Scalability vs Stability: The Shifting Business Models of the Music Industry

There was a time when the route to success in the music industry was simple.

Great Music + Record Deal + x = Profit.

The idea of a traditional record deal was imperative to your success. Even as digital avenues sprung up and more and more artists achieved success through online means, the record contract was the end goal. Artists who are synonymous with “internet success” like the Arctic Monkeys or Justin Bieber (although I use the term “artist” very loosely for Justin…) leveraged their online success to secure a record deal. Arctic Monkeys signed with Domino and Justin Bieber with RBMG.

The funny thing is, labels have been getting less patient with their artists. Where before artists would be given time and opportunity to grow and succeed (The Doors, for example, signed a 10 album deal), nowadays artists can often drop down the priorities list before an album is even released, if the single doesn’t perform as well as expected. And performance is often measured on sales or similar metrics that don’t necessarily show the impact of a song when there are so many avenues for fan consumption.

The fact is that high advances and unnecessarily expensive marketing campaigns can provide false hope to artists and ultimately prevent them from achieving a fair royalty rate or even regular and consistent revenue, despite their sales. This is why avenues like Pledge Music and Kick Starter have grown so fast, as it gives the control back to the artist. But there are services that labels offer that most bands don’t have the time or capability to perform themselves, whether it’s distribution, rights collection, or licensing. All of these are significant revenue streams for artists, and they do not have easy access to them without getting tied up in an outdated system. This is why in recent years we have seen the growth of label services companies. This model allows artists to release through an indie label, or through their own label, and retain full creative control over their music while all the business (and, in some cases, technological) aspects of the release can be handled experts in each relevant field.

In this model, instead of receiving an advance and owing money to a label who own your output, you pay experts to provide their service in the specific areas you need. It has a measurable cost to an artist, which can be off putting, but it gives you control over your music and your approach, which is a huge benefit of the digital channel. Companies like Kobalt Label Services are leading the way with this new business model, boasting internationally successful artists such as Die Antwoord and the Pet Shop Boys on the roster. The company is also working with smaller artists such as Todd Terje on their releases and it is only a matter of time before a new artist achieve break through success using this label services model.

I believe that the label services business model signals a fundamental change in the way the music industry operates, providing transparency and creative control to artists as well as all the expertise available within a major music company, without having to sign with a major label and incur potentially crippling costs that are associated with receiving an advance. In an industry that has been reticent to change over the years, it is amazing to see this change come in. And while it seems like a fairly minor shift in understanding and approach, if you consider the business analogies of the two models you get a much better understanding of just how significant a shift this is.

The traditional label structure is analogous to venture capital in many respects. At a basic high level, Venture Capitalist firms work within a specific industry (finance, social, etc.) and fund a company in return for a percentage of that company. This ownership gives the VC firm the ability to direct and influence the development of the company and, given their experience, their influence is often beneficial to the company itself. VC firms often also invest in a large number of firms, with the theory that one firm will become successful and give the firm a return that covers all their investments. By spreading the risk across multiple ventures, VC firms can mitigate the risk presented by any one firm. VC investment allows for rapid expansion and scaling of a company, but it reduces the autonomy of the company as the VC takes some ownership of the company.

Similarly, a major label that signs a band invests money and resources into that band. The advance that the label pays out provides an injection of cash into the band to allow them take the next step in their evolution. This money goes towards funding the band to focus full time on their music, record an album in a high quality studio with a producer, undertake a detailed marketing campaign, and generally scale the band. In the halcyon days of the industry, artists would be signed to multi-album deals and, similar to VCs, the risk taken on each artist would be spread out across multiple artists. If one band crossed over into mainstream and made a huge return on investment, this covered the costs invested in the other artists.

Where the record labels differed was labels didn’t take a percentage of the band, they ensure that they earned back their advance before the band saw any of the money generated by their sales, and the label took a percentage of sales thereafter as well as owning the rights to the music produced. The deal was weighted more in favour of the investor than would be accepted in traditional business. A combination of greed and a market bubble led to labels expecting the return on their investment to occur much faster as time went one, and the days of labels offering 10 albums deals (as was given to The Doors, for example) disappeared. In the current climate, when bands earn their money primarily from live performance, merchandising and licensing (live and merchandise were two areas that labels did not take a cut of), this traditional business model became untenable.

By comparison, the label services model is most closely aligned to a Software as a Service business model. SaaS business models operate by licensing and delivering software on a subscription basis, where the software is centrally located. Companies like Netflix operate using this model, where you pay a monthly fee and are able to sign in to a centralized platform through a web browser, rather than owning the software outright.

Label Services work off this business model, allowing artists to pay for subscription to a specific service that they need. Artists have an ongoing payment, but they only pay for what they need and can guarantee a level of transparency in what they’re paying for. This puts the impetus on the artists to provide the cash but allows them some degree of stability, regardless of the size of their audience.

The above analogies are very broad and high level, but it shows just how fundamental this change in the industry is. A move from a Venture Capital business model to a SaaS model is not one that industries often take. It is a shift in the fundamental understanding of what artists are looking for from their music output, a move from scalability to stability.

I would encourage all artists to seek out companies such as Kobalt and investigate alternative methods of managing your career.

Stability in such a volatile industry is a hugely attractive idea and this new business model may help you to create a consistent and transparent revenue stream.