MUSIC INDUSTRIES MUSI 3403A

Record Labels & Power

Music Producers & Consumers are Back in the Drivers Seat
Matthew Handy 12/9/2013 SN: 100820716

Introduction The record label may not be dead, but they will be if they do not adapt to today's media landscape. Digital media has caused the recorded music industry to change completely, in terms of power structures, distribution methods, and illegal activities. All of these changes have shifted the power in the recorded music industry from rights holders to the producers and consumers of music. For the better part of a century, record labels had a stranglehold on the recorded music industry. In 1999, that all changed because of one college dropout who was fed up with not being able to find music online. Shawn Fanning created Napster, and in a matter of months the recorded music industry changed forever. In the wake of those changes, the internet marketplace for music exploded. Retailers like iTunes and streaming services like Spotify and Pandora have become wildly popular, because of their simplicity, safety and high quality in comparison to illegal downloads. These gatekeeping websites also have online competition in the form of the producer to consumer model. Many bands have opted to crowd fund their projects, or simply offer their music through their own website or a platform like Bandcamp. The internet allows this model to be a very attractive alternative for bands who want to make money off of their music rather than giving it to a middle man like a record label, iTunes or Spotify. Although much of the music downloaded on the internet is done so illegally, there has undoubtedly been a shift of power from rights holders like record labels to producers and consumers. The important question this paper will attempt to answer is: can record labels stay relevant in todays digital media landscape, and if so, how? Record labels have been a major part of the music industries for the last century, and it is important to understand how digital media has changed their role in the music industries. There are many who believe the record label is dead, but there is also a great deal of evidence that the record label is very much alive and well.

Definitions Piracy is an important concept to discuss since it is so central to how the recorded music industry has changed. The concept of piracy is not a new one, but it has changed significantly in recent years. From J.P. Vergne's book The Pirate Organization, he outlines the key concepts around piracy: "...[pirates] enter into a conflictive relationship with the state, especially when the state claims to be the sole source of sovereignty; they operate in an organized manner on uncharted territory, from a set of support bases located outside this territory, over which the state typically claims sovereign control; they develop, as alternative communities, a series of discordant norms that, according to them, should be used to regulate uncharted territory; and ultimately, they represent a threat to the state because they upset the very ideas of sovereignty and territory by contesting the states control and the activities of the legal entities that operate under its jurisdiction, such as for-profit corporations and monopolies."1 Pirates represent a threat to the state because of the shift of power that piracy allows. Consumers can dictate whether or not they want to pay for music, so they represent a threat not only to the state but to corporations that would normally profit from the sale of recorded music. Brief History of the Recorded Music Industry The history of the recorded music industry is defined by the power of record labels over the consumers and producers of music. The recorded music industry has always been changing along with the dominant technologies of the time. Beginning in the form of Edisons phonograph, music has moved through many mediums including vinyl, cassettes tapes, CDs, and finally to todays digital mediums such as MP3 files. Prior to 1999, the record industry consisted of players that were multinational, converged and vertically integrated. These companies, such as Universal Music Group (UMG), Sony Entertainment, and Warner in the

United States are still very much alive and well today, but their control over the music industries has significantly lessened. A main issue with record labels before the invention of Napster was the fact that they accounted for control of so much of the music industries as a whole. Pekka Gronow establishes this power in terms of the distribution of production among record labels: ten large multi-national concerns [] produce about half of all records sold in the world.2 After this article was written, convergence in the recorded music industry continued until 2012 where there are now 3 major players that account for the lions share of recorded music. Piracy has rendered recorded music very different today in terms of how it defines profits for labels and bands. It has gotten to: a point where the value of the recorded music industry appears to be in decline and the other industries such as live music and music publishing are increasing in value.3 This suggests that since record labels have less power over recorded music, they could turn to other music industries to recoup those losses. In fact, Williamson & Cloonan argue that: sales of recorded music are of decreasing importance to the overall economic value of the music industries. According to the IFPI figures, since 1999 the value of recorded music sales has declined from a peak of $38.5 billion in 1999 to $33.6 billion in 2004 (IFPI 2005).4 Another important set of players in the industry are the umbrella organizations, most notably the Recording Industry Association of America (RIAA). The RIAA is a trade organization that supports and promotes the creative and financial vitality of the major music companies, and exists to protect the intellectual property and First Amendment rights of artists and music labels; conduct consumer, industry and technical research; and monitor and review state and federal laws, regulations and policies.5 This information does not tell the whole store about the RIAA, however. For example, in 2003, the RIAA filed 261 lawsuits against 12-yearold Brianna LaHara for downloading music through the file sharing website KaZaA. This is just

