The big film studios control most of the production and distribution of their films. Smaller studios, or production companies usually hire specialists to do some of the work on their films since they cannot afford the cost of maintaining their own facilities, paying full-time editors, etc. In the old studio system, the studio would have a contract with a particular actors and directors both, but in the modern industry, artists are free agents and are represented by unions.

When films come to market, they are typically shown in cinemas to audiences who pay to attend the showing. Films might be subject to a limited release to test the market and/or build buzz via festivals. After the films have been released in cinemas, they are sold to individuals for private viewing; sometimes films bypass the cinema release and are released directly for private viewing. The film studio owns the entire production and earns income from anything resulting from that work, including sales of derivative products, branding, and merchandise deals.

How the Music Business Differs

While both the film and music are media industries and have a large number of commonalities, it is important to not conflate the two. The music industry, especially in the independent sector, doesn’t have the same level of control over the release and its production. Record companies generally do not own the infrastructure for the production of recorded music; they pay studios to do that. Many independent record companies will even simply license an album from an artist, who pays for their own recording; even some majors have done similar deals with very popular artists. Historically, recording contracts have been for multiple albums, usually three, with the so called “option” to have a second or third album being the record company’s right to exercise, i.e. if the company does not exercise its option on the second album, the artist is free to go find someone else to release it.

Unlike in film, music artists perform live to audiences and the record companies do not usually get a share of this money. There is no real market for playing albums to paying audiences, and the club and DJ industries really rely on sales of alcohol to support their businesses. Some record companies might even see a live performance only as an opportunity to promote the recorded music they sell, although industry figures show a growing trend of fans purchasing their music directly from bands at gigs. Merchandise is not usually included in record deals, either.

The More Things Change…

This simple structure is changing for all players in the music industry now that it has become more difficult to make money off of selling music recordings. Major labels have had the money and influence to offer lucrative deals to artists for merchandising rights, promotional appearances and so on, and many have included some of these things in their contracts. Lately, deals made with bigger artists have included all of these things. The new model is the so-called “360 deal” (from 360 degrees, indicating an all-encompassing agreement), in which a company gives an artist much more support in exchange for a share of all of the income streams generated by that artist: music sales, live performances, merchandising, promotional appearances and so on.

360 deals touch on many areas that have not really been the domain of record companies, new players have entered the field of music production and marketing from areas like (live music) promotion. For example, in 2007 Madonna signed a long-term deal with Live Nation that covers nearly all activities she might take part in–Jay-Z and Robbie Williams have done similar deals. Remember the “old” movie studio system mentioned above? These deals are a lot like that.

* This blog isn’t called “Film Industry Rules” for a good reason: we know more about the film industry than most people outside of the industry, but we’re not experts. This means we’ve had to research the topic. almost like real journalists. We think this sketch is general enough to avoid cringing from the film crowd.

Edit Log

2012-01-22: Fixed language throughout post.

It means nothing.

The change in ownership of a major label like EMI from one finance company to another means nothing at all for music fans, musicians or even the music business. The major labels are massive corporations with many shareholders. Now the largest part of EMI is owned by another finance company. No change there. Citigroup used the money owed to it to leverage a takeover of EMI, its Board obviously deciding that they were more likely to recover their investment by taking over the company rather than liquidating it. Now, that is interesting.

It’s likely that Citigroup will try to sell EMI quickly. If they decide to resell EMI to another major label, the purchaser’s Board of Directors will almost inevitably decide to consolidate their business and fire staff they consider to be redundant. We often humanise corporations by speaking of them as if the CEO / Managing Director were the force behind every decision or claiming they practice Corporate Social Responsibility (CSR), but that simply isn’t true. People will be fired because that is the most cost-efficient thing to do.

We know what happens, so while music fans need not worry that they will be able to buy Katy Perry or Coldplay CDs, and artists contracts would be sold along with the company, people who work for major labels should be concerned for their jobs.

The alternative proposed by the film is a fixture of the independent music industry: artist-run labels. It is very important for artists to understand the business side of things if they want to succeed. This is nothing new to people familiar with how ethical independent labels work, and the carousel of major artists who have made a lot of money from the majors system were acting as if they’d invented the idea.

