Technology’s Disruption of Record Labels and the Market for Recorded Music

The development and implementation of new technologies has had a profound effect on music, changing the industry in ways that would have been unimaginable before the turn of the millennium. Like in all industries, the business of music is cyclic and trends seem to suggest that the industry is beginning to enter a period of growth and could reach a period of prosperity within ten years. This growth will be driven by technological innovations that make the music industry more efficient, and I predict that these innovations will be result of large technology companies disruption and replacement of record labels by acting like record labels who discover, record, and promote artists and produce original music content.

Current Status of Record Labels and the Market for Recorded Music

The industry for recorded music has been in decline for over fifteen years. A number of factors including technological disputation and piracy have lead to a decline in revenue; however, recent trends suggest the the industry is poised for growth. A study of the industry over the last 30 years can help to make predictions about the next ten years and beyond.

Russian economist Nikolai Kondratiev suggested that industries expand and contract in cycles lasting about about 40 to 60 years. These cycles, which have come to be known as Kondratiev waves or K waves, are driven by technological advancements that increase efficiency within an industry resulting in economic growth. There are four periods in the cycle (which are often illustrated with a comparison to the four seasons):

A flourishing industry at its peak is in a period of prosperity, which continues until a lack of new innovation limits efficiency and ushers in a period of recession. But then, when new disruptive technology enters the marketplace and destabilizes the traditional methods of doing business the industry enters a period of depression while the marketplace adapts to these changes. Finally, successful adaption to the new technology results in increased efficiency in the marketplace, bringing a period of growth.

Since the release of the first compact disc in 1982, the K wave models the recorded music industry quite accurately, with the total cycle lasting just under 40 years and periods lasting about 10 years or slightly less. In 1982 total revenue from recorded music in the United States was approximately $8.9 billion (adjusted to 2015 dollars), marking the beginning of the period of growth brought about by the CD, lasting until about 1990 when total US recorded music revenue reached approximately $13.2 billion. The recorded music industry then enjoyed a period of prosperity until 1999, its most profitable year, when total US recorded music revenue peaked at approximately $20.2 billion. This was followed by a period of recession that was brought about by a set of disruptive technologies — the internet and digital music formats — that enabled the rise of piracy on illegal sites that allowed users to download music for free. The most famous of these, Napster, was released in 1999 and had an immediate effect on the music industry, causing a decline in music sale the very next year. Easy access to pirate sites plunged music sales as consumers refused to pay for music, and it was this change in consumer culture that lead to the creation of streaming services — platforms that provide a legal method for users to listen to music while paying rights holders through advertising revenue. By 2008 the total US recorded music revenue dropped to approximately $9.6 billion. The industry badly needed a legal alternative to piracy, and it was at this time that Spotify, the United States’ most popular streaming platform, was released, with Vevo, the record label funded music video streaming service, coming shortly after. This marked the end of the recession period, as these innovative platforms showed promise to reinvigorate the music industry; however, like all new technology it took time to adapt to the marketplace. This time between 2008 and 2015, when the total US recorded music revenue reached its lowest point at approximately $6.9 billion, marked the depression period. However, streaming platforms grew more and more each year and by 2016, the total US recorded music revenue reached approximately $7 billion, showing its first growth in nearly two decades. This trend suggests that the industry is entering its next period of growth. Streaming services have made music more accessible than ever before, and although streaming music does not pay rights holders as much as CD sales, users are consuming music more through streaming, thus the difference may be regained by sheer volume. This data for the United States barely scratches the surface of the possibilities for the global market, where highly populated develping areas like China and India could cause an explosion in streaming music consumption and revenue when they begin to adapt platforms like Spotify. Like previous periods in the K wave, I expect this period of growth the last 10 years if not slightly shorter do to the increasing speed of technological development. By the mid 2020’s the music industry could be poised for a period of prosperity, and I predict that large technology companies will enter the music industry during the current growth period and be controlling much of the content by the prosperity period.[1]

A lack of up-to-date laws is a major factor holding back revenue growth. The primary laws governing digital copyright are the United States is the Digital Millennium Copyright Act, passed in 1998. So much in the music industry and the internet has changed since then, and the DMCA was not prepared to handle the scope of interest piracy, which is one of the (if not the single) most important factors that lead to a decrease in revenue and in turn forced the rise of lesser revenue sources like streaming platforms. If a stronger, broader set of laws were in place (both in the United States and the rest of the world) it is unlikely piracy would have had as big and impact as it did on record sales.

