http://artistcore.blogspot.com/2012/09/the-end-of-new-music-industry.html       

The end of the new music industry transformation; How technology destroyed the traditional music industry

Until recently, the music industry provided artists one path, and one path only, to reach and connect with their fans and monetize their pre-recorded music. Artists had to sign to a record label, transferring ownership of copyrights, relinquishing exclusive artistic control, and giving up most of the revenue from the sale of their recordings. Fans could only buy pre-recorded music in physical form from retail outlets from the limited number of artists that labels chose to anoint. Labels were aware of their unique position and took full advantage of it by gouging both artists and music fans.  However, thanks to recent technology, the entire old school music industry is a hairbreadth’s away from being dead.  In the new digital music industry, the gatekeepers are gone and so are the abundance of obstacles for artists and music fans.  With the launch of streaming services, the proliferation of broadband and high-speed Net access via ubiquitous devices – i.e. smart phones, tablets etc - the only remaining relevant piece of the old industry is AM/FM radio in cars.  This last bastion of what was will be gone within the next 24 months. With this final change, the collapse of the old industry will be complete.

THE TECHNOLOGICAL CHANGES FOR MUSIC FANS

The money behind the music industry follows the consumption behavior of music fans -- it flows according to the technology infrastructure through which music fans get their music.

For the last 90 years, music fans listened to music in two ways: on AM/FM radio and/or buying pre-recorded music in a “format” (vinyl, cassette, CD, MP3 etc).  If someone heard a song they liked, they would most often buy the album with that song on it and play it via a hardware device (i.e. turntable, cassette deck, Walkman, CD player, MP3 player etc).

For over sixty years, music fans bought their pre-recorded music almost exclusively on vinyl. In 1979, this shifted somewhat with the launch of the Sony Walkman. Prior to the advent of the Walkman only AM/FM radio was portable.  The Walkman provided the first truly moveable and convenient way for music fans to take their own music with them.  Cassette sales skyrocketed. The trend would not last long, however, as shortly thereafter the CD was introduced.  Once again, music fans’ buying habits, and money, would shift.  This time the consequences would be much greater for the old industry as it placed billions of digital songs encoded on CDs into the hands of hundreds of millions of people.  When music was freed from the 5” circular piece of plastic it was embedded on, it set the stage for true industry (r)evolution.   All hell was about to break loose for the old school music industry.

Shortly after the CD made it into the market, an elite technologically-savvy few created a way to “rip” music off a CD and place it onto a hard drive.  When free “ripping” software became available on the Net, it hit the mainstream.  Soon thereafter, Napster (the first mass used peer-to-peer “file sharing” service) took off, educating the world on how to download and play music on their computers. Consumers now needed a way make it portable; a digital “Walkman.” After a few iterations of digital musicplayers that never took off, along came the iPod. It was not only sleek, cool and very user friendly, it also provided the portability of a LOT of music on a very small lightweight device that could be backed up.

In addition to this new type of music playback device, another huge change was provided to music buyers with the introduction of two digital music stores: eMusic and then iTunes.  With these two entities, music fans no longer needed to buy physical albums for $17.98 to get the one or two songs they wanted.  For the first time since 7” vinyl singles dominated the market up to the early 1960’s, music fans could buy any individual song they wanted at any time for under a dollar.  In addition, the songs downloaded “pre-ripped,” removing an inconvenient step for the consumer.  The end result, iPods, digital music sales, and consumption took off.  In 2011 in the U.S., just eight years after the launch of iTunes, digital music sales generated more revenue than physical music sales in the United States. 

At the same time, Net radio picked up speed, offering the ability for a user to listen on-line to a small number of pre-selected/filtered song streams (just like AM/FM radio). From Net radio came the ability for the music fan to listen to songs he/she selected with “interactivity;” i.e. select the song, start, stop, skip, rewind, fast forward etc.  However, before interactive streaming could take off, one very important addition was necessary: the ability for the listener to play and discover a lot more music on demand by accessing someone else’s music collection. 

Enter Rhapsody, the first on-line streaming interactive music service. Rhapsody negotiated licensing deals with labels allowing music fans to stream music interactively on demand that they did not own; a true industry first.

That being said, it’s important to note that whereas iTunes currently has over 500 million consumers with accounts and credit cards on file, the streaming services, until recently, were lucky to have a few hundred thousand paying subscribers.  With more hardware devices, apps, and connectivity entering the market, and lower prices for all of the above, that trend is shifting.  According to the 2011 Pew Research Center’s report The State of the News Media, “Americans for the first time report listening more to online-only outlets like Pandora or Slacker Radio than they do to streams from AM/FM stations.” And interactive streaming services like Rhapsody and Spotify are just a hair's breadth away from non-interactive services like Pandora. 