The choice of interviewees was very revealing in some ways, and it was interesting to see  Jenny Toomey (formerly of Simple Machines and the Future of Music Coalition, and now the Ford Foundation) talking about how Clearchannel has taken over the world. (And yes, low-power radio would be a great thing to have as an alternative.) The other interviewees appeared to be all people who worked for major labels at one point or another, and so were happy to not talk (except Erykah Badu) about the deals majors make with their artists and rather focus on the lack of artist development. A large advance from their label is the only money many artists ever see from their deals with majors.

Eric Clapton and one of his proteges who signed a deal with Geffen and then wanted out after they apparently put pressure on him to sell music (the very thought!) on his third album are used as an example of what can happen to an artist with lots of potential who isn’t developed properly by his label. Eric says the guy is good, which is a shortcut to us discovering for ourselves whether he’s any good. Perhaps that’s a legitimate storytelling technique, but my heart hardly bleeds for the plight of the guy who very likely had a huge advance from a major and then decided it wasn’t for him. Do you know what our label could do with that kind of money? So if you don’t want to write hits, don’t sign to a major!

I did like the overall message of Before the Music Dies, though: understand the business of music if you are an artist. It’s just too bad no real alternative was proposed for music fans. There are so many to choose from!

Less polished, but possibly more compelling to indie retail advocates like myself, I Need That Record (Uncut review) tells the same basic story from the perspective of US independent music retailers and their customers. Brendan Toller’s story concentrates mainly on the personalities involved, some of which are larger than life. Record shops exist as hubs of social activity–someplace to hang out–so the loss of a shop means more than just another business closing.

Toller’s interviewees include Ian MacKaye, Glen Branca, Thurston Moore and Mike Watt on the artist side, speaking as music fans, and Mike Dresse of Newbury Comics and Rob Miller of Bloodshot records (most gratifyingly in front of a PW Long tour poster) representing retailers. Toller also interviews Noam Chomsky, who represents the Left, and well at that!

Some readers might be familiar with Graham Jones’ book Last Shop Standing, which is about the demise of music retail in the UK. I Need That Record is a similar kind of document, but it feels more poignant because it focusses (almost) entirely on record shops that have gone out of business, a kind of In Memoriam.

http://songbytoad.com/2010/02/owning-information-and-terminating-debate/#comment-41555

I help run an independent label, so I’m writing from that perspective.

We really don’t have a problem with bloggers writing and sharing individual tracks on a release, as long as they use the “covermount” track we provide to everyone for free, or get permission from us to use another track. We do have a problem with bloggers posting entire albums and we file complaints against them with their hosting service provider.
We have our own semi-automated system (which I wrote myself) to deal with the actual takedown notices. It’s more expensive to do things this way, but using the automatic systems the IFPI and others have developed comes at a cost in terms of the relationship artists and labels have with the fans. I think the industry organisations like the IFPI and its members the BPI and RIAA are far too heavy-handed with fans and people, like bloggers, who have less traditional roles in the music business. Educating people about the difference between what a normal independent artist earns from their music, and what a major-label-manufactured “act” makes seems like the right approach. Let’s just say that almost of the artists on our label won’t be quitting their day jobs any time soon.

Over the past 15 years, a new generation of music fans has developed in an environment where music is omnipresent and seemingly free. Music is not given the same value that previous generations might have attributed to it, and it is now difficult to explain how those 15 years of “free” were actually paid for by the people who produce music.

Of course there are “bloggers” who produce no original content and share entire releases, often ahead of the official release date. I don’t think these bloggers are motivated by any (or much) genuine love of the music. I think their motivation is similar to that of the pirate/cracker BBS community in the computer software world–prestige and bragging rights–but these bloggers can’t even claim to be particularly clever since ripping a CD is not even remotely as difficult as overcoming copy protection on software.

It’s hard to get statistics about how much illegal downloading
actually takes place, but since they linked to our image, our server
faithfully kept track of how many times someone loaded that image on
the blog. In the month of October, that image was downloaded 31,000 times and so far in November, it’s at 12,300 hits. That’s a lot of hits for one release on a small independent label.

As an aside, I’ve since taken steps to make sure that hotlinking on
our site doesn’t work very well. I’m sure they’ll be surprised to see
the images have changed.

Who benefits from music sales?

