Democratisation of the Music Industry, Vol. 2: Music Business Infrastructure

by Sheldon Rocha Leal

Recently I’ve been exposed to various articles in which the authors decry the move from physical sales to streaming. In these articles, it is claimed that recording artists/songwriters made more money when physical sales were prevalent as opposed to the virtual consumption of music experienced today. Whilst there is merit to these allegations, I don’t believe that they are entirely true or warranted and I’ll explain my beliefs as this article progresses.

In the 1950s with the rise of Rock ‘n Roll and the beginning of the Rock era, certain structures were established to facilitate the proliferation of the genre. These structures dominated the music industry for over 60 years and dictated the way in which all business was conducted. Recording companies, collection societies, publishing companies, recording studios, marketing and public relations companies all worked in tandem to create the ultimate music brand/product.

Although these structures helped create jobs for many musicians and other individuals, it further helped establish the careers of many stars. The downside was that the system established to generate these stars became a monopoly, tantamount to a music dictatorship. At its infancy the recording industry was controlled by a group of major recording companies that dictated who would be signed, when and how the content would be released and how it would look and feel. Everything from publishing to touring was controlled by the major recording labels. If an artist preferred not to be part of the machinery of the major labels, they could opt for an “Indie” release, but these did not generally attain the same levels of success experienced by their major counterparts. Moreover, occasionally a major artist would emerge from an Indie and inevitably these Indies would be acquired by the majors.

These were the Top 6 major record labels in the world at the height of the success of the music business

These acquisitions resulted in the establishment of super major’s that not only controlled the music industry in the USA, but around the world. These companies controlled publishing, recording, live touring, artist management, cinemas and even merchandising. They employ(ed) teams of lawyers (amongst other individuals), leaving artists at a disadvantage, as attempting to approach any of these lawyers may result in a conflict of interest. Between 1988–1999 at the apex of the power of the record industry, 6 record labels controlled the world of music: EMI, Sony, Warner Bros., PolyGram, BMG and Universal.

In the heyday of the music business young and up-and-coming talent courted record companies because these organizations possessed the money/resources to record, distribute and promote albums. The cost of hiring recording studios, paying musicians, creating a record, paying for compulsory licenses and compiling a finished product was prohibitive. This, therefore, meant that any musician wanting to create and release a record needed to either have major cash reserves or a recording contract with a major or an indie.

Contrary to popular belief, however, there’s no such thing as a “free lunch” in the music business. The record companies felt, and rightly so, that if they were taking the bulk of the financial risk, then they should take the majority of the financial gain. This, therefore, made many artists unhappy as they felt they would never benefit financially from their intellectual property, which is valid. That aside, many artists consistently fell for the trap, believing the apex of the business was the recording contract, which would culminate in fame and fortune, not taking into consideration the financial drawbacks.

These three albums were all hugely successful but the artists didn’t make money from the sale of their music.

The way things worked was that an artist would only start making money, off a studio album, once they recouped the costs of creating it, which included recording costs, the hiring of musicians and any related advances. The list went on and on and some musicians never made any money from the albums they released. The way deals were structured and recording label’s opaque accounting practices meant that many artists never broke even on a project and, therefore, relied on other forms of income to make a living.

Rodriguez infamously never made any money from his debut album “Cold Fact” (1970) even though it was a major hit in Australia, UK and South Africa. TLC and Toni Braxton, both LaFace artists, declared bankruptcy at the height of their careers, between 1994–1996. Whilst their albums “CrazySexyCool” (TLC) and “Secrets” (Toni Braxton) shipped a respective 14 and 15million units internationally, LaFace claimed that their advances exceeded their album earnings. The industry was confused: if an artist could not break even on an album that was a certified international mega hit, then who could make money off studio albums?

In order to understand the bankruptcy of the above artists one needs to understand the accounting behind these royalties. Firstly artists would make a royalty of between 8%-20% of SRLP (Suggested Retail List Price) or PPD (Published Price to Dealer), but only once any costs incurred on their side were recouped from record sales. The bigger the star the higher their royalty, so as can be gauged by the latter quoted percentages, the lion’s share of the royalties went to the recording companies, not the artist. Furthermore, the numbers may seem big, but they really weren’t.

Michael Jackson and his “Thriller” project shipped over 100million records in the world. The album is the biggest selling album of all time and the 7 out of 9 singles releases from the album shipped an additional 36million units.

Hypothetically, a hit like “Thriller”, which shipped over 60million units worldwide, would have brought Michael Jackson $156million if his royalty was 20% (the highest percentage) and the record price was $13 each. But royalties are based on SRLP/PPD and Michael’s royalty was probably not yet 20% (superstar rate) at the time of “Thriller’s” release, because prior to the release of the album he had still not attained superstar status. But for the sake of this example let’s stick to the 20%. Before an artist earned a royalty they needed to recuperate any costs/advances incurred during the making of the album and were also subjected to a barrage of deductions. These customary deductions included, but were not limited to: Reserves (40% of SRLP); Breakages (10% SRLP); Packaging (20% of SRLP) and Giveaways (15% of SRLP). This, therefore, means that out of the $156million Michael could have made he probably made about $23million, after deductions and that’s only because the album was a smash hit. But if we base his royalty on SRLP and let’s say that was about $10 then the picture is slightly different and he would have only earned about $18million, yet the album earned Sony about $700million before deductions.