one of countless examples of the RIAA resorting to litigation against consumers. Nobody likes playing the heavy and having to resort to litigation, RIAA president Cary Sherman said in a statement. But when your product is being regularly stolen, there comes a time when you have to take appropriate action.6 It could be suggested that this method of punishing consumers was largely ineffective, as it is apparent that since 2003, piracy has continued to be a very popular method for acquiring music. Piracy The Signal of Change Piracy is the most significant example of how power has shifted from the hands of record labels to consumers. Industry research suggests that there have been billions of dollars in lost sales due to piracy. The RIAA website suggests that: global music piracy causes $12.5 billion of economic losses every year, 71,060 U.S. jobs lost, a loss of $2.7 billion in workers' earnings, and a loss of $422 million in tax revenues, $291 million in personal income tax and $131 million in lost corporate income and production taxes.7 While that may be the case, there are some glaring problems with this analysis. First of all, it is impossible to calculate sales lost to piracy with any sort of certainty. The fundamental concept that industry research relies on it that one download is equal to one sale. This is simply not true, and cannot be the basis for very important research on the recorded music industry. In fact, it has been proven that people who pirate the most music actually buy the most music as well. A study outlined in an article in the Guardian suggests that: those who download music illegally are also 10 times more likely to pay for songs than those who don't.8 This research suggests that piracy is certainly not to blame completely for lost music sales; in fact it could actually be thanked for some of the sales that still happen. Michael Giest also states that, in Canada: music downloading is not responsible for the ills of the music industry and Canadian artists have not been harmed by the sales declines that

have occurred over the past five years.9 Although somewhat outdated, Giests point still stands that piracy is not the reason for the decline of record sales. Music Streaming Services - A Step in the Right Direction Music streaming services are an example of how record labels should have adapted to the threat of piracy. Instead, music streaming and retailing online is largely populated by other types of companies. The most significant being Apple, who run the wildly successful iTunes store, but sites like Pandora, Spotify and even YouTube are important players in this new online music streaming industry. There are many reasons that music streaming and retailing online works, mostly stemming from the problems that come with piracy. The threats of computer viruses or malicious files from illegal downloading are one significant part of why consumers may choose to use a legitimate music streaming services. Streaming services offer a guarantee in that the user always knows what they are getting unlike piracy, where: "antipiracy agencies and malicious publishers publish a large amount of fake les to protect copyrighted content and spread malware respectively."10 This uncertainty of the type of files being offered on a site like The Pirate Bay could drive many consumers to legitimate means of requiring their music. Some other reasons for the success of music streaming services include the fear of the law, the want for high quality music, the inability to find certain music on pirate websites, and the simplicity of these services in comparison to downloading music illegally. Music streaming services are, unfortunately for artists and record labels, not the answer to piracy. They are a very attractive alternative for those who have reason to be against illegally downloading music, but they cannot compete with unlimited, free music. They also pose the issue for artists that record labels that hold rights to music still make most of the profit off of music that is hosted on streaming websites, and even in cases where the artist owns the rights,

they get paid very little unless their music gets played hundreds of thousands of times. For example, in an article on TechDirt, one European band called Uniform Motion outlines the exact amount of money they receive from various streaming and hosting websites for their music: With Spotify, well get 0.003 EUR/play [] on iTunes, we will keep 6.28 EUR/album, and through Bandcamp: If you choose to pay 5 EUR, Paypal takes 0.37 EUR, Bandcamp takes 0.75 EUR.11 The obvious choice for artists out of these options would be Bandcamp, or the producer to consumer to method of distribution. The lack of the middle man or the extremely removed role of the middle man allows for bands to make the maximum amount of money from their recorded music sales. From Producer to Consumer The internet allows for direct avenues between producers and consumers, effectively rendering the traditional role of record labels moot. In an article in the New York Times, Brad Stone quotes Radioheads manager Brian Message saying: Artists are at the point where they realize going back to the old model doesnt make any sense [] There is a hunger for a new way of doing things.12 Two major parts of the traditional role of the record label were to work as a distributor as well as a funder for musicians who did not have the resources to create and sell their music on their own. Digital media and the internet have changed how funding and distribution work. Artists now have virtually endless options to distribute their music through their own means or online retailers. Musicians with an existing fan base also have the option to crowd fund their projects instead of lending money from record labels to create their albums. Crowd funding has given artists and consumers more power because they define the exchange of goods rather than labels and retailers. Artists can give consumers incentives to donate money to their cause, in turn giving the consumer not just the album but merchandise, meet-ups with the