Some artists choose to sell their copyright to labels in exchange for the money necessary to make a recording (an “advance”) and an ongoing share of the sales of that recording after the label earns enough in profits to cover the advance, production and marketing of the release. This is called “recouping”. Among independent labels, the artists share is often half and sometimes even more. Major labels generally do deals where the artist gets a much larger advance and a smaller share of the sales, with the assumption that the sales will be much higher due to the investment the major label can make into getting the recording into the public eye.

In the world of physical releases, the label will take the final master recording and have it made into a physical product, or several, based on sales projections it has made. The product is then shipped to distributors, and then on to retailers, who put the release out for sale.

Where digital distribution is concerned, the label may choose to deliver directly to retailers or to use a so-called “aggregator”, which is simply a digital distributor. Regardless of who actually does the work, they take a copy of the master recording and convert it into one or many file formats that the retailers need to “ingest” the release into their system, then they add all the information retailers need to have about the recording–the “metadata”. The metadata is almost never just the titles and names on the recording, but also the right holders for the recording and the artwork, the territories in which the release may be sold (yes, even on the internet), the release dates, and some guide information for pricing the release. All of this is then packaged up in an agreed format and sent to the retailer, who puts the product up in its online shop.

From this description, you can see that the people who profit from this supply-driven system include songwriters, performers, record companies, distributors and retailers. Each step along the music supply chain is dependent on the premise that the artist has the right to sell their music and that there is someone willing to pay to listen to it.

Who benefits from illegal file sharing?

How illegal downloading of music works is probably easier to explain if you follow back the supply chain from the consumer. Of course, there are also more philosophical implications from looking at things this way, and it does appear as though the illegal system is, in large part, demand-driven. The basic scenario involves someone who is looking for music to download for free–an obvious benefit over having to pay for the music. The downloader has quite a few options for getting new music, such as using software to connect to a peer-to-peer (P2P) network, file sharing forums, browsing blogs, searching on “pirate” sites, and simply asking for something via instant messaging (IM). The supplier may change, but the thing that does remain constant is that all the downloads go via a connection that is provided by the the downloader’s internet service provider (ISP).

On the other end, there may be someone connecting via their own ISP, or a site that is on the network of a hosting company (HC). Regardless of whether the download is located on a dedicated web server or on a number (often a large number) of personal computers connected via a file sharing protocol, there is one more commonality in the illegal download supply chain–the uploader. What exactly motivates uploaders depends on the means of distribution. For example, the BitTorrent P2P protocol (which is also widely used for perfectly legal downloads) discourages “leeching” by throttling their download speed according to how much they upload to others for a given file–helping make sure the download remains available. Thus, motivation is built in. With blogs and file sharing forums, often it is a feeling of prestige that motivates uploaders. With forums in particular, members can earn “kudos” from other members for uploading files. With so-called “pirate” sites, uploaders are often members of groups who compete with each other to provide the best / most popular material the quickest, analogous to the groups that crack the copy protection on computer games.

The owners of these sites can also benefit financially through advertising revenues. Nothing is quite as appealing as “free”, so these sites often have very high traffic, making them attractive to advertisers. You will frequently see advertisements from perfectly legitimate companies in places where illegal activities are taking place. In addition to paying a site owner, advertising revenues are used to pay for the costs of maintaining the site, such as hosting fees (from hosting companies willing to host such sites), and so these HCs also benefit from illegal downloads.

It is the ISPs who remain the common denominator in this entire system. While stopping short of actively encouraging illegal activities, many ISP customers consider the ability to download music for free as part of the package of services the ISP offers. Of course downloading music isn’t really free, since you have to pay an ISP for a connection to the internet. And thus the ISP also benefits from illegal downloading, with customers buying faster services with fewer download restrictions in order to be able to access more “free” content.

The Shadow Economy

We have seen that the parties who profit directly or indirectly from illegal file sharing are the downloaders, the site owners, the advertisers, some hosting companies and the internet service providers. The fact that many advertisers, HCs and ISPs profit from illegal activities has created a shadow economy which, on the face of it, is legal, but which isn’t particularly ethical. In fact, the fact that these companies benefit from illegal activities encourages a kind of wilful ignorance of those activities.