In other words, music fans are rapidly shifting from buying pre-recorded music to listening to someone else’s music collection via on-demand streams.  One of the last pieces of the equation holding back an even more explosive adoption of on-demand streams is the proliferation of broadband and connectivity in cars.  When that arrives, and it will in force within the next 24 months, the old system will be truly dead.  (The fight to get into the car and dominate it -- between Apple, Microsoft, Pandora, Sirius, Spotify, Slacker, Google etc -- is going to be a big one).

For today’s emerging music fans, CDs, vinyl and cassettes are a thing of the past; a fringe or niche market that is being replaced by tablets, smart phones and (soon) cars that provide instant on demand access to someone else’s music at lightning speed.

It’s the music fan that ultimately drives the industry.  If the industry does not adopt the technology that the fans want, whatever permutation of the “industry”exists will fail.

THE TECHNOLOGICAL CHANGES FOR THE ARTIST

Until recently, there was only one path for an artist to follow to pursue their dreams of becoming a national (or international) music star -- get signed to a record label.

Why? Four main reasons: barriers to recording, manufacturing, distributing, and marketing music were virtually insurmountable.

Recording

First, it was extremely expensive to record anything of technical quality.  Two-inch reels of tape (or quarter-inch or half-inch), tape machines, sound boards, mics, baffling, reverb units, edit decks, gear rentals, soundproof isolation booths, cables, effects and the expertise (producers, engineers, mixers, master-ers) needed to get the best sounds possible out of the air onto the tape—these all cost a lot of money.  Prior to the world of digital, renting a recording studio of quality varied between $500 - $5,000 a day.  To record a 12 song album, a band would usually spend a few weeks (months in some cases) in the studio just laying down the raw tracks. 

Once the tracks were recorded, they then needed to be mixed at the pace of about one song a day.  This may have happened at the studio where they were recorded, or brought to special mixing studios that had a whole other set of specially customized gear used for mixing. And of course, the artist needed someone with the expertise in how to mix, who charged an additional fee.

Once mixed, the recordings then needed to be mastered – yet another specialized niche where a trained expert with his/her costs would be added onto the costs to rent another suite of equipment.  This involves sequencing songs, adding cross fades and the spaces between each song, tweaking the mixes to assure they were all more or less at the same volume and EQ range (i.e. bass, treble) etc.

Now, add on top of all of this, the ancillary costs for the artist – hotels or studio room rentals to sleep, food, laundry, cigarettes, gas for the drive, parking etc.   

(For of an idea of how great it could be to record, check out Peter Gabriel’s Real World Studios in the UK, its mind blowing, expensive but worth the cost.

Recording an album of decent technical quality was just damn expensive; to realize the vision in their head, artists needed someone else to front the money for them.  That’s what labels did in the form of a loan to the artist that came with some serious strings attached: i.e., transfer ownership of your copyrights to us and agree to payback the loan at a rate of 12% of what your album sells for (we keep the other 88%), give up control etc.  And mind you, this was only for the less than 1% of artists that the labels let in.

Manufacturing

As if the costs to record, mix and master were not enough, the artist needed even more up front cash to manufacture the vinyl or CDs they hoped people would buy. If an artist wanted to sell 10,000 CDs, they needed to front the money to make 10,000 CDs and then hope to god they sold. The risk of not getting the manufacturing money back was huge (let alone making a profit).  If they did not sell, the artist was stuck with 10,000 pieces of plastic wrapped in shrink-wrap and a lot less money in their bank account (or unpaid credit card bills).

Distribution

The third barrier was distribution of an artist’s pre-recorded and manufactured music. The artist needed his/her music available on the shelves on the stores where people went to buy it. Unfortunately, in the physical world, an artist simply had no way to get his/her CDs onto the shelves of the 10,000+ retail stores across 3,000 miles of the United States. Physical distribution is an expensive, inefficient, costly endeavor of trucks, warehouses, shrink-wrap, inventory systems, finance systems, employees and more.  The only way to get distribution was for the artist to do a deal with an entity that had this pre-existing infrastructure – another function of the major labels.  In addition, physical retail stores could only stock so many releases before they ran out of room.  It was only the majors with their pipelines and money that had access to the shelves of stores like Walmart, the number one music retail outlet in the United States for a period of time.

Marketing

The fourth and final step on the road to success was marketing and promotion of an artist’s music.  Music marketing and promotion was accomplished by having a song (or music video) played for other people in hopes those people would like it, buy it and tell others. 