band, concert tickets, or anything else a fan of an artist might desire. This method is a win-win for both consumers and producers, because producers get more profit while consumers get lower prices. The pie may have shrunk, but now that the record labels do not have a giant bite out of the pie, both consumers and producers are left with more power over their exchanges and ultimately define how the exchange of music works. Thom Yorke spoke out recently in favour of this producer to consumer model, saying that: We don't need [Spotify] to do it. No artist needs you to do it. We can build the shit ourselves, so fuck off. But because [Spotify is] using old music, because they're using the majors the majors are all over it because they see a way of re-selling all their old stuff for free, make a fortune, and not die.13 Yorkes position is a very significant one because it brings up the issue of major record labels attempting to stay alive through gatekeeping. In order to compensate for their loss of power, they use their copyright holdings to continue to stay afloat. Where is this Going & Next Steps Since record labels have much less power than they have in the past, they must change their approach in order to stay relevant in a marketplace that simply has no room for their traditional role. Record labels have begun to answer to changes in the marketplace and in technology, but they could very well be too late. One role the record label can still play in the recorded music industry today is the connection for small bands to the industry. The can still be the middle man in the sense that they can provide a source of connections to the industry in terms of: distributors, PR people, touring bookers, and more. As far as a band just starting out, just starting to release their own records, yeah, you could do that. You can manufacture your own record and try to get it out there, but unless you're going to like set up distribution, establish connections . . . it's not going to go too far.14 This point is important because it exemplifies the

notion that small bands may still need record labels to guide them into the industry. For bands with existing popularity and fan bases, record labels may be unnecessary, but for small bands, record labels can still fill a very important role. There is also the idea that labels can act as a signifier of what type of music a certain band plays. Todays digital media allows for the widest range of options for consumers in history, but too much choice can have negative connotations: Faced with an infinite number of bands, putting out an infinite number of albums, for an infinite amount of days, it just makes sense to segregate them into some kind of channels, under some kind of heading, which you might as well call "a record label," even if it's one guy working out of his house in the woods.15 From the consumers perspective, it is possible that knowing what types of bands are on a certain record label could be beneficial to discovering new music. For example, the label Rise Records almost exclusively signs metalcore bands, so a fan of that genre can be fairly certain that they will like any music released by a band on Rise. The label is so ubiquitous in the metalcore scene that many have taken to calling the genre of bands on the label RiseCore. This role can also be filled by curators like iTunes genius feature that recommends music based on what a user has in their library. Many music streaming services also offer features that recommend music based on music a user has in their library, such as Rdios recommendations tab. While record labels may be able to fill the role of being an indicator of style or genre, many streaming services or retailers can fill the same role. One paper from 2003 entitled Newly Vulnerable Markets in an Age of Pure Information Products: An Analysis of Online Music and Online News, provides a very interesting insight from the past. The authors offer some suggestions to record labels in light of the proliferation of Napster and piracy: record labels could provide promotional management and production

management services for competitive fees or, [labels] could work with Napster and Gnutella and other online distribution channels to assure (for a fee) that they and their artists receive compensation every time a copy of their work is exchanged.16 This paper is particularly interesting because the authors bring up two very key points ahead of their time. Their first suggestion regarding promotional and production management is a strategy that major record labels today likely should have fully embraced much sooner. Their second point is less viable, but that situation has played out almost exactly according to their suggestion in terms of music streaming services. Power structures are in the hands of consumers and producers because record labels failed to embrace changes in technology. Conclusion A blog on Mind Funk Music accurately describes the general situation that record labels find themselves in today: the four main record companies are too big and too powerful to allow themselves to be buried six feet under by some cheap audio recording software and free social networking sites. So don't think of them as dead or dying but rather undergoing a metamorphosis.17 This is an accurate representation of the situation record labels find themselves in today, and effectively outlines that the biggest record labels still hold power in the recorded music industry. They need to leverage the power they have left and do what they should have done long ago: adapt to changing technology and adjust their business models to take advantage of emerging platforms to make money from recorded music online.

