Are Record Labels Evil?

By Anonymous

Artists nowadays don’t know how lucky they are when they are offered a $100,000 advance and a 20/80 split, 360-degree record deal by a major record label. But more often than not, they and their entourage of lawyers and managers bitch and moan about the “unfair” contract terms they have been offered by those evil, evil record labels. How dare a record label ask for a 360-degree deal? How dare a record label propose a 5-year contract? How dare a record label ask for 80% of an artist’s album revenues and another 10% to 20% of an artist’s revenues in other areas not directly related to the album itself? How dare a record label determine which songs to release as singles? How dare a record label determine the marketing approach and stylistic direction of a music video? etc. etc.

To all those artists out there complaining, I say F**** OFF!!! You don’t know how lucky you are. It’s like turning down a winning lottery ticket. You just don’t know whether you got 5 or 6 numbers right…

But before I start getting off on a rant here, let me take a step back and explain in baby language – because that’s the only language your average, high-school drop-out of an artist/waitress/model/mattress understands – what is happening in the music business today and why artists should be grateful for the opportunities they are given.

The Dying Music Industry

With the emergence of P2p sharing and Napster some 15 years ago, the recorded music industry was pretty much dealt a death sentence. Digital piracy made is easier than ever for people to download and enjoy music entirely for free. As a result, the recorded music business has commenced a frightening decline shrinking from $27.1 billion in global revenues in 1999 down to some $15 billion in 2013 (source: IFPI) with no end in sight. Boohoo, you might say: It’s still billions of dollars. You’re still making so much money! Hold on, imagine getting a $50,000 salary one year, and it being reduced down to $27,777 the next. And you still have to feed your family of 4 with that amount of money. How would you feel about that, Robin Hood?

Indeed, when the rapid decline of the music industry commenced, record labels not only reduced salaries, but also started slashing budgets and headcount. When that wasn’t enough to stop the bleeding, record labels either shut down or merged with another label. The result?

Before 1999, we had 6 major record labels:

1. Warner
2. EMI
3. Sony
4. BMG
5. Universal
6. PolyGram

Today, we only have 3 survivors:

1. Universal
2. Sony
3. Warner

And this is what happened to the majors. Imagine how much worse indie labels fared over the past decade…many of them went bankrupt and out of business altogether.

To make matters worse, the future outlook for the recorded music industry is bleak: Emerging digital services like Spotify and Pandora make the prospects for the music industry even worse, because royalty rates for digital streams are much lower than for physical CD sales or even digital downloads. Superstar artist, record producer and songwriter Pharrell reported to have made only about $2,700 from his global hit song “Happy” on 43 million Pandora streams in the first quarter of 2014. A paltry sum indeed.

Where’s the Money?

So where has the money in the music industry gone? How do recording artists make money?

Today’s established recording artists generate 90%+ of their income from concerts and sponsorships.  For example,U2’s album releases have been the best marketing tool to drive U2’s massive concert ticket sales, so why not just give away an entire album for free to grow its fan base even more? Indeed, that’s what U2 opted to do. In a brilliant marketing ploy on September 9, 2014, U2  just gave away their latest album for “free”  to some 800 million Apple’s iTunes users (though note that Apple is reported to have paid U2 a fat check of $100 million for that privilege). Just imagine the promotional value of reaching 800 million users compared to only 5 million fans that bought U2’s last album “No line on the Horizon”. Not surprisingly, U2 is on track to generate $1 billion in concert ticket sales (http://en.wikipedia.org/wiki/List_of_highest-grossing_concert_tours).  

Unfortunately, record labels have historically not benefited from a musician’s ancillary revenue streams. A record label’s survival has depended on the success of the little things that people rarely buy these days: CD’s and digital downloads. What to do?

The very record labels that have been behind the successes of bands and artists like U2, Sting, Lady Gaga, the Rolling Stones, Madonna, Britney Spears, and many others have pretty much gotten the middle finger from established artists who do not need the services that record labels provide anymore. Established artists either start their own record labels, negotiate mere distribution deals, or JV’s with record labels these days, commanding up to 70% of revenues. So it’s tough for a record label to make money from any artist that it helped become successful in the first place. Artists figured out how to have their cake and eat it, too. Bummer.

Investment Required

In the top 5 music markets – USA, Japan, UK, Germany and France – it costs a major record label between $1,000,000 to $4,000,000 to break a new artist nationally. That amount considers all costs involved, including:

• Artist advances
• Record production
• Music video production
• Marketing
• Public relations
• Finance and accounting
• Tour support
• Personnel (someone has to do the work)
• General overhead of a record label, i.e. travel expenses, office space, utilities, etc.

After all, in a typical release, a team of about 15 to 20 people get involved at various stages in the process of developing, launching and marketing an artist. Of course, you could launch an artist for a lot less than that. Smaller labels like Ministry of Sound, Kontor, Spinnin Records or Ultra can easily produce quality music videos for $5,000 to $20,000 in Eastern Europe. Of course, it’s also possible to record a quality album in a home studio these days.

