Defending Big Record Companies

- - The Future

I was listening to the Adam Carolla Podcast a few weeks back and he had the band O.K. GO on the show. They had recently split up with their record label EMI (Billboard story) so it was interesting to hear their frontman Damian Kulash defend big record labels. I’d never really thought much about this but it really made sense to me so I wrote it down:

What record labels are really good for is essentially risk aggregation. It’s a very small percentage of bands that get to the level of being signed and even of those people who’ve gotten past that very high bar only about 5 percent succeed. So, 19 out of 20 fail. If it was your own money, you would be a moron to spend it, because there’s a 95 percent chance that money’s not going to come back even if you’re already at the level that record labels want to sign you.

So, the only way people can make that bet is to conglomerate all of them. You sign 100 band and assume 5 of them are going to succeed and the other 95 fail you just need to make enough back from those 5, which is why record contracts are so onerous in the first place for successful artists, because the money you are now making is paying for the other 95 percent who failed.

Somebody needs to be doing that risk aggregation unless we only want the independently wealthy who are artists.

When you think about it in terms of magazines and newspapers, because all the stories are packaged together they can afford to take chances and to have a few misses in there. And, that’s probably my biggest complaint about them as well. They stopped taking advantage of their unique ability to  swing for the fences and whiff a few once in awhile.

There Are 34 Comments On This Article.

  1. That is precisely how the music business works – or at least how it used to work – and that is one of the better and more concise descriptions I’ve read.

    Dan

  2. you don’t have to be independently wealthy to produce and distribute your music anymore. if you can afford a PC, then you can get your hands on production software and distribution methods for free. this is why record companies are becoming increasingly irrelevant, as are magazines and newspapers.

    • c.d.embrey

      @David N. Drake,
      It’s all about editing. Writers need editors, photographers need editors and so do musicians.

      Vanity publishing has been around for years, but how many self published books make the NYT best seller list?

      Will having ProTools and a FaceSpace site get you a Gold Record? Make you real money? Good A&R people will never become irrelevant.

      • production companies are all vestigial structures in rapidly evolving industries. The ability to cheaply produce high quality work and distribute it to consumers effectively is the deathblow to businesses built on analog foundations.

        Basically, my point that the NYT best seller list, gold records, subscriptions, readerships are all bygone barometers (or will be within the decade). The rules of commerce are being rewritten, and I don’t think relevance can be guaranteed to anybody who continues to rely upon the old business models for employment. The way in which money will change hands, who is paying, how much is being payed, and what is being payed-for will be completely different in a very short time I think.

        Dave

      • @c.d.embrey, for some reason half my post got deleted. here it is again.

        Yes, all those above mentioned things require editors, but editors do not require magazines, production companies, or publishing houses. Rather, they simply need a willing artist.

        Also, I don’t think digital distribution and consumption can be compared to vanity publishing. The digital age is game changing in the way intellectual property is controlled… it can no longer be controlled through the possession of negatives/reels/manuscripts. These things are now readily copy-able and steal-able by anyone with internet access, so how can copyright continue to be a commodity if it’s based on a trust system.

        Publishing houses, record labels, production companies are all vestigial structures in rapidly evolving industries. The ability to cheaply produce high quality work and distribute it to consumers effectively is the deathblow to businesses built on analog foundations.

        Basically, my point that the NYT best seller list, gold records, subscriptions, readerships are all bygone barometers (or will be within the decade). The rules of commerce are being rewritten, and I don’t think relevance can be guaranteed to anybody who continues to rely upon the old business models for employment. The way in which money changes hands, who pays, how much, and what is being payed-for will be completely different in a very short time I think.

        Dave

        • @David N. Drake, “how can copyright continue to be a commodity if it’s based on a trust system”

          How can production (of any *free* product) continue on a trust system today?

          • @Bob, thats exactly my point. it can’t. things have to change, but it isn’t the digital exchange of information/products thats going to change. Rather, the way in which money is earned (and how much) will change, drastically. in fact, it’s already changing. we’re at the cusp of a dramatic shift, not too dissimilar to the shift that occurred back when Mesopotamian cities began to quantify shipments of grain and began to represent these measurements with precious metal ingots (the first currencies). since 2000 BC, products have been relatively quantifiable, but NOW, with the ability to copy a product over and over an infinite amount times for absolutely no cost (like a song), one must realize that traditional ways of measuring the worth of something needs to change. it seems likely to me that digitally reproducible products will lose their intrinsic worth, for instance, like the ownership of an image’s copyright… it’s not enforceable, so it’s worthless. It’s just like if the government didn’t enforce the worth of a paper bill… it too would be intrinsically worthless.