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1 2

Vergne, The Pirate Organization, 11-12. Gronow, The Record Industry, 55. 3 Williamson & Cloonan, Rethinking the Music Industry, 314. 4 Ibid., 314 5 RIAA, Frequently asked questions. 6 Vance, The RIAA Sees the Face of Evil. 7 RIAA, Frequently asked questions. 8 Michaels, Study Finds Pirates 10 Times More Likely to Buy Music. 9 Giest, Piercing the Peer-to-Peer Myths. 10 Cuevas et al., Is Content in BitTorrent Publishing Altruistic, 1. 11 Masnick, How Much Does a Band Make From Various Music Platforms? 12 Stone, Artists Find Backers as Labels Wane. 13 Dredge, Thom Yorke Calls Spotify. 14 Chafin, Record Labels Arent Dying. 15 Ibid. 16 Clemons, Gu, and Lang, Newly Vulnerable Markets, 31. 17 Mind Funk Music, Death of the Major Record Labels.

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Bibliography Chafin, C. Record Labels Arent Dying, Theyre Thriving. Village Voice, September 19, 2013. http://blogs.villagevoice.com/music/2013/09/record_labels_are_thriving.php?page=2 Clemons, E., Gu, D., Lang, K. R. Newly Vulnerable Markets in an Age of Pure Information Products: An Analysis of Online Music and Online News. Journal of Management Information System 19, no. 3 (2003): 17-41. http://faculty.unlv.edu/thatcher/mis748/readings/NewlyVlulnerableMarket sinInfoAge.pdf Cuevas, A., Cuevas, G., Cuevas, R., Kaune, S., Guerrero, C., & Kryczka, M. Is Content Publishing in BitTorrent Altruistic or Profit-Driven? ACM CoNEXT (2010): 1-12. http://conferences.sigcomm.org/co-next/2010/CoNEXT_papers/11-Cuevas.pdf Dredge, S. Thom Yorke Calls Spotify the last desperate fart of a dying corpse. The Guardian, October 7, 2013. http://www.theguardian.com/technology/2013/oct/07/spotify-thom-yorke-dying-corpse Giest, M. Piercing the Peer-to-Peer Myths: An examination of the Canadian experience. First Monday 10, no. 4 (2005). http://firstmonday.org/ojs/index.php/fm/article/view/1217/1137 Gronow, P. The Record Industry: The Growth of a Mass Medium, Popular Music 13 (1983): 53-75. http://www.jstor.org/stable/853094. Masnick, M. How Much Does a Band Make From Various Music Platforms? TechDirt, September 12, 2011. http://www.techdirt.com/blog/casestudies/articles /20110911 /00284415891/how-much-does-band-make-various-music-platforms.shtml Michaels, S. Study Finds Pirates 10 Times More Likely to Buy Music. The Guardian, April 21, 2009. http://www.theguardian.com/music/2009/apr/21/study-finds-pirates-buy-moremusic Mind Funk Music. Death of the Major Record Labels, Myth or Fact? Mind Funk Music, 2013. http://mind-funk-music.com/articles/deathMajorRecordLables.htm RIAA. Frequently asked questions. 2013. http://www.riaa.com/faq.php Stone, B. Artists Find Backers as Labels Wane. The New York Times, July 22, 2009. http://www.nytimes.com/2009/07/22/technology/internet/22music.html?_r=0 Vance, A. The RIAA Sees the Face of Evil, and its a 12-Year-Old Girl. The Register, September 9, 2003. http://www.theregister.co.uk/2003/09/09/the_riaa_sees_the_face/

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Vergne, J.P. The Pirate Organization: Lessons From the Fringes of Capitalism. Boston: Harvard Business School Publishing Corporation, 2013. Williamson, J., & Cloonan, M. Rethinking the Music Industry. Popular Music 26, no. 2 (2007): 305-322. http://www.jstor.org/stable/4500319.