The Elimination of the Major Label Model
This comment was left by Ritch Esra, the Publisher of Music Business Registry, on the post 6 Reasons Why The Major Labels Are Still Screwed.
The four major labels have a far more profound problem which is that they can no longer sustain their business model.
Last year, around this time, writer Paul Rogers' published an article in the LA Weekly that discussed the demise of the major label A&R profession.
Here we are a year later, continuing to witness the decimation, if not outright elimination, of the major label model. It's now apparent that, in the face of new economic realities, the model that flourished for years cannot be sustained in its current form. Universal Music Group has already announced cuts for 2011 of over $138-million in a massive restructuring plan even after several rounds of layoffs.
I imagine that one of the first orders of business for Doug Morris, the new CEO of Sony Music, will also be trying to reposition Sony to deal with the new market realities facing the entire music industry that have put both Warner and EMI on the selling block. There are currently TEN interested parties in Warner Music's assets (that also includes several inquiries into Warner/Chappell). At no other time over the last forty years have two major labels been for sale at the same time. The more interesting question rather than who purchases these companies is what will they do with them and what business will they actually be in.
Over the last several years, I've often wondered which major label would be the first to abandon the front-line business altogether (i.e. the signing and marketing of new recording artists that was once the heartbeat of any record label).
There is a belief in the industry that if BMG Rights Management purchases the assets of EMI from Citibank that EMI will no longer function as a 'front-line label', but will be limited to only marketing the existing music assets and catalog. The economic model of what we once knew as the major label system – worldwide infrastructure, large number of highly paid executives, the signing of talent to long and fully encompassing 360-deals, the marketing of their music to the widest possible audience via mainstream media outlets – may no longer make sense.
We now live in a world where none of that can be sustained. Yes, I'm aware of the normal responses that major labels are good for the so-called 'Pop Superstar Acts' of the world such as Lady Gaga, Black Eyed Peas, and Beyoncé, but the reality is that there are simply not enough of these kinds of big sellers today to justify the continuation of the major label model. It's also very important to note that what constitutes success today is counted in singles sales and not album sales (where labels have traditionally made the majority of their money).
It's a sobering statistic to note that despite having five top-five singles including two #1 hit singles, Lady Gaga's album only sold 3.4-million copies in the U.S. The Black Eyed Peas, who also had five top-five singles including three #1 hit singles, only sold 3.6 million copies of their album. What's never spoken of in these situations is, 'What did it cost to sell each one of these +3 million copies?'
Labels used to be able to rely on big-box retailers for sales of albums. Those same big-box retailers have for some time now effectively declared music just another loss leader to get their customers into their stores. When those retailers continue to drive down the price of music to unsustainable margins for the labels, what then? The retailers simply move on to other loss leaders and drop music altogether (we've already seen the shrinking of space retailers have allocated to physical product). Have the labels effectively made albums the loss leader for singles, and will singles simply become the loss leader for touring or merch?
It's like the great line by Jack Nicholson's character in the film "As Good as it Gets" spoken to a room full of patients waiting to see their therapist:
'What if this is as good as it gets?'
The brutal answer staring the major labels in the face is that if this is as good as it gets, then it's simply not enough. There's no more real payoff left for the majors when they hit these massive home-runs — certainly NOT THE KIND of payoff they need to sustain the major label model, which is why they may abandon it.
Good. Majors, by definition, will chose profit > art. Thus (generaelly speaking), anyone who supports these models does not support the art of music. Shawn Fanning’s work has cast many shockwaves across music – the slow death of the majors is one that he should always be proud of. This is not a commentary on those who WORK at majors, just a commentary on the system itself.
I would propose that the majors have already abandoned the economic models everyone speaks of in favor of the pop promotion and exploitation of music acts across all platforms.
What we are seeing is the emergence of the new majors who still have the power and inside track on significant portions of this landscape.
It is naive to count them out of the game entirely.
As a customer, I am really not seeing this very often:
“Labels used to be able to rely on big-box retailers for sales of albums. Those same big-box retailers have for some time now effectively declared music just another loss leader to get their customers into their stores. When those retailers continue to drive down the price of music to unsustainable margins for the labels, what then?”
CDs are still pretty expensive at Big Box stores. Regular price is $13.99, and if you’re lucky a top title will go on sale for $11.99 and some indie type CDs might be $9.99, and those are a minority. I am not seeing prices much lower than that. Also, if you consider Barnes & Noble a Big Box, their prices are obscene – $18.99!! The only place I know that is really cutting prices is Amazon.com (and that’s mp3s, not CDs which vary wildly in price), and I have noticed that they haven’t done a major Daily Deal since the Decemberists’ album in January. The cutting prices strategy seems to have ended, at least for albums I want to buy.