            • @David N. Drake, reminds me of a saying about some people: they know the price of everything, and the value of nothing.

              If there is no economic value in pursuing a career, then only those with excess time and excess residual wealth will do it. Basically, only the rich will be able to afford to create content, according to your model of the future.

              • @Gordon Moat, thats not true at all. anybody can produce and distribute their products for no cost whatsoever. there is no need for residual anything. digital technology allows for cheap/high quality production, and also allows for free mass distribution (i.e. Bit torrent). And just to clarify, this is not my model of the future… its the current state of affairs, whether people like it or not (download and watch “Steal This Film”). the true test for photographers and creative professionals in this digital age will be their adaptability and willingness to change. i mean, you can’t deny the fact that print is dying, that traditional media is dying, and that advertising will be drastically effected by this… and there will be a knock on effect on everything else that touches it. i’m not making this stuff up.

                • @David N. Drake, Actually, I do “deny” that print is “dying”, because quite simply print will not go away. There are large segments of the world that are not on smart phones, nor on the internet, even in the US.

                  So, how many musicians or creatives with FREE web hosting do you know who are making a sustainable living? How many creatives do you know who are using FREE computers at their local library to run a business? You might know lots of people running Warez and pirated software, but I don’t see that as an ethical (nor legal) business model. Just because it is technically easy to rip off companies and people does not mean that makes it a great business model. Eventually someone has to pay. There simply is no such thing as “no cost”, unless you ignore the tools needed, or you are doing something illegal (based upon current laws).

                  If you don’t pursue a creative profession with the idea of profit, then you will not be around long. Do anything creative without profit, and it is simply a hobby. Profit is not evil, it is simply a way to remain sustainable.

                  • @Gordon Moat, Denial doesn’t change whats happening. You’re argument that a large portion of the world doesn’t use smartphones is sort of irrelevent. The developing world’s use of the internet/smartphones is growing exponentially day by day. Take a look at this internet use map (http://bit.ly/9zcOHn). Give it a few more years, and it will be available to everyone on earth at a low cost. Also, if you want me to name you all the musicians I listen to who only have
                    myspace pages it would take days. Just visit websites like Pitchfork or Stereogum for that answer. Many of these musicians make comfortable livings producing and distributing their music digitally. Lets not forget concerts pay well too, and there is no way to bootleg a live event.

                    Additionally, who needs residual income to start a website and buy a PC? Hosting is $100 per year, and a domain is $7 per year. You can buy an acceptable PC for $400 (http://www.cyberpowerpc.com/). Digital technology gives people from low income backgrounds (like myself) the venue to cheaply start a business. I would never have been able to afford a storefront, studio, or darkroom, but I can afford the $200 a year running a website and the occasional $50 splurge for biz cards.

                    And just to clarify, nobody here is pro piracy. I use a legal copy of photoshop. However, I’m also not pro price-gauging, and I think a lot of piracy is sticking it to the man because these companies ARE price gauging. If photoshop was $200+ when it was only available for in store purchase, how come it is still $200+ now that its available for download (which is far less cost for Adobe than the physical product). Why are DVDs $50 when they come out, and $20 a month later (when its costs something like 15 cents to produce the DVD). Why does iTunes charge $0.99 per song (if its infinitely copyable for free) and websites like LaLa can offer you the entire album LEGALLY for just $0.80. Why did photographers who transitioned from film to digital not lower their prices even though their overheads decreased drastically?

                    Of course profit is not evil, I need to pay the bills just like the next photographer. My point is not that making money is unnecessary, my point is that the internet is killing off professionals and businesses that are not willing to transition, lower their prices, and honestly/competitively asses the worth of the provided service/product in comparision to the market. The demise of traditional media means less work, and the ease and cheapness of digital production means more people will be competing for less jobs… which means prices need to go down. Some people don’t want to accept this fact because it means they can’t afford their mortgages, but just because it isn’t good news doesn’t mean it isn’t true.

                    • @David N. Drake, You just blew your “no cost” argument with that reply. Even your “low budget” shows you have expenses. It’s like trying to claim that a DSLR allows you to make images for free, as if it would never break down nor fail.

