Monday, January 04, 2010

The Crash of the Record Labels in the Digital Age

If you have any questions on why the major record labels are faltering, read Appetite for Self-Destruction: The Spectacular Crash Of The Recording Industry in the Digital Age. It’s well organized, well researched and well written. It’s a page-turner! It’s not a lament about piracy killing the business. In fact, the author, Steve Knopper (a contributing editor for Rolling Stone) barely uses that as a reason for the destruction. He confirms what hit me in the mid 1990’s: the major labels were always about 3 years behind technology, which probably increased to about 8 years behind as the 1990’s became the 2000’s. The unwillingness or arrogance to embrace anything outside their business model (which is rooted in the 1950’s) has led to the downfall.

The book traces the labels troubles beginning in 1979, which is about the time I started to get my feet wet in the music business. Disco was selling. People seemed to love it and the lifestyle or hate it. Steve Dahl, a DJ from Chicago lived the Disco Sucks credo. With the help of Mike Veeck, son of the White Sox owner, he organized a death to disco promotion at Comiskey Park. Anyone bringing a disco album to the game on July 12, 1979, got into the park for 98 cents. 59.000 fans showed up for the game. Crates of disco records were “blowed up real good” in the words of Dahl, fans rushed onto the field. This ignited the fire that would kill disco. Here’s the shocking news of what that meant to major labels: Sales plummeted by almost 11 percent in 1979 after 10 years of growth. Casablanca Records (Donna Summer and Kiss) founded by the big spending, lavish lifestyle lover Neil Bogart, was probably the biggest casualty. PolyGram purchased half of Casablanca for $10 million in 1977. As seems to be common practice, a label pays high and comes in on the end of a trend. Labels seem to think the wave will never crash to the shore. Besides out of control spending, Casablanca had no problem shipping way more product to stores than was needed. Of course unsold product got shipped back to the label. In 1978, fueled by the success of the Saturday Night Fever soundtrack, the recorded music industry brought in $4.1 billion in sales. The anti-disco trend sent the business into a tailspin from 1979-1982. PolyGram spent years cleaning up a $30 million Casablanca mess. CBS Records laid off 2000 employees.

In 1982 Michael Jackson released Thriller. It can be argued that he single handedly saved the business. Walter Yetnikoff described by one as “the bearded, Yiddish, smack-talking dervish” was chairman of CBS. Knopper beautifully weaves the story of Yetnikoff into the advent of MTV, which issued a new round of life support for the business, even though MTV would wind up reaping huge benefits, while getting the labels to pay for their programming. Labels covered expenses (which were billed back to the artists) for the making of the videos and provided them and access to their artists for no fees. It was considered “for promotional purposes”. They were giving away free content. Something the labels haven’t grasped when it comes to file sharing.

The advent of the Compact Disc is a fascinating tale. Knopper takes it from its infancy as James Russell experiments with the technology behind the CD in 1965 to convincing the major labels (as well as recording engineers) that the CD would be as a new source for selling music. In 1981 it took Marc Finer (product communications manager) of Sony to play a CD of Billy Joel’s Honesty to label heads to break the wall of resistance to the CD. Those running the labels finally “got it”. Now there was a way to charge more for an album and charge back higher production costs to the artists for this new technology, therefore garnering higher profits for the label. Production costs quickly lessened for the labels, but this was never reflected in artists’ bottom lines. For this chapter alone, it’s worth reading the book.

Throughout Appetite, there is a six part series outlining “Big Music’s Big Mistakes”. They run the gamut from The CD Longbox to Independent Radio Promotion to the final blow, Sony BMG’s Rootkit.

As they say history repeats itself and it’s never more evident in this book. The teen pop bubble is another trend the industry thought wouldn’t end. Napster is the new technology that is ignored. It took an outsider to make digital music sales work: Steve Jobs and Apple get it right with the iPod and iTunes, once again taking a huge chunk of profit out of the labels (and artists) hands.

Knopper considers the future. Artists are now taking their careers in their own hands and it's working, ie Radiohead, Nine Inch Nails. Noted that they did have the benefit of a label to launch their career. Subscription services would probably be the most lucrative for the labels if they want to hang on. 360 deals are examined. The label that makes this deal receives a percentage of all the artists income for an advance and a record deal. The point that is overlooked in these deals is that the label is not equipped to handle the other aspects of the artists’ career to warrant that extra money. They are not in the touring, management or merchandise business. Companies like Live Nation are signing artists such as Madonna and Shakira to these contracts and are revamping their staff to handle such things as product endorsement pitches. I don’t think anyone knows the fate of the labels, but as Knopper points out repeatedly in the book, unless they are willing to move into the 21st Century, this could be the beginning of the end of record labels as we’ve known them.

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