The industry would benefit from a more efficient record label business structure. Labels have suffered from a lack of record sales, while other areas of the industry, like touring, have grown. Before the invention of Napster there were six major record labels — now there are three. Labels have had to compensate by putting more financial pressure on the artists, offering more “360” deals that earn a percentage of all revenue streams instead of traditional deals that only earn a percentage of record sales. Now is the time that a new type of record label could disrupt the industry.

Prediction of the New Trend

Technology companies will replace record labels as a means of artist discovery, recording, and promotion — they will become leaders in producing original music content.

Large technology companies have already begun to control areas of the music industry by functioning as the distributors. Without producing their own content, companies like Amazon, Google, Apple, and Spotify make significant revenue simply because they have become trusted retailers where consumers shop for music. Most record labels (including industry giants like Capitol and Columbia) do not retail their artists’ music directly through their own websites but instead have links to retailers who make a percentage from their sales, like Amazon (15% commission), iTunes (30% commission), and Google Play (30% commission). Record labels missed the opportunity to create their own retail platforms before services like iTunes became ubiquitous, and even when the labels anticipated changes in the market technology companies were still able to outsell them. This is illustrated by the success of Vevo, a music video streaming platform created and managed by the Big 3 record labels (Universal, Warner, Sony), that only became popular when the labels reached an agreement to stream their videos through YouTube. Vevo’s website currently stands at Alexa rank 6128 while YouTube is 2.

More recently these technology companies have shown signs of moving toward content creation to compliment their distribution platforms. The success of technology companys’ original video content (like Netflix originals House of Cards and Orange is the New Black) suggests that the same could be done with original music content. After all, there’s no difference in the quality or a TV show or song whether its produced by a media company or a technology company — they are still drawing from the same pool of actors and directors or musicians and engineers. The final product is the same, the only difference is who pays for it. A company like Youtube, Apple, Spotify, or even Facebook has all of the resources available to discover, record, promote and in general create original content through their own artists in the same way a record label does, and all have taken steps that might suggest they are heading in this direction:

Google / YouTube

Google invests in 300 record label —Google invested $5 million into the formation of Lyor Cohen’s experimental record label, 300. While this is not the same as Google launching it’s own record label, it still indicates the company’s interest in content creation and ownership in music. The label has been described as ‘a music content company devoted to the discovery and development of the artists of the future” with the goal to “create an innovative artist development structure with greater flexibility and lower overheads to challenge the majors.” Google could be using their relationship with 300 to gain an inside perspective on record labels.[2]

Youtube names Lyor Cohen as Head of Global Music — After investing in his record label, Google hired Cohen to be the Head of Music at YouTube. He has been one of the most influential music executives in the last 30 years and brings a wealth of music industry experience to the technology company, having served as an artist manager at Russell Simmons’ Rush Artist Management (Run-DMC, Beastie Boys), President of Def Jam and consolidated Island Def Jam Music Group, CEO of recorded music at Warner Music Group, and Founder and CEO of 300 record label. As Head of Global Music he has expressed three main goals: To help the music community embrace technological shifts, tor break new songs and artists through YouTube’s distribution platform, and tor work toward a more collaborative relationship between the music industry and the technology industry.[3]

Google invests in Kobalt Music Group — Google Ventures, the company’s venture capital firm, has (along with Michael Dell) invested $60 million in Kobalt, a music publishing company that specializes in royalty collection. Kobalt excels at collecting on digital platforms and is a leader in its field, claiming that it is “collecting royalties two to three years faster with a 30% higher cash return on average than traditional collection methods.” Perhaps Google will use Kobalt to manage publishing issues on YouTube or is preparing to managing publishing for original content. Additionally, Kobalt offers ‘label services’ to independent artists — a feature that Google could use to develop ‘label services’ of their own.[4]

YouTube Creates “YouTube For Artists” Data Resource —YouTube created a data resource called “YouTube For Artists”, designed to provide musicians with analytics about users engagement with their music. As the world’s largest streaming service the amount of information available to YouTube is unprecedented, giving the company resources to excel at artist discovery with a potential unparalleled by any record label should they choose to produce original content.[5]

YouTube Red Set to Release an Origin Christmas Special — YouTube Red, the company’s paid subscription service, is set to release an original Christmas special featuring music by superstars such as Mariah Carey, DJ Khaled and Fifth Harmony later in December. Though this show would be considered original video content, it will contain original music from each of the artists recorded specifically for the show.[6]

Google and Youtube have an enormous amount of resources across a number of music industry areas. Investment in 300 represents engagement in record labels, investment in Kobalt represents engagement in publishing and rights management, YouTube represents a wealth of analytics and data as well as the world’s most popular music and music video distribution platform, and Lyor Cohen is the executive to tie it all together. Should Google or YouTube decide to produce original music they could discover, record, distribute, and publish with greater efficiency and scale than any other record label.