                      I have lots of friends in small bands, all on MySpace, and nearly every one of them needs a “day job”, despite the availability of low cost distribution and production. The promise of the dot com blow-up was that all you needed was an internet presence, and business would flow your way; we saw where that went. There is so much content on the internet, that more effort is needed tha simply being there.

                      Some bands from my neighborhood include Louis XIV, The Zeroes, and Transfer. The Zeroes were big in the past, and just got back together for a 21 day tour in Europe; every one of them has some other line of work to pay the bills. A couple guys from Louis XIV use to hang out at the same café I still go to, though after they got signed and better promoted, I don’t see them around. Transfer are still new and barely known, though I think they will become more known soon. Local clubs pay poorly here, and would often rather have a DJ doing mash-ups or spinning something that is more mainstream; few clubs on the west coast pay well for unknown bands. The few I see doing well have been boosted by a tune of theirs being used on a TV show or in a commercial, like with 8mm and One Eskimo.

                      Fact is that small local bands, who play great music, need promotion to become more known, just like little known photographers need to promote to become known. Promotion is an expense, whether you are using your time to do it through social networking, or paying for advertising. Getting yourself, or a band, noticed in the cloud is not as simple as being there.

                      You should be better informed about print and paper prior to making wide sweeping claims, so here is some reading for you:

                      http://www.na.sappi.com/paper-insight/lifewithprint

                      Just in case you think paper production means clear-cutting forests, here is a link to the Forestry Stewardship Council, of which nearly all major paper producers now belong:

                      http://www.fsc.org/

                      The late 1990s, when I was in college, promised us the coming of the paperless office. Obviously that didn’t happen. Quite obvious too is that the way we communicate has changed; few people mail cards or letters any more. I don’t hang onto the past, but I don’t dismiss it as easily as you do either. If you choose to dismiss print, because you think the internet is your path to sustainability and prosperity, then you have assessed your risks, and I wish you luck.

                    • @Gordon Moat, I think you’re still missing the point. First of all, thanks for the history of those bands. Look, just because a band exists doesn’t mean it’ll be successful, same for photographers and writers. As mentioned in the original article, a very small percentage of musicians, even after being signed, make a career out of it. What makes you think that my argument is the internet = success? I certainly never said it. My argument is that digital technology allows for lower costs. Are you going to deny the vastly lower costs of DSLR as compared to SLR?

                      Also, why do you assume I’m a tree hugger? You must think I’m some trust fund hipster or something. I’m a married 24 year old father. I never went to college (not as much residual wealth as some others I guess), and have been financially independant since I was 18. I worked as a full time manual laborer since I graduated from high school, and I scrimped and saved to buy my first DSLR. If it wasn’t for the cheapness of starting a website, I wouldn’t have looked legit enough to land my current job, which is as a photojournalist for an established upstate NY newspaper. If you’re suggesting I have little invested in print, you’d be wrong. The fact is, much of my current income comes from that newspaper and other print magazines that I freelance for. That doesn’t change the fact that print is dying. You sound like you’re in serious denial. Take a look at what The New York Times says (http://nyti.ms/cWAjlo). If you want to continue believing print is going to be relevant in ten years, paying the same as they always paid, be my guest, but please realize you’re setting yourself up for a decade of disappointment. Best wishes man.

                    • @David N. Drake, What you imply in all your posts in this thread is that lower costs are driving changes. If that is true, then it is a race for the bottom, and if you are completely correct in your decade assessment, then neither of us will be a photographer in 10 years, because the “the worth of something needs to change. it seems likely to me that digitally reproducible products will lose their intrinsic worth, for instance, like the ownership of an image’s copyright… it’s not enforceable, so it’s worthless.” When the images are worthless, than your implied message is that what we do will have no value. I disagree.

                      It is not apparent from your website that you are a photojournalist. Newspapers are definitely changing, though I strongly disagree with the NYT idea that pay-for-it tablet content will save them. In fact, the financial world also largely disagrees with them. I invest in lots of things, but newspapers is not on my list.

                      Hope you don’t lose your idealism. You will need it to survive your next decade.

  3. I agree to a certain extent but at the same time, why do 5 bands succeed when 95 fail? Doesn’t it have anything to do with quality? Yes, out of the 95 failed bands there are a few in there who were talented but had bad luck (or didn’t have good luck). But if the music (or story) is good, does it matter where it comes from?

