenue as record labels become marginalized."

"Demise" - Really?  I don't know about demise.

The press release highlights 3 of the recommendations in the report:

"Abandon DRM; embrace watermarking: Record labels can’t escape DRM, but by embracing watermarking, they will make it completely transparent to consumers.
Leverage Anywhere Consumers: Record labels should encourage consumers to become legitimate distribution channels themselves and enable them to profit from it.
Promote PC, not the phone: Wireless carriers must aggressively push the PC rather than the phone as the digital music distribution channel. The PC dominates music downloads."

More recently Forrester has issued the report "The End Of The Music Industry As We Know It" I borrowed their pun for the title of this post. (Press release) (by way of the cool Coolfer). The big news in the report is that Forrester forecasts digital sales will surpass CD sales by 2012.

A couple of highlighted graphs from their press release:

"Digital music sales will grow at a compound annual growth rate of 23 percent over the next five years, reaching $4.8 billion in revenue by 2012, but will fail to make up for the continuing steady decline in CD sales. In 2012, CD sales will be reduced to just $3.8 billion."

"The industry has to redefine what its product is,” said McQuivey. “Music executives have spent years tracking CD sales. But the artist is the product — not just the source of it. New forms of revenue will come from unexpected sources. For example, the industry has failed to capitalize on the growing popularity of video games such as Guitar Hero and Rock Band. In a market where musicians are happy to sell a million copies of a CD, a video game market where titles can sell five million copies is enough to motivate even the most depressed music executive.” 

Nate Anderson's article "A brave new world: the music biz at the dawn of 2008" is a pretty level headed assessment of the current state and near future of the industry.

From his article:

"Given the years of declining revenues at the major labels and the constant stream of stories in the mainstream press about music's decline, you'd be forgiven for thinking that the music industry's pallbearers are already lined up and waiting in the hallway. But music isn't on its deathbed yet; in fact, people are listening to more artists than ever before, on more white earbuds than ever before, in more places than ever before. They're just not paying as much."

He goes on to point out, among other things that even at reduced sales, the Majors are still a huge industry, but it is the Indies moment to shine as the focus shifts more from selling little plastic disks to the artists themselves.

He sums up nicely...
"Indies gaining market share
Digital downloads up 45 percent in one year
Well-known artists going indie
DRM-free downloads from all major labels
Major label revenues declining
CD sales in a death spiral
Those don't suggest that the music business is dying so much as changing, and the center of gravity is shifting to individual artists and to smaller, more focused operations. There will always be a role for what are still called the "major labels"; who would put out all those American Idol and Hannah Montana albums, for instance?

It's too simple to say that the majors suck and indies are the future. Labels like Nonesuch (part of Warner) are putting out great music with a lean staff. They're also willing to make artist-friendly gestures like allowing Wilco to sell CDs with no Nonesuch logo, no Warner logo, and no copyright information (this is contained on a disposable cardboard sleeve around the jewel case).

But the majors aren't entitled to their "major" status by an act of God. They have to scrap for it like anyone else. The Economist put it well when it concluded that the majors may have to adjust to lower revenues. Calling it the current experiments with music "a leap into the unknown," the magazine noted that "some among their number, indeed, may not survive."

 Yeah that's about right.

Of course this environment is great for the Indies and small labels who partner with artists to get the attention of consumers in their particular niche. (Good for us, although there is no guarantee for success just because we are a small niche label - that's for sure)

I do think the majors are catching on though; for instance in a cool Gaurdian piece, Sony BMG UK chief Ged Doherty points out some of the industry's mistakes and offers a realistic and optimistic assessment of the current business climate and that of the near future.

"We're not an industry that has generally been run by forward-thinking people. The CD boom papered over lots of cracks. The current generation are paying the price for the mistakes of our forefathers,"  CDs in the 90s are to the music industry what SUVs and pick-ups were to the auto industry in the 90s. There are similarities to the situation both industries find themselves in as I have pointed out in a earlier post.

Doherty goes on: "I don't think as a business we did ourselves any favours. The quality of music has not been good enough. How many times have you or I bought an album and there's only been one or two tracks we like?"  

"...remodelled major labels, offering a balance of local expertise and global reach, have a future. He says relationships with artists in the digital age will rely on deals being "fair, open and transparent".

..." Doherty refuses to see the shift in power as a minus. He says it has forced major labels to level with the artists that pay their wages."

The majors are starting to get it. Music is not dying, in fact it is thriving, its just that the good ol days of over shipping and counting plastic disks are gone.

Update on Wednesday, February 27, 2008 at 10:41AM by Cheevo

Nate Anderson in his post  at Ars Technica reports from the Digiatl Music Forum East conference:

"Five hundred top members of the music business gathered today in New York to hear that "music 1.0 is dead." Ted Cohen, a former EMI exec who used the phrase, opened the Digital Music Forum East by pleading with the industry to be wildly creative with new business models but not to "be desperate" during this transitional period. But what is music transitioning to? No one seemed quite sure, except to say that it won't look much like the music business of the last several decades." 

The majors are getting it. lets see what they do about it.