It’s really popular to kick labels and call them dead. But at least few of the Majors will stay in the game and evolve. They have too many smart people inside not to. Though painfully they will survive. Cutting costs is good. As soon as new business models are found (or should I say accepted by the big companies, not only labels but publishing and distribution companies) they will adjust fully and bring size advantage to it.
Or even if they end up ‘dead’ some indy labels will start growing into bigger companies, merge or buy each other and we will have new ‘Majors’ just in the new business model.
The issue with your argument is what they used to charge for CDs. 15.99, 19.99, 24.99, etc. Before the advent of mp3 in the mainstream, demand for physical product was higher, the ability to just buy singles didn’t exist, so you were willing to pay the price of the record to get the tracks you wanted. It still costs about 5.00 to make a CD when you add art costs and packaging and shipping, but they used to make a lot more selling it than they do now. That’s why unit sales were higher than ever last year, but profit still dropped. There needs to be a move made towards less cost/expenditure.
It’s going to be interesting to see exactly where things go and what the role of a record label will transform into in the future. Ultimately, what needs to be understood is that there is no sense trying to fight a technology so disruptive as the internet. Especially considering that the limits to its access are dissolving little by little everyday.
I’ve been saying this for the past couple of months now.
Best comment for months! And you’re absolutely right… We’ll always have majors in somekind of size…
looking at the situation in the smaller countries we’re there already. the grip of majors on distribution is starting to get weaker and weaker. physical retailers are closing down or cut back massively on their music offering, itunes and amazon don’t really give a great deal of attention to smaller territories like Austria (though admittedly it’s getting better)
accordingly employee numbers are tumbling down – back office gets shifted to bigger territories (in the case of Austria to Germany) and affiliates that formerly had around 20 employees now work with around 4 (like EMI in Austria for example).
my guess would be that bigger territories will also have to follow with further massive staff reductions as there’ll be nothing to squeeze out from virtually nonexistent small countries.
Smart guy! 😉 Musicians still need labels to get big because one needs to be business-y type and musician at the same time and only few of them have that talent. Those who don’t can get the balance needed still have to take up on additional team members to help (like my friend did) and form a label. And here it is that word ‘label’ again. People say labels are dead but go and create one for themselves.. the concept is alive and kicking..It’s a fashion now to start your own label…
Cheers man!
I think we will have big ones and then much more middle class labels…
Now, continuing the theme…radio can be real big winner in all of this mess if they react fast…
That’s right. The difference is that you don’t have the overhead and salaries of 5800 people a week to meet. There will be far more of the small indy operation starting up ratjher than the major label model continuing.
Maybe, BUT it might happen so that the Majors will stay and the middle class will consist of Indy labels which will promote artists, get them to a certain level of popularity and then send or loose artists to big labels who then can scale it more.
Well, my comparison is from the recent past. I agree they were ridiculously expensive at the end of the ’90s, which we now know was due to some unethical behavior by record labels, when they colluded to make the prices higher (and buying a single was not an option). But there was a time when one could find some good deals at Target — I picked up an old Whites Stripes CD for $5.99, for example, last summer. But I have noticed in 2011 that they have given up on major cost cutting in order to move units. I am seeing most popular titles selling for $13.99 which is not a bargain at all. I think they have given up on the CD as far as it coming back, and are now going to ride it out at regular prices until they disappear. The prices are not going to go down anymore IMO. They’ll be full price, and then one day they’ll be gone.
I’m not counting them out entirely. I’m just stating that the model that made them MAJORS can no longer sustain itself. The “emergence of the new majors who still have the power and inside track on significant portions of this landscape” as you say have no where near the power, scope or level of dominance that the Majors ONCE had. The main reason is due to the fact that we no longer live in that world. Today, we live in a musical world that dominated by “endless landscape of choice & options” The so-called – “Landscape – ie; major label type acts” as you say in reality is smaller and far less significant in 2011 than in years past. So while I don’t count them out entirely, I DO see their power, dominance and influence significantly reduced.
If you truly believe “at least a few of the Majors will stay in the game and evolve. They have too many smart people inside not to” then I would say you’re not in touch with the realities of the Major Label Business Model. If this IS TRUE – why are 2 of the 4 Major Labels left on the market to be sold. Believe me, if Vivendi (parent owner of Universal Music) COULD find a buyer for it, they would have already sold it. Actually, I strongly disagree with your assesment that “they have too many smart people not to stay in the game” This is one of the sad realities of the last decade that is very rarely spoken of; THE BRAIN DRAIN THAT HAS OCCURED IN THIS BUSINESS” is profound. Too many bright, smart, passionate and intellegent executives have already left the business. I’m not convinced that the complex problems facing the music industry CAN be solved by those who remain in it – especially those at the TOP. When you see these Major Labels in the 21st century CONTINUING to exchange the same CEO’s that have been running things for the last 30 years then you have to ask “How committed are they to ANYTHING BUT THEIR OWN SURVIVAL?