To Evolve or Not To Evolve, That Is The Question!

It should come as a shock to no one that traditional music labels are hurting due to decreasing album sales, though the industry is not as “dead” (SEE RECENT MUSIC THINK TANK ARTICLE). For new & existing labels looking to prosper, one area of focus should be on the creation of new verticals for the artist (& their brand) and understanding how to monetize things other than music sales. With album sales being depresed from historic highs, we advise artists to look to diversify their cash flows.  For most artists, live performances and touring account for the majority of their revenues. Back in the days of strong album sales and consistent format innovations, the major labels were willing to take a small artist/brand and dump tons of money into heavy marketing campaigns and artist development because they knew they would make it back with album sales. On top of that, the touring market was less saturated, which generated a higher demand for premium concerting experiences, creating greater revenue opportunities for all parties involved.

Today, labels typically look for artists with established market drivers, and are slower to invest into artist development. In their typical investment analysis, they are looking for low risk, high upside investment opportunities. In many cases, the focus becomes less about the art and more about the commercialization of the artist. Independent labels have, however, filled some of these gaps, and more artists are realizing the benefits of independence in the modern music era. The larger traditional labels have played a significant role in the growth of indie labels by entering into “partnerships” where they contribute financial support in exchange for securing an interest in projects that indie labels and the artists themselves have contributed blood, sweat, tears, and money to develop from early stages.

As social networking options continue to expand globally, traditional label control of the distribution function has been lessened. As an example, platforms such as Facebook have become increasingly driven by e-commerce, as evidenced clearly in their recent S-1 pre-IPO filing with the SEC.  As part of the filing, the soon to be public company had this to say about creating reach for marketers:

Reach. Facebook offers the ability to reach a vast consumer audience of over 800 million MAUs with a single advertising purchase. For example, a movie studio seeking to increase awareness of an upcoming film release can reach a broad audience of Facebook users on the day or week before the film’s opening. By advertising the release of Transformers: Dark of the Moon on Facebook, Paramount Studios reached 65 million users in the United States in a single day.

Facebook is also creating opportunities for developers on the Facebook Platform as well, which will undoubtedly play a role in user interfacing and content consumption.

The Facebook Platform is a set of development tools and application programming interfaces (APIs) that enables developers to easily integrate with Facebook to create social apps and websites and to reach our 845 million users. Platform developers build experiences that allow our users to connect and share with friends while engaging in activities such as playing games, listening to music, watching movies, reading news articles, discovering new recipes, and exploring new running routes. Platform developers range from a student on his or her computer at home to teams of programmers at leading websites. More than seven million apps and websites were integrated with Facebook as of December 31, 2011. We are focused on the growth and success of Platform developers in creating compelling user experiences by enabling:

• Personalized and Social Experiences. We enable Platform developers to create better products that are personalized and social and that offer new ways for our users to engage with friends and share experiences across the web and on mobile devices. For example, a Facebook user can visit the Pandora website and immediately begin listening to a personalized radio station that is customized based on the bands the user Likes on Facebook. As another example, a Facebook user can visit The New York Times website and see which articles have been recommended by friends. Our Platform developers can only access information that our users agree to share with them.

• Social Distribution. We enable Platform developers to reach our global user base and use our social distribution channels to increase traffic to their apps and websites. For example, users can invite their Facebook friends to play a game or see when their friends have achieved a new high score.

• Payments. We provide an online payments infrastructure that enables Platform developers to receive payments from our users in an easy-to-use, secure, and trusted environment. In 2011, our Platform developers received more than $1.4 billion from transactions enabled by our Payments infrastructure.

The evolution of social media and e-commerce has significant implications for everyone, including major & independent labels, distributors, producers, and artists.   With access becoming more and more direct, traditional contracts and agreements are quickly becoming outdated and inappropriate.  The focus should increasingly be shifted to active management and utilization of these outlets.  Simply put, the days of getting paid just for showing up are coming to an end for most labels and distributors.

Generally, the brands with the largest marketing budgets tend to make the most impact. We remember a time when no one knew what Hulu was… then a well funded advertising blitz (including a Super Bowl spot) and coordinated development plan changed all that.  The money (and man hours) dedicated to that push made them one of the largest video streaming companies in the world.

Interesting Side Note: According to Nielsen Soundscan, acts that perform at halftime during the Superbowl get an average sale bump of 555%. Artist with the largest marketing budgets, the ones that can afford radio play, PR, and other marketing tools, generate the most revenue.

A common mis-conception is that artists are in the business of selling music. In reality, artists are in the business of creating & exhibiting art. This is true their free & paid releases, video content, web pages, & performances.  Developing their relevance and following is key to reaching a level of financial sustainability.  The process overall takes time, money, talent, passion, management, communication, creativity, and integrity.

Labels have traditionally front-loaded projects with the goal of making back their investment in the first weeks after release from sales.  For artists selling 10s or 100s of thousands of copies, this model still can work, for now. However, as content consumption technology and user interfacing continues to evolve, it’s likely that free or subscription based consumption will become more widespread.  Artists looking to make a living with their craft should focus on developing brand awareness through live performances and active touring when possible, while labels need to rethink how and when they spend marketing dollars to promote a record or artist.  Young Money Cash Money is one of the most successful labels around today in terms of overall exposure, commerical sales, radio play, and overall relevance.  Some of their success can be attributed to how they market, cross promote between their artists, and where they commit their time and resources. Not only do they have significant marketing budgets for radio promotion, they also actively create new products and market them to their collective fan base. Whether it is a Young Money pre paid Discover^® credit card, a new release, or a branded clothing line, everyone in the label actively uses their brands to cross promote each other.

It is a unique time in the entertainment business because people are still unsure as to what the next steps are. The digital landscape is ever changing, and streaming models threaten current digital music consumption formats. Companies like Spotify, Rhapsody, MOG, and Pandora continued to expand in 2011, and will likely continue to do so this year. Ingrooves CEO Robb McDaniels was recently quoted as saying by the time CDs are the size of the vinyl market, streaming will have likely replaced the download as the favored digital consumption option. Music fans want their music on demand and mobile, and streaming seems to provide this for them. Understanding that streaming models pay micro-cents on the dollar to artist, everyone needs to understand the long-term nature of investment.