Supporting Artists in a World of Free Distribution of Music

-- By BradleyMullins - 17 Nov 2009

That the music industry is changing is undeniable. As free distribution of music over the internet becomes a practical, if not legal, reality, the current business models of record labels become increasingly challenged. While people continue to debate whether music should be free, there is no dispute that free distribution will have an inevitable impact on artists themselves. Lily Allen, British singer/songwriter/tabloid fixture, was recently thrust into the spotlight after she blogged her view that filesharing was a disaster for the development of new artists. While Allen’s opinion is not universal amongst artists, she does raise two important questions: Can labels continue to support artists without revenue from album sales? Do new artists need labels at all?

The Future of Record Labels

The free distribution of music has undisputedly contributed to the deterioration of record labels, which have been largely dependent on album sales. Between 2007 and 2008, physical album sales fell by 60 million, and increased digital sales accounted for only 22 million of this loss. Artists have historically benefited less directly from album sales. The cautionary tale of TLC serves as a reminder that stellar album sales do not guarantee an artist personal wealth. Under the typical label contract, an artist receives only a 9-15% royalty on album sales. These rates seem especially low for digital sales, as they often include include deductions for packaging and distribution costs – an inclusion that is less justifiable for digital sales rather than physical sales, as the costs of packaging, manufacture, and distribution are effectively zero for digital sales.

Free distribution of music need not signal the apocalypse for record labels. Already recording contracts are being altered to place greater emphasis on alternative revenue streams. The most well-known new model is the “360 contract”, under which labels take a percentage of profit, typically 30%, from all income streams available to the artist. Three sources of revenue are of particular interest: touring, merchandising and licensing.

Yet the move to 360 contracts may present a significant risk to artists. Signing a record deal always requires an artist to balance important considerations – an artist must decide whether the advances, financial backing, and marketing support are worth relinquishing control over his or her artistic product. Before 360 contracts, touring, merchandising and licensing were areas left largely in the artist’s control. Not only did this mean a greater share of profits, but also a greater ability to manage an artist’s own brand. Under a 360 contract, however, artists are required to forsake even this limited control. And control over one’s career should be a concern of every artist, a concern heightened by the potential nuptials between Live Nation, which helped spur the move to 360 contracts through its deal with Madonna, and Ticketmaster, the dominant (if not monopolistic) seller of concert tickets. While there is certainly an appeal to being aligned with the king, any artist should be frightened by a single entity that would largely control concert venues, tour promotion, merchandise production, ticket sales, and, through Live Nation’s parent Clear Channel, radio access.

Artists Without Record Labels

Labels may survive free distribution of music, but that does not mean that they are a necessary component of new artist development as Lily Allen contends. The story of Allen’s own success runs counter to her argument -- her initial popularity was due in large part to her posting of demos on her Myspace account. Perhaps more importantly, new business models continue to provide opportunities for new artists to develop without resorting to the support of record labels, and suffering the resultant relinquishment of control. One such label alternative is the venture capital model represented by Polyphonic. Polyphonic treats new artists like a start-up company, providing an initial investment, typically $300,000, in return for a share of profits. Unlike a record deal, however, artists maintain control over their careers, recording their own music and handling decisions about publicity and touring. Additionally, Polyphonic artists retain ownership of their copyrights and master recordings. Abandoning records labels for alternatives like Polyphonic or self-distribution does represent a risk for artists, particularly the risk associated with forsaking the marketing machine of the major labels or the brand recognition of the more niche labels. This is an area where free distribution of music may actually play an important role in supporting the income of artists that decide against label control. This is especially true as artists recognize the importance of the alternate revenue streams that labels are attempting to envelop through 360 contracts. In 2002, for the top 35 artists as a whole, touring income exceeded income from record sales by a ratio of 7.5 to 1. Licensing is also increasingly significant, as new opportunities, such as licensing music for use in video games, continue to emerge.