Apple

Apple Forms Partnership With Drake — Drake signed a $19 million deal with Apple to endorse their brand in a variety of ways. He served as an spokesman at Apple’s Worldwide Developers Conference when the company unveiled Apple Music, aired radio shows on Apple Music’s Beats 1 radio station, used his music in several Apple advertisements, and distributed his 2016 album ‘Views’ exclusively through Apple Music and iTunes for a period after its release, going on to sell over 600,000 copies in its first week. Additionally, the company is believed to have funded the music video for his single ‘One Dance’ off his album ‘Views’ which is still officially unavailable on rival Google owned YouTube.[7]

Apple Forms Partnership With Cash Money Records — After signing exclusive deals with individual artists, Apple has partnered with an entire record label, Cash Money Records. With artists like Lil Wayne, Birdman, Nicki Minaj, and Drake, Cash Money is one of the most prominent labels in the world and will release exclusive content through Apple Music and iTunes.[8]

Apple Music Builds Artist Relationships — Apple has sought to work favorably with artists in order to oppose criticisms that streaming services and musicians don’t get along. While Spotify has been criticized for its lack of royalty payments, perhaps most famously by Taylor Swift when she chose to remove her catalogue from the platform altogether, Apple has partnered with Swift to has released her ‘1989′ album on Apple Music and was feature its release on iTunes. They have also hired a number of record label and music industry executives including Jimmy Iovine to build their relationships with artists the way a record label would.[9]

Apple Hires Original Content Producer — Apple has posted job listings seeking candidates who come from “a senior level entertainment and media background” to “devise, develop and project manage a diverse and multi faceted original content and live projects program for Apple Music, iTunes and the App Store.” This listing suggests direct involvement in creating original content.[10]

Apple has begun work toward creating original music, but what makes them most like a record label is their exclusive content. Apple is revered for their name value across all of their products, and this is no different for they’re involvement in music. Apple has partnered with artists for exclusive releases that have publicly denounced other streaming services. The next step from releasing exclusive content is acquiring and owning that content — directly signing artists and their catalogues. If instead of exclusively releasing the next Drake, Frank Ocean, or DJ Khaled album Apple signed the artists, they would quickly become one of the most powerful labels in the world.

Spotify

Spotify Releases Original content — Spotify has begun producing original content through two programs: Spotify Singles and Spotify Live. ‘Singles’ features artists (both prominent and unknown) who record two songs, an originals and a cover, that are recorded at a Spotify-owned recording studio in New York City and released exclusively on Spotify. For example, the first edition of Singles featured Esperanza Spalding’s original, “Unconditional Love,” and her version of David Bowie’s “If You Can See Me.” Additionally, some recordings in the series will also feature in-studio videos. ‘Live’ features artists playing live in-studio shows.[11][12]

Spotify is the closest of the three to functioning like a record label. They have a wealth of analytic data that can be used in artist discovery, including weekly playlists that feature viral songs and musicians. They have the means to record music, either through their own recording studio or by funding an artist’s album. They have one of the most popular distribution platforms in the world. Because they already have a program that releases original music, I would argue that Spotify already is a record label nested inside a streaming service.

Scenario and Prescription for the New Trend

If this prediction were to prove to be accurate, the Big 3 record labels (Universial, Warner, Sony) would be replaced by a new group of digital technology labels, including Google / YouTube, Apple, Spotify, and perhaps Amazon and Facebook. These new labels would be more efficient and able to adapt more rapidly to the changing marketplace. The entrepreneurial, risk-taking mindset of these companies would give them more opportunity for growth and longevity than the antiquated record label models of the past.

If record labels are to stay relevant they must take steps to increase their efficiency and scalability in order to compete with the larger technology companies. Labels may find success by diversifying their revenue streams and branching out into other areas of music. Though revenues from recorded music are shrinking, areas like touring, publishing, and licensing are growing. Recently, labels have offered more “360” deals, which monetizes alternate revenue streams; however, it puts more financial strain on their artists and has been met with criticism. Combining their label responsibilities with management responsibilities could be one way to broaden their influence and create a more vertically integrated environment for their artists. Recently several high profile management companies have merged with companies in other areas of the music industry. These mergers include Azoff Madison Square Garden Entertainment — a joint venture between Irving Azoff’s management company and the venues controlled by Madison Square Garden — and Artist Nation’s acquisition of Paul McGinnis’s Principle Management (U2) and Guy Oseary’s Maverick management company (Madonna).[13] A label / management merger could provide stability for both and more options for their artists. Labels must also be willing to embrace technology innovations that can help them increase efficiency. Though their chance at developing distribution platforms has passed them by, labels still may have a chance to use analytics in artist discovery and promotion. Researchers at the University of Antwerp successfully created an algorithm that was able to predict which songs would land on the dance chart’s top 10 with relative accuracy.[14] Of course there is no formula that determines what song will be a hit, if record labels were able to use technology like this algorithm to determine which artists show promise or which songs have potential in which areas they could allocate resources much more efficiently. Labels could decide what songs and artists are worth putting effort into and which are not. This would surely increase their efficiency and could even allow for a restructuring in artist contracts. Instead of 360 deals or even the standard 85% / 15% split, labels could offer artists more favorable contracts and still stand to make more profit.

