EMI: go digital or die

It’s stating the bleeding obvious, I know, but EMI’s new owner has said the record industry needs to embrace digital or die. But there’s more to it than just selling downloads. The whole business model needs to be looked at.

In an email to staff, financier Guy Hands says:

“The recorded music industry… has for too long been dependent on how many CDs can be sold,” he wrote. “Rather than embracing digitalisation and the opportunities it brings for promotion of product and distribution through multiple channels, the industry has stuck its head in the sand.”

Which is true. But the really important bit is where he talks about big-name acts.

“Why should they subsidise their label’s new talent roster – or for that matter their record company’s excessive expenditures and advances?”

The music business is ultimately a high-stakes gambling system. The record companies spend huge sums of money on launching new acts, and 95% of those acts never recover the money spent – but the 5% who do break even include a handful of superstars, and the profits from those superstars finance the whole shebang.

That business is only sustainable when the record labels are the only way to reach music fans, and pre-digital they were. There were all kinds of barriers to entry: the cost of recording, the logistics of pressing and distributing records, the cost of marketing, the lack of space in the mainstream media, and so on. Digital is killing all of that.

Part of it is the relentless rise of technology. I can do stuff on my Mac that I couldn’t have done in a recording studio even 10 years ago. Part of it is the rise of alternative media, social networking and other ways to spread the word without paying for PR or praying for an NME review. And part of it is the long tail. The record industry is based on a model where a handful of acts make huge sums and everybody else makes nothing – but thanks to digital, there’s now a middle way where musicians might not become superstars, but they might not starve either.

And more than anything, digital means the big acts don’t need the record companies to get their music to their fans. All you need is a web server and a bit of bandwidth, and because you’re removing so many overheads – the general overhead of being a company, the cost of manufacturing, of marketing, of paying for all the bands who shouldn’t have been given record deals in the first place – you can make a profit while charging much less. Which in turn adds to the downward pressure on the price of music, which squeezes the labels’ margins even further.

Fundamentally, the record labels need the U2s, the Radioheads, the Foo Fighters et al. But U2, Radiohead and the Foo Fighters don’t need them. If the labels can’t address that, they need to find a new business model that doesn’t use a tiny number of successes to bankroll a catalogue of extremely expensive disasters.

And if they can’t do that, they’re doomed.

18 thoughts on “EMI: go digital or die

  1. Mike Robinson says:

    I’ve been thinking about this a lot recently, but I can’t help but wonder: what exactly can labels change their business model to? “Online services for technically-incompetent musicians: A kid modified your wikipedia entry but we’ll have it fixed before anyone notices”?

    Props to the new EMI guy though, just hope he has a plan. For his sake that is, I just want to buy music, pay fairly to the artist, and no bullshit (DRM, etc).

  2. Tony Kiernan says:

    Thankfully, from the labels’ point of view, people will always jump at the chance to be mortgaged to the hilt for the rest of their days fro the slight chance of being famous. They’ll just be increasingly reliant on the huge cash-cows. Much in the way that recently as the likes of Robbie get more and more stupendous amounts of money, the amount spent on A&R and less surefire hits goes down.

  3. Alex says:

    Even at the very very low level I operate at, I still make more money on self released stuff than I do on the ‘proper’ records.

  4. Gary says:

    Yeah, the slight chance of being famous explains most of the bad stuff that hangs around the music industry, from pay to play gigs to ridiculous contract terms. And of course, most music is still sold on CD.

    what exactly can labels change their business model to?

    Maybe something more akin to venture capitalism – offering X investment in exchange for a cut of the business. That would bring publishing, touring etc into the money pot. Don’t have the exact figures to hand but I think global CD sales are around 33 billion dollars a year, compared to overall music business revenues of about 114 billion. That’s concerts, merchandise, sync royalties etc etc.

  5. Gary says:

    More on the register:

    His message for the middlemen: “You are about to become squashed between hundreds of managers and artists that want to go direct, large retailers like amazon that re-write the rules of online music selling (think bundles… think flat-rate), telcos and operators that are getting fed up with the tedious and outmoded licensing practices, and search engines that are powering or becoming music communities and the next generation of radio.”
    And, he told his blog readers: “If [the industry tries to] keep up the strategy of ‘you need us badly and therefore we make the rules’ you will lose the artists, their managers… and the audience. Another 12 months for this Radiohead experiment to become the default approach. Get engaged or get outmoded. And do it soon.”

