February 03, 2003

As the Musical Oil Runs Dry...

Bruce Sterling does one of his classic dissections of the news for his Viridian pseudo cult/ mailing list. This time its a Fortune article on how oil has actually ruined Venezuela. Apparently discovering a large abundance of a valuable natural resource actually tends to harm countries economies in the long run. When one product is producing all the wealth the net result is that proper economic development is ignored as everyone takes the path of easy money.

Why work hard developing a strong product when you can just siphon off some of the massive cash flow from the oil wells? Its the classic putting all your eggs in one basket deal. And history shows it to be a path towards failure. Venezuela is just the latest example. Saudi Arabia could be next...

Even more interesting to me though is the parallels it draws with the music industry. For the past 50 years or so record labels have been making all their money from one resource: their control over the distribution of records and cds. What gets overlooked is the fact that the record labels are basically running a handful of business, only one of which, distribution, directly makes money.

The first business the labels are in is filtering, or as they call it A&R. There are thousands upon thousands of musicians out there. Many of them just plain suck. Most are decent but nothing special. A few are amazing, the ones that make you cry, the ones that write songs that get you through lifes worst moments, the ones that make the party go out of control. The labels are out there looking for those artists. They don't bat 1000 that's for sure, but they do a much better job then many give them credit for. You certainly don't have the time to listen to every band in the country do you?

Business #1 = filtering

Once the A&R cats have found the talent, the next step is artist development. This involves two businesses in itself. One is providing a unique form of high risk loan, in the form of an advance on royalties. These advances are often criticized because of the way they can be used to manipulate artists. And they often are misleading and exploitative. But what is forgotten is just how risky these advances are. Would you lend a band $400,000 to record an album, higher stylists and party like rap stars? And in the off chance you would lend that money, would you agree that they only need to pay you back if they produce a hit record? If you were stupid or bold enough to lend that money, odds are your terms would be pretty exploitive too...

Business #2 = high risk loans for artists

The other side of artist development is management. Guiding the band to making good decisions, writing good music and winning fans. This role is usually played by a person or group outside of the record label. Too much work for the lazy mofos high off of cd sales... But the labels do manage to a degree, helping pick producers, studios, music videos, etc. And they are in pole position to do more.

Business #3 = artist management

Once the artists are developed enough (maybe) its time to present them to the public. Here is where the labels excel. Marketing. Lifestyle manufacture. Selling the concept. Inside any record label is a world class marketing company. One that could charge big time dollars for their services. They sell artists, trends and fashions to the world. And are damn good at it. And they don't charge for it. Instead they take their cash from the CD sales. How nice. Worked great for decades. But now its just retarded. CD sales are going to hit 0 in the next 10 years. But the demand for high quality lifestyle marketing is just going to increase. This is the record industries parachute, perhaps they'll wake up soon enough to use it...

Business # 4 = marketing

The final stage of record industries current business model is the selling of physical product, at the present CDs. It's been enormously profitable for years. But it only worked because it required an extensive and expensive manufacturing and distribution network. And that network is no longer needed. MP3's and internet have made the whole process practically frictionless, and free. It costs $0 to make a copy of an MP3, and to try and make money selling a product that costs nothing is plain idiotic. That doesn't seem to stop the record industry... The distribution business is over. Dead. But the music industry is not. They have skills that are in demand.

Its time the record companies wake up and reformulate their business plans. The MP3 is the start of a new era, a new way of making music. And there is plenty of money to be made. The longer the current market leaders cling to their old ways the closer they get to death. They can make money in the new system or die in the old. Some one will step up and take their place. Get rich or die trying to cling to old traditions. Which do you prefer? There is a future to build, I know which way I'm heading.

Posted by Abe at February 3, 2003 03:47 PM


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