When it comes to potentially profitable activities like touring and licensing (as well as related sources of income such as merchandising and endorsement deals), free distribution of music has the potential to actually increase an artist’s income. An essential aspect of convincing people to buy a ticket to a show is making those people familiar with an artist’s music. Promoting the sharing of music amongst friends, or even amongst strangers with similar musical tastes, has the potential of exposing an artist to a much wider population than is possible with restricted distribution. The repeated listenings made possible by transmission of an actual copy of a song rather than just a one-time broadcast may make consumers more likely to develop the familiarity necessary to attend a concert. Additionally, if consumers no longer have to devote resources to the purchase of albums, they may be more likely to spend money to attend a concert.

The Embrace of Free Distribution

It is likely that, in the foreseeable future, labels will remain an available option for developing artists. As new alternatives mature, however, artists should become more cautious about forsaking control of their career, and focus on utilizing free distribution to support alternate revenue streams. As artists are able to retain control over their creations, a greater diversity of new artist may be the actual result.

Bradley, a few thoughts on your paper. Let me start by saying that I'm entirely sympathetic to your argument, but I think there are few weak spots here which could be bolstered a bit.

First, when you say, "It is difficult claim that record sales are a particularly beneficial source of income to most recording artists" you are putting the cart before the horse in a big way. There's a circularity in saying that artists can thrive in a free distribution world because they aren't making money from recordings, when they aren't making money from recordings because of free distribution. All you've done is shown that the old business models aren't working, but you haven't taken the reader any farther in showing that the new model of free distribution will. I happen to agree with your implicit contention that it will, but pointing to the failure of one system isn't a substitute for demonstrating the efficacy of another.

Second, and this is perhaps more literary, I think you're leaning a bit too heavily on Allen/Swift/Knowles in the essay. It's useful as a framing device, but you're making some very serious arguments here that affect an awful lot of people, and of course what really matters, an awful lot of money. Who really cares what Taylor swift has to say about business models? You face too the problem that none of these "artists" are actually in control of the distribution of their own music. They really have no more to say about the choices musical artists face than I do--- that is to say, not a lot.

Third, the section about Knowles is a bit problematic. The future of free distribution of content isn't in the "rebellion" of a pop star typing away on her Twitter. The song was still taken down. Obviously the subtext of this is that the record company can't do anything anyway--- the flow of information can't be stopped--- but I think you've framed this in an ineffective way. You call this section "Letting the Artist Decide", but really Knowles did anything but. Her record company tried to make a choice, but the realities of digital distribution did it for them.

I think you have a lot here, but there are some gaps that make it hard for even your sympathizers to get on board. -- DanaDelger - 18 Nov 2009

Bradley, I also have a few thoughts. First, I think that when advocating for other models than the traditional artist/label model you may want to spend some space, if you can spare it, discussing the current model in more depth. You do spend some time on this in the Unreliability of Album Sales section, but I think it would be useful to discuss why artists are willing to give up control over so much of their careers and music in order to sign the record contract. In my view these reasons include the cash up front advance, access to a influential marketing vehicle, and perhaps even some cognitive dissonance ("even though most albums don't sell well, mine surely will"). There may also be a cultural aspect to it -- many of the music artists I know see a record deal as "making it." I think addressing some of these points would make your discussion of why Polyphonic and other models are attractive to artists more complete and convincing.

Second, I think the debt comment in the same section might be a bit misleading. Yes, some artists take out loans against future sales from their record label, but my understanding is that it is rare. As I understand the standard contracts I have seen, the advance and expenses (dinner will be provided while you record Mr. Elvis) can only be regained by the record label through the application of royalties, and thus are not debt the same way law school loans are debt: if the album doesn't sell well the artist keeps the advance and the record label loses the advance and expenses.

-- JustinColannino - 20 Nov 2009

Dana and Justin,

Thank you both for your comments. I'm currently going through a fairly major revision, and I hope the resultant product will address many of your points. Any additional discussion is of course more than welcome!

-- BradleyMullins - 22 Nov 2009

Bradley,

I just stumbled across this piece, and thought I would share it with you since it relates to this paper.

-- JustinColannino - 01 Dec 2009