    • @Mason,

      I can’t believe I’m going to say this but I think, unfortunately, “good” is really subjective when dealing with mass markets. This is why watered down, usually less musically talented and more “entire package” talented acts actually are “successful” because they can be easily digested and sold to a mass market. I think the acts that usually fail in the market are acts that have something to give or push boundaries that can’t be sold to a mass market. So I think it’s really opposite of what you’re thinking. Another way to put it: Why does American Idol, and the singers after they leave the show, continue to be such a huge success when it’s vacuous art and talent? Because most Americans can identify and not have to think when enjoying this type of “art” and to them that is really what art is supposed to be in order to maintain the myth that ignorance and not having to be an “intellectual” is a prideful right in this country.

  4. I agree with your assessment of the magazine and newspaper industry. In regards to the writing (and in some cases the photography), very few outlets are willing to take a chance on any sort of old school investigative journalism. Also, nobody besides a very very limited number of publications do any sort of long format photo stories. There is very little experimentation occurring in print media, which I believe is what is leading to the declining readership. Why look to print when we can find more interesting and more edgy material on the web? It’s a shame to see the print industry in such decline, but when a product takes no chances and is rarely updated, one must suffer the fate of an aging product.

  5. I guess I have the opposite perspective on the same data.

    It used to be without a major-label recording contract you were nothing. No one would play your music, book you into recognized venues, interview you etc. Now with the Internet, and affordable good quality recording equipment, artists can produce music and market it themselves. There have been a number of artists who have achieved mainstream popularity without a major record label deal. Even established artists are starting their own recording companies to have creative control over their work and eliminate the middle-man from the profit picture.

    A big downside to major record labels is they tend to be driven mainly by profit. Many of the artists who are offered contracts sound like someone else. Recording companies are less willing to take a chance on an artist with a unique sound. Even established artists are often pressured to make more commercially-salable records than to branch out into more creative ways.

    Compare that to publishing. The big barrier to starting up an independent publication is the capitalization. Printing, distribution and production costs are huge. And since the ROI is generally poor, fat chance anyone will give you venture capital to start a publication. The established publishers tend to fund new ventures that look like other successful publications. The primary focus is on profit, not quality or finding a unique editorial mix.

    Enter Internet publishing. Now you don’t need significant capitalization, because Web production costs are minimal. So it seems, at least to me, to follow that IF a credible sales/distribution model develops for Internet publishing we are going to see a lot of start-up ventures. There are very talented writers, photographers, graphic designers, etc., out there who could join forces to create some innovative publications. And if you can keep headcount low, a handful of good people could actually make some decent money doing good work.

    If anything indie musicians should be the business model for the next wave of publications. Good talent plus low overhead/production costs can be a profitable formula.

    The other important lesson indie musicians have taught us is collaboration can be very fluid and still be successful. A group of artists can join forces to produce a record, then move on to other things (solo recording, other collaborations, etc.) I think the same could be said for Web publishing. You don’t necessarily need a large fixed staff to produce a publication anymore. You need a stable core group of people, but then you can use different talent.

  6. Interesting post. Hate to say it, but couldn’t a stock agency like say Getty Images use this argument?

    I may have posted this OP piece on this blog before. It provides some revealing information:
    http://www.nytimes.com/2009/08/01/opinion/01blow.html?_r=2

    “A study last year conducted by members of PRS for Music, a nonprofit royalty collection agency, found that of the 13 million songs for sale online last year, 10 million never got a single buyer and 80 percent of all revenue came from about 52,000 songs. That’s less than one percent of the songs.”

    With regard to content, I believe there are two poles with a range of consumption (comfort levels) between the two.
    This can be applied on a retail/consumer level, as well as on a professional level with companies and organizations. One the one side are those that want their “content” to reflect their own feelings, lives, experiences. On the other pole there are those looking for fresh experiences and are willing to be open to the new.

  7. I’m really enjoying your posts. I agree wholeheartedly that some companies need to spread the risk. In fact I audited re-insurance companies, which sold risk off to willing participants.

    I do though believe in one, rather large, caveot.

    In the old days, the cost to produce and eventually distribute a record was prohibitive for pretty much anyone. Thus the need for WEA, Universal, Arista, etc. Now with the advent of the internet as a distribution mechanism and accessibility of recording software/hardware, well, the music and film industry have been caught with their proverbial pants down. The kings are scrambling to protect their property and I think the ship is sinking faster than they care to admit. It is much cheaper to produce and distribute than before.