The old media outlets for music discovery and exposure were the tightly controlled and gated arenas of commercial radio, MTV and print magazines, all of which could only be reached by a record label. (Mind you, just getting exposure through these media outlets did not guarantee success. 98% of what the major labels released failed, because it did not cause enough reaction in consumers to motivate them to buy the music through retail outlets.)

Labels were well aware of the position they held and took full advantage of it.  They exploited the hell out of artists by requiring them to give up their copyrights, control and over 85% of the revenue from the sale of the pre-recorded music in order for the artist to gain access to distribution, marketing, and recording funds.  In addition, labels removed transparency in royalty accounting and did their best to create laws that singularly benefitted them.

Technology changed all of these four points for the artist.

First, it’s far cheaper to record now than it ever has been before.  In addition, the level of expertise needed to record has dropped considerably.  With a laptop, some one-time purchases of software and some hours to learn how to use it, a home recording studio can be created for the cost of one day’s recording at a high-end studio.

Second, in the digital world there is no up front cost or risk to manufacture inventory.  The music is available in unlimited quantity as a digital file that replicates on demand only after it’s bought or accessed to stream.

Third, music fans have shifted from buying CDs in stores to buying/streaming music on-line.  Now an artist, for a nominal fee and the click of a button on a website, gets an unlimited amount of self-replicating inventory with no up front cost into the world’s largest music retail stores (i.e. iTunes is larger than Walmart ever was), all while keeping their copyrights.

Fourth, there is now equal access to music discovery outlets – YouTube, blogs, Slacker, Pandora, Spotify, digital music stores’ discovery features, Twitter, Facebook and other social networking applications are open to everyone, not just the elite few artists signed to labels. The only media outlet not open to everyone is commercial radio, but with that going the way of the 8-Track over the next few years, the last stranglehold of the traditional music industry will be gone.

THE END RESULT

Artists no longer need labels to record, manufacture, distribute, or gain access to media outlets.  The traditional music industry based on the concept of “exploitation” of the artist is being replaced by an industry that serves the artist.  These new service entities provide value at fair prices while being innovative, transparent, accurate and fast.  Due to the fierce competition between these new music companies, it is the artist who now has the power as they get to determine which ones will survive. The culture gatekeepers from labels and media outlets no longer get to decide which artists and music the general population gets to listen to.  Instead, crowd sourcing is the new A&R.  All artists now have a shot. The only thing not changing is the hardest task of all: the creative challenge for the artist to create music that makes a personal and meaningful connection with the listener.

Music fans no longer need labels, retail stores and media outlets to pre-filter what pre-recorded music they get to hear and buy.  Instead, the general population has access to all music, makes it owns decisions as to what is “good” and can buy individual songs.  In addition, fans no longer need to tether themselves to one device  designed solely to play pre-recorded music.  Instead, they can buy a smart phone, tablet, etc that not only makes phone calls, takes pictures, texts and shows movies, but also includes on-demand access to an almost unlimited supply of music via ubiquitous cellular and WiFi networks.  There are now more people engaging and listening to music, and it will be available through all their devices, everywhere, at all times.

Despite these undeniable realities, the traditional labels are still attempting to prolong their control and revenue by operating as if the CD music industry world of 1995 still applied. The labels:

• Sue music fans for copyright infringement  
• Create more onerous agreements between labels and artists requiring them to give up even more of their copyrights, not fewer (the infamous “360deals”) while providing less value.
• Use antiquated royalty accounting systems and provisions to slow down or reduce royalty payments owed.
• Stifle innovation under the guise of “protecting” copyright (As one example, the majors made it a condition that they must own a piece of Spotify in order for Spotify to have access to their music).  
• Killed artist development and long term careers in a mad dash attempt to make money as quickly as possible.  
• Feed the media as much false information as possible (i.e. the entire music industry is dying) in an attempt to discredit, slow down and delegitimize the new emerging industry. 

Despite their best attempts, the supposedly “impossible” is happening as many “unsigned” artists top the sales charts of the music stores and sell millions of units of music - i.e. Civil Wars, Alex Day, Boyce Avenue, Hoodie Allen, Blood On The Dancefloor, Lecrae, Colt Ford, Ron Pope etc etc etc.

The transformation is now technologically complete. There is very little left to “disintermediate” or “disrupt.”  The old system is in ruins, degrading a bit more each day.  With all the new pieces in place, there will soon be little left of the Wayne’s World record executives pulling up in their white limos signing the artist to a contract requiring them to give up their rights and revenue so they can decide which artist gets to make a 5” circular piece of plastic available for music fans to buy at Walmart.

The new system will not be perfect by any stretch. Like it is with any system, there will be great things and bad things.  But I strongly suspect that the worst of the new system will not be considered that bad when compared to what was.  That is, until the next disruption occurs and it all starts over again.

Posted 14th September by Jeff Price