However, if you want to work with Timbaland, Pharrell, Darkchild, RedOne, Max Martin or any of the other superstar producers out there, you need to be prepared to spend millions of dollars on the album production itself. And if you don’t want to wait 3 or 4 years to gradually build-up your fanbase, play college bars in Wisconsin, Idaho and Alabama, you need to be prepared to spend millions of dollars on a nationwide PR & Marketing blitz campaign to build a name within 100 days. And before I forget, there’s also the advance that artists need to pursue their dreams full-time. Otherwise, it’s waitressing at T.G.I. Friday’s for a couple of years to make ends meet.

As a new artist, you need to understand that while your content is king, marketing it is king kong.

Unfortunately, your typical 21-year old, high school drop-out a.k.a. emerging artist takes these amounts of money for granted. Many artists – like many other creative types – have this entitlement mentality. The world owes them: As they are God’s artistic gifts to mankind, they expect record labels to consider themselves lucky and privileged to be able to release their wonderful art to the world…

Playing the Lottery

Alas, not all artist are successful. A review of a major label’s success rate over the past decade revealed that 83%  of releases failed to recoup their investment. That means that even artists that have a record deal with a major label have an 83% chance of failure, and will likely lose their record deals within 12 to 18 months of getting signed.

For record labels to survive as businesses, the 17% of artists that are successful need to cover the investment made in unsuccessful artists. For illustration purposes, that means that a record label that invests $100 million in 100 different artists needs 17 artists to generate more than $100 million in revenues for a label to achieve profitability. The media business – whether its film, TV, videogames, books or other types of media – is a portfolio business. Nobody can predict with absolute certainty which media property will be successful. As such, a media business needs to have a basket of diversified investments in the hope that one winner will make up for all losers. 

In other words, one successful artist has to pay for the failures of 5 to 6 other artists. Fair or unfair?

The Evil Record Label Contract Terms

For the economics to work, a record label has to have a deal with an artist that is favorable to the record label in three areas:

• First of all, the record label needs to be able to recoup its investment first before it shares any profits with the artist. 
• Second, the record label needs to get disproportionate amount of the profits to make up for its losses on other artists (typically between 80% to 90% of profits).
• Last but not least, as the recorded music part of the music industry is tanking (= CD sales and digital downloads), record labels typically ask artists to sign 360-degree deals, so a record label can participate in the revenues an artist could make in other areas like concerts, music publishing, merchandising and corporate sponsorships. This is necessary for a record label, because CD and digital sales might not suffice for a record label to recoup its investment and make a profit.

A record label is a business after all, not a charity…

The Ungrateful Child

Unfortunately, most artists don’t understand the realities of the business part of the music business. They think that evil record labels are out to screw them. They may have read Moses Avalon’s tell-all book “Confessions of a Record Producer” and feel the need to surround themselves with armies of attorneys and managers out to protect their interests. Indeed, record label deals are always in favor of the record label. But if we’re being brutally honest, the record labels are the only ones that risk real hard cash whereas the artist who lives on cushy artist advances has absolutely nothing to lose and everything to gain. Artists expect everything to be handed to them on a silver platter, and are quick to complain about the “unfair” working conditions that record labels put them under. Yet, once an artist gets her record deal, she automatically turns into a diva and surprises me with these types of antics:

• She doesn’t show up to her scheduled recording session, because she was partying a bit too hard the previous night with her “fans”. Oops, who cares about the $1,000 / per hour that the record labels pay to the studio, engineer and producer while waiting for an artist.
• Those that do show up are often intoxicated with booze or drugs, or both. Oops, can we reschedule the session for another day?
• Few artists that show up at the studio have actually practiced the songs beforehand. Oops, it just takes a couple of months to record one album. Who cares, right? The label can afford it. They get 80% of the artist’s money anyway.
• And so on…

It takes a record label sometimes several years to break an artist – as in the case of Alicia Keyes who was signed by Clive Davis when she was still in high school, but didn’t get her big break until a few years later. Years of artist advances and risk of total loss of that investment if an artist decides to pursue another career or fails.

But when artists succeed, it’s not uncommon for them to complain about the unfair record deals they have signed… 

Suddenly, the record labels that fed them with artist advances for 2 or 3 years, set them up on co-writes with top record producers, marketed the hell out of them, and broke them on a national stage are pure evil. George Michael and Prince are two prominent examples of artists who just refused to record anything until their contract terms were substantially changed. Of course, once an artist is established, record labels are more than happy to improve the contract terms to keep at least some of that established artist’s revenues. But those label deals are different, because the investment risks with established artists are significantly lower. With established artists, labels have a 70% to 80% chance to recouping their investment and making money.

F**** Off

So are record labels evil? Yes, we are all evil!