    Same goes with the film industry. I worked for WB in their international division. They were, might still be, the powerhouse for distribution channels. This afforded them the power to squeeze movie theatres to the point that these theatres are now selling advertising time before each movie to make up for lost revenue share. Enter the internet and Indie films are destined for greatness.

    Defending the music industry, hummm. consider listening to Courtney Love’s chat about the music industry.

    Thanks again for great posts.

  8. I don’t know the ins and outs of the music industry but I think one could draw quite a different conclusion from the 95% vs 5% example.

    In order to ‘pay’ for the 95% of unsuccesful attempts the successful 5% have to be big sellers who appeal to as many people as possible which means that the music will most likely be watered-down mainstream crap. By signing 20 bands of which only 1 will be successful the record company is not taking any risks – it’s just taking a shotgun approach at the whole thing. They’re gonna waste more bullets but they’ll kill the beast eventually.
    Another approach would be to sign 20 bands of which 10 will be successful but only in a smaller niche that values their music for its uncompromising quality.
    This approach would actually be more analogous to what you would like to see in publishing. By taking chances a magazine might not appeal to everyone but the people who do value it will appreciate it much more.

    • @m, This is exactly what I was going to say. I don’t know the industry well enough, but it seems from the outside that is all or nothing, get rich or get a day job. It seems like there should be musicians throughout the income spectrum, struggling, middle class, and successful. Less of a hockey stick (1 per 20), more of a bell curve (10 per 20). Lets see that model in publishing.

  9. I have to say, I like the swing for the fence analogy. It really has to take the efforts of all who want to play the game. When it is your turn at bat you need to swing away, don’t hold back.

    Get foucsed so you can hit the home run, so what if there a some bad pitches, a couple of foul balls or maybe you evenstrike out a few times. It doesn’t end the game you still have future at bats. Just means you need more time at batting practice.

    The game only ends when you stop putting in the effort. The GM needs to convince the owner he’s making the right decisons when putting players out in the field. So whether your the publisher, photographer, musician, PE, AB, or CEO; you gotta get out there and play the game.

    Corny Huh?

  10. Don’t want to sound too condescending, but you’re being a bit shortsighted here: that essentially true of all the culture/entertainment industries. Major film companies get their money back only on 5% of the films they produce (that’s MPA data), the failure rate on tv shows is about the same, publishers get most of their income from 8/10% of their books, 80% of all the income of the record companies is generated by 5% of the disks., etc. I have less info on the performing arts, but I would bet the success ratio is not very different

    In all it’s a gigantic industry devoted to the constat manufacture of failures.

    I find it hard to believe that this simple fact escapes so many of the “insiders”, the professionals of these indiustries, journos, etc.

    As I find it hard to believe anybody still bothers to write about internet bussiness models in connection with these industries and how cheap publishing/distributing software is gonna change all of it. Internet is a bussiness only on the hardware/isp side of it. The content providers are being sistematically ripped off by them and by the end user. People get their entertainment without paying for the content, just for the distribution. Some even theorize about how great it is to work for free… Who knows, next big thing may be slavery… We should ask Chris Johnson

    Content providers should start billing IT companies.

    In the meantime, I still have a word to say on behalf of record companies, book publishers, etc: I am pretty sure much of the music I love exists because of the Ahmet Ertegun’s, Sam Philip’s, Berry Gordy’s, Manfred Eicher’s, Norman Granz’s, etc. of this world, as I am pretty sure most of the books I love exist precisely because some editors decided to bet on them. We know Kafka because a certain Max Brod insisted on it, etc. (Sorry, I am writing you from Spain and I am not familiar with the US publishers).

  11. Can’t help but notice the hypocrisy of the US society. They kill millions on the other side of the Earth in the name of “fighting commies”. Than they say each for himself and there’s almost no health coverage for those in REAL need, there is no social support for those ACTUALLY needing that. On the other hand the so called successful brands promote 95 bands on the profits deserved by 5 others. When the financial system is in need the state finds enough money to give them even some bonuses. People vote one party, yet the advisors and the bosses of the major state agencies are from the other party.

    Guys! Stalin did the same. Promoted 100 bands to show that the music was good. Of course, only 5 bands were actually good. But the state propaganda asked for 100 so there were 100. Sure, people didn’t have to die on the other side of the World… but that’s about the only difference. When a state company was mismanaged the state injected enough money to keep it afloat. And, obviously, no matter what the people voted few individuals were changed at the top.