  6. Tony Kiernan says:

    Have you seen Sellaband? Basically, aa site where you try and do a Marillion to get an album out. But, effectively, it’s a social networking site where you get to pledge money to other bands to buy a part in their album. When they get to (wait for it) $50,000 they get to make the album which is them sold on the site. It beggars belief that people will sign up for such a thing.

  7. Stephen says:

    Similar article in the Times, they miss the point entirely, of course. CDs are simply a tool to make money out of music. If their effectiveness has been reduced, and concerts now make more money, so what? Where is it written that things have to remain the way they were when we were growing up?

    Back in the days when doing it required tons of very large and very expensive equipment, my father had a profitable typesetting business. At first the advent of the Mac allowed him to replace his expensive Linotypes with cheap Macs. But soon enough the ad agencies bought their own Macs and started doing ads themselves. So my father moved his business into printing. That’s the normal business response. But I suppose the people in the music industry are pretty poor excuses for business people,

  8. Andi says:

    One thing record companies don’t seem to be able to understand is if the musics crap nobody will buy it, be it on cd-vinyl-tape-paper roll-flash drive or whatever.

    I personaly like cds (non drm), I’ve got 7 machines i can play them on and I can rip them to my ipod, nice and simple. I do like having the physicality of the cd.

    Also music is not like bread where every 3day you need to restock and thats what a lot of companies looking for business models keep forgeting

  9. Gary says:

    Have you seen Sellaband?

    Yeah. I’m not convinced it’s the future either.

    Where is it written that things have to remain the way they were when we were growing up?

    Indeed. Digital is doing the same thing in pretty much every area now, so for example firms that built their business on information – directory publishers, etc – are being eaten by the search engines and by collaborative sites, Craigslist et al are killing classified ads, some areas of print publishing are being eaten, etc etc etc. But at least those industries have attempted to engage with the new technology, with some firms having more success than others.

    Digital’s not just going after music, of course. If it can be done online, it will be – so estate agents will suffer the same fate as travel agents and so on. You can’t uninvent this stuff, so you need to find a way to exploit it. Or another business to be in.

  10. mupwangle says:

    Related, but I assume everyone knows by now, but Nine Inch Nails (AKA Trent Reznor) has been “released” from his “several albums left” deal with Universal. It might have had something to do with his rant telling Australians to download his album on P2P sites due to Universal deliberately trying to rip them off by overpricing. He’s already said (before this) that he wanted to give cheap downloads from his website.

    Love him or hate him, but Trent Reznor has put his neck out a bit. Name another artist that has released tracks in garagenband format and asked people to remix it to see what happens. He also left pendrives with NIN new material on it lying around (which the RIAA then tried to sue the finders) but at least he didn’t pretend that it was it was accidental.

    I know that most people here seem to hate Radiohead and I would be very surprised that most folks here were NIN fans but you have to respect the stand.

    Another big seller going it alone.

  11. Squander Two says:

    By the way, who’d’ve thunk a couple of years ago that one of the most forward-thinking, downright revolutionary entertainment distributors in the country would be The Mail On Sunday?

  12. Gary says:

    This is brilliant – Ian Rogers of Yahoo Music:

    Want radio? No problem. Click play, get radio. Want video? Awesome. Click play, get video. Want a track on-demand? Oh have we got a deal for you! If you’re on Windows XP or Vista, and you’re in North America, just download this 20MB application, go through these seven install screens, reboot your computer, go through these five setup screens, these six credit card screens, give us $160 dollars and POW! Now you can hear that song you wanted to hear…if you’re still with us.

  13. Stephen says:

    Name another artist that has released tracks in garagenband format and asked people to remix it to see what happens.

    William 0rbit: I have two of his songs in GarageBand format and Ableton Live format cluttering up my hard drive. (I mean cluttering in the nicest possible way of course.) He even had a remix contest for Bubble Universe, but I was too chicken to enter my no-doubt entirely predictable effort.

    I would be very surprised that most folks here were NIN fans

    I like Nine Inch Nails :)

    I like Quake, does that count?

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