But what do the above deductions mean?

1. Reserves: amounts set aside to counteract returns. If no albums were returned this reserve was liquidated.
2. Breakages: an amount set aside to counteract any returns of damaged goods.
3. Packaging: record companies felt artists should not benefit materially from the inflated price of the finished product as a result of any additions to the price of the product. The cost of artwork and packaging were, therefore, removed from the royalty.
4. Giveaways: all albums given away for promotional purposes were deducted from the artists royalty.

Napster triggered a much needed music revolution and Apple’s Steve Jobs took up the challenge by starting iTunes.

Therefore, to put this into perspective, if a 10 song album is $10 SRLP, after deductions there is only $1,50 left, out of which the artist only gets $0.15 per album if their royalty is 10%, which means that the royalty per song would be about $0.015. On top of that recording companies levied many other expenses against artist’s accounts and weren’t consistent in their accounting, which meant that many low level artists never made money from their records. This made many creators very unhappy and towards 1999, there was a feeling amongst a majority in the business that a French Revolution type revolt by musicians and recording artists was eminent. It just so happened that the Napster (a peer-to-peer music file sharing website) incident occurred at about the same, with an ensuing case, which Napster lost. The establishment of Napster was, however, the catalyst that sparked the revolution that musicians and recording artists had been longing for, but at the time didn’t know they wanted. Although services like Napster, initially, contravened artist’s intellectual property, they facilitated the establishment of an infrastructure that legitimized virtual music and gave artist’s control over their business.

It was a long road to recovery: In the first 15 years (1999–2014) after the Napster case the music industry lost 60% of its value ($38billion in 1999 to $15billion in 2014). Additionally, recording companies were slow to adapt to the changing tide and were, therefore, left behind, resulting in the merger and consolidation of many of the major labels. We went from 6 major labels at the height of the music industry in 1988, to just 3 today: Universal, Sony and Warner Bros. One of the early adopters of virtual music was not even a music company, it was Appel and they were handsomely rewarded for their investment. Only in the last 5 years has the music industry seen considerable gains and in 2019 the music industry was valued at $20billion, an improvement on previous years, but nothing like it was in 1999. That being said, there is hope that once digital sales and streaming become more dominant, these numbers will grow exponentially.

After the beginning of the music revolution sparked by Napster, the music industry lost half its value and the majors consolidated. Today only three of the big 6 remain: Warner Bros., Sony and Universal.

The Napster case and everything that followed assisted in democratizing the music business and aided musicians in taking control of their industry and the way in which their intellectual property is exploited. The proliferation of online retailers, distributors, technology and social media has allowed artists to record, produce, package, distribute and market albums without relying on labels, giving rise to the DIY Artist. These developments have allowed artists to take the lead in the music business, resulting in major record labels losing the power they once held. Majors no longer dictate, to the extent they once did, what, when and how music will be released. Indie artists can now release whatever they want, whenever they want, utilizing whatever platforms they prefer and even using all the platforms simultaneously, in they so choose. The possibilities are endless.

The advent of the new music industry reality brought with it the establishment of online retailers and streaming services such as Apple Music, iTunes, Amazon, GooglePlay Spotify, Deezer and Tidal. Online distributors were another addition, and included companies such as CDBaby, TuneCore, Distrokid, Ditto, Spinn Up, Level and United Masters. Social media platforms such as Facebook, LinkedIn, Instagram, Twitter, SnapChat and TikTok have provided DIY artists with platforms to market and promote their music, without having to rely on labels. By utilizing the above platforms artists are now able to exercise greater control of their creative output, masters and destiny in the music business. For a small percentage of earnings or an annual subscription fee, any kid with a computer, microphone and some music know how, can produce, record, distribute, market, promote and sell their music online. The different distributors have different payment schemes and arrangements with their members, meaning that distribution costs have been heavily reduced since the early days of the business:

• DistroKid: $19.99 per annum membership and artist gets 100% of income.
• cdbaby: artist pays 15% of earnings and $9.95 per single and $49 per album.
• Ditto Music: artist can upload unlimited music for R199 per year and they get 100% of sales.
• AWAL: 15% of income generated.
• United Masters: 10% of income generared.
• Level: $20 and 8% of income generated.

The above are some of the plethora of online distributors through which an indie artist can distribute their music.

On all these distribution platforms, the company will endeavor to distribute the artists works to multiple streaming services, therefore, maximizing the artists earning potential. On the social media platforms, depending on the artists following, they are able to reach hundreds of thousands of people and for a nominal fee they are able reach far greater numbers. The costs of making, promoting and distributing music in the new musical dispensation has been drastically reduced, therefore, lowering the barrier to entry into the music business. This has totally revolutionized the music industry and loosened the vice-like grip record labels once held over the business.