Regardless of these considerations, predictions are uncertain. Any number of factors could change and shift the industry in a way that allows current record labels to flourish. If the decline in revenue in the recorded music industry is a result of consumer’s lack of desire to pay for music, and consumers’ lack of desire to pay for music is a result of the easy access to free music through piracy, perhaps eliminating piracy could restore the industry to it’s pre-2000’s prosperity. Experts suggest that new laws governing copyright and intellectual property could become more powerful and widespread around the United States and the rest of the world in the near future.[15] The previous set of laws that were unable to limit the effects of piracy could be replaced by enforceable laws that would facilitate its decline faster than its rise, and new technology could better allow these laws to be enforced. Blockchain, an innovation that attaches a secure ledger allowing digital files to be traced, is the technology behind Bitcoin and is trusted for other transactions like the recording of medical records and personal identification. Someday it, or a similar method of tracking, could be used to securely track and transfer files between legal distributors and recipients. Even now a startup called Dot Blockchain Music is developing a secure method of transferring music files.[16]

Additionally, research companies like IBIS World have predicted that over the next five years revenue in the recorded music industry will not grow, like in the K wave model, but rather will plateau if not decrease slightly. They have predicted that major record labels will only earn approximately $5 billion in 2021 while independent record labels will only earn approximately $291 million.[17][18]

market for major label recorded music sales

market for independent label recorded music sales

It is impossible to know for certain what record labels and the recorded music industry will look like in five years, ten years, or beyond; however, trends suggest that the industry is poised for a period of extended growth, and large technology companies possess the resources to replace record labels and become the major players in content creation. Unless certain factors like legislation and technology work together to restore the industry to its pre-piracy prosperity, labels must work quickly to either imitate or associate with with the technology giants.

References
  1. https://www.riaa.com/u-s-sales-database/
  2. http://evolver.fm/2014/01/07/google-backed-300-hopes-to-reinvent-the-record-label/
  3. http://www.billboard.com/articles/business/7525695/lyor-cohen-named-youtube-global-head-of-music
  4. http://www.latimes.com/business/technology/la-fi-tn-music-royalty-hunter-kobalt-wins-google-ventures-funding-20150226-story.html
  5. http://www.billboard.com/articles/business/6502290/youtube-debuts-youtube-for-artists-data-resource-for-music-creators
  6. http://www.billboard.com/articles/columns/hip-hop/7603864/mariah-carey-dj-khaled-fifth-harmony-youtube-christmas-special
  7. http://fortune.com/2016/05/09/drake-apple-music/
  8. http://www.musicbusinessworldwide.com/apple-music-signs-game-changing-label-deal-cash-money-records/
  9. https://techcrunch.com/2015/02/08/exclusive-streaming/
  10. http://appleinsider.com/articles/15/11/02/apple-hiring-manager-for-original-live-content-linked-to-apple-music-itunes
  11. http://www.forbes.com/sites/hughmcintyre/2016/11/30/spotify-is-investing-in-original-musical-content-with-new-programs-singles-and-live/#3de26b4d3ab0
  12. https://www.cnet.com/news/spotify-singles-original-content-recordings-playlist-sessions/
  13. http://www.forbes.com/sites/bobbyowsinski/2013/11/15/how-music-management-rollups-could-affect-music-techs-future/#50fe2e17639d
  14. http://www.forbes.com/sites/bernardmarr/2015/12/23/big-data-taylor-swift-and-the-future-of-the-music-industry/#464562051009
  15. http://blog.sonicbids.com/what-will-the-music-business-look-like-in-2020-5-predictions-from-industry-insiders
  16. http://www.hypebot.com/hypebot/2016/11/what-4-music-startups-reveal-about-the-future-of-music.html
  17. http://clients1.ibisworld.com/reports/us/industry/keystatistics.aspx?entid=1252
  18. http://clients1.ibisworld.com/reports/us/industry/keystatistics.aspx?entid=1251