The new models, whilst offering more people a greater opportunity to enter the recording industry hardly pay more than what was previously earned by an artist signed to a major recording label. That being said the system allows for the greater democratization of the business, transparency and a lower entry point, which may initially not be great, but will eventually bear fruit. Additionally artists retain control of their Masters and are therefore free to come and go as they please. Furthermore the costs of producing, marketing and distributing music is much cheaper, as mentioned earlier.

What some people don’t understand is that the way in which people consume music has changed inextricably since the beginning of the new music dispensation in 1999. We have gone from consuming music on vinyl, to cassette, CD, MP3 and now ownership is not even “a thing” as people want to stream music whenever and wherever they are without having to own and store the music. We have also moved from an album’s market to a single’s market, with artists preferring to invest in once off singles, then spending an inordinate time conceptualizing and compiling full albums.

Above are some of the online retailers on which artist’s music is available. A young, unknown artist today can be playlisted right next to a major artist like Ariana Grande or Taylor Swift.

This has changed the financial models that govern the industry and the way in which musicians and recording artists get paid. Most notably the way in which music is certified, gives one an indication of the value of music in its multiple iterations. The RIAA (Recording Industry Association of America) defines sales as follows:

• 100 streams of a song=1 single download
• 10 song downloads=1 album sale
• 1,500 streams of a song=1 album sale

It is, therefore, clear that a stream is not as valuable as a download and a sale is more valuable than a download. Based on that latter it would make sense that a recording artist would make more money from a physical sale, than a stream. In the former the consumer is buying a product, whereas in the latter they are merely experiencing the music on a platform. Additionally, the sale of an album will bring anywhere from R150-R200 per sale, whereas a subscription with a service such as Spotify, will cost R60 a month, allowing the user to stream as much music as they wish. It goes without saying that an artist will get paid more money from a sale than a stream. But the likelihood that the will get paid from a streaming service is greater than a new artist with a record label, because of all the deductions and accounting practices associated with record labels.

Currently the different streaming services pay different amounts per stream, so it’s important for a recording artist to select a service that will pay out the most and that works best with their target audience. These are the rates currently paid by the different services, per stream:

• Napster: $0.019
• Tidal: $0.0125
• Apple Music: $0.00735
• Google Play: $0.00676
• Deezer: $0.00676
• Spotify: $0.00437
• Amazon: $0.00402
• Pandora: $0.00133
• YouTube: $0.00069

Artists today have a multitude of social media platforms on which they can promote their music.

If one compares the above numbers to the numbers quoted earlier, with regards to single and album sales, it is evident that the numbers are slightly different, but not by much. Although streams bring in less money, at least the artist has greater control over their intellectual property, the way in which it is exploited and access to multiple income generating opportunities, with less costs.

Although streaming incomes are less than physical sales, it should to be noted that we are only at the beginning of the streaming revolution and royalties currently paid will be altered as critical mass is reached. Amounts paid per stream have already been increased, since the beginning of most of these services, as more people have gone online. Furthermore streaming and the new musical revolution afford artists many opportunities to which they were not privy in the previous dispensation. Some of these opportunities include:

1. Having access to a world market (an artist today will go head to head with established artists like Katy Perry and The Weeknd).
2. The cost of recording and producing music has been radically reduced, therefore lowering the barrier to entry into the music industry.
3. The cost of marketing and distributing musical works is now accessible to a greater number of people.
4. An unsigned artist, with the right marketing and distribution can become a breakthrough worldwide success.
5. Artists have access to multiple income generating platforms, including multiple streaming services, physical sales, online retailers and live music.
6. Record companies no longer posses the power they once held over the music industry and how music can be exploited.
7. Artists have greater control over their intellectual property, when, how, where and how much they want to release and at which frequency.
8. Overall costs have been reduced and the world market is now one.

Artists like Prince, Kanye West, Aretha Franklin, Stevie Wonder, George Michael and Mariah Carey have notoriously battled publicly with their record labels, and I don’t believe this will change in the future for artists signed to majors. But the new music musical dispensation does afford new artists alternate opportunities.

Record companies still play a pivotal roll in the music business and those artists that are signed to them are still subjected to the same financial models and accounting practices of yore. The good news is that because of the advent of the digital music revolution there has been a democratization of the music industry, affording a greater number of people the opportunity to explore their creativity. Whilst not everyone will be a star, at least more people are given the chance to pursue their dream and whilst this may result in an influx of bad music at the outset, at least it’s a move in the right direction. Hopefully somewhere down the line things will balance out and the financial models will become more viable, I fear, however, that at that point new power brokers will come into play, replacing the recording companies of old. Which has already begun. This will then start the cycle all over again.

Record companies have been replaced by online retailers and streaming services, big recording studios have been replaced by home studios and marketing agencies have been replaced by social media. That does not mean that there is no place for the infracture of the past, but there are some new players in town. Although it may seem as though artisrs got paid more money in the previous dispensation the opaic accounting practices implemented by recording companies meant artists may never get paid for their creative output. At least with the new dispensation artists get paid something rather than nothing. Although things are not ideal, at present, at least everyone has a fair chance and whilst the money is currently not substantial I do believe we will get there in the end.