This shadow economy has external power, as well. Governments don’t like to involve themselves in matters that can end up being very messy, so are loathe to take on anything without a clear legal mandate. Solutions have been suggested and experiments have been carried out, such as the recent UK-wide letter-sending scheme in which ISPs sent out letters to their customers who were caught by (major label) record industry organisations while distributing illegal downloads.

I doubt whether such measures will have any effect without the threat of access termination. This was just about the only point on which I agreed with the BPI and IFPI at a recent talk I attended where the spirit of the discussion indicated the move from scaring 15 year-olds with legal action to sticking it to them using technical means. Unfortunately, BPI research from the beginning of March this year indicates that abstract warnings do not appear to affect the average illegal downloader.

Monetise It

My personal preference for addressing the problem is a monetisation scheme in which ISPs monitor customer downloads and the customer is charged for the download. There are a couple of problems with the idea, though, not the least of which is a privacy issue. One could argue that any right of privacy ends when the activity becomes illegal, but I personally would not feel comfortable knowing my ISP is actively monitoring my every move regardless of any legal issues. Another problem with the monetisation scheme is how to charge the customer. Do you add the price of anything the customer downloads to their monthly bill? How do you determine the price? In a perfect world, the artist or label would set the price, but in the digital world, nearly all retailers reserve the right to set the price at what they think the market will bear. What it all boils down to is this: Should ISPs be treated differently to retailers where recovering money for artists and labels is concerned?

My first theory has to do with convenience, which is What Customers Want. Perhaps they value convenience over quality. The high-quality lossless formats like FLAC or, heaven help us, Apple Lossless (ALAC) or WAV make files that are simply too large. MP3 and the like are quicker to download. But if this is true, why hasn’t the spread of high-capacity broadband made the lossless formats more attractive? Or maybe it has, and it’s time for a change.
The second explanation is about compatibility and storage capacity. Audio device manufacturers only support certain formats. I think it’s safe to say that most devices on the market today support MP3, which is the de facto standard. And since MP3s don’t take up much space, the audio device manufacturers don’t need to make devices with a lot of storage. However, if this is the case, why haven’t more manufacturers opted for Ogg support, since Ogg files sound better and are smaller at the same bitrate? And as storage decreases in price, will there be more interest in promoting lossless formats.
And what about Apple promoting its own proprietary formats? Why does ALAC exist when FLAC does the job better?
My last theory involves planned obsolescence. What if retailers are offering products in a low quality because they know it means that they can sell it to you again when the devices improve to the point that it becomes apparent to most consumers that the sound quality of their MP3s is horrible.

It is with great sadness that we are reporting some major changes here at Touch and Go Records. Many of you may not be aware, but for nearly 2 decades, Touch and Go has provided manufacturing and distribution services for a select yet diverse group of other important independent record labels. Titles from these other labels populate the shelves of our warehouse alongside the titles on our own two labels, Touch and Go Records, and Quarterstick Records.

Unfortunately, as much as we love all of these labels, the current state of the economy has reached the point where we can no longer afford to continue this lesser known, yet important part of Touch and Go’s operations. Over the years, these labels have become part of our family, and it pains us to see them go. We wish them all the very best and we will be doing everything we can to help make the transition as easy as possible.

Touch and Go will be returning to its roots and focusing solely on being an independent record label. We’ll be busy for a few months working closely with the departing labels and scaling our company to an appropriate smaller size after their departure. It is the end of a grand chapter in Touch and Go’s history, but we also know that good things can come from new beginnings.

(Corey Rusk, quoted in [1])

If this has happened to Touch & Go, it could happen to almost any independent label. I hope this news isn’t a prelude to a rash of other closures. I really feel that mid-size independents have been hit much harder by the changes in the music market that have led to a large overall drop in sales across the industry. The tiny labels have no overheads and few staff, if any, and the majors can live off the fat of the land. But with the mid-sized independents like T&G, there isn’t any fat to begin with, and it’s incredibly hard to find anywhere to cut. And what does get cut are the vacations, the evenings and weekends at home and any sense of optimism about the future of the music business.

It’s much easier for IODA to aquire new retailers than for a smaller digital distributor for the simple reason that the digital retailers are willing to do all the technical work (converting files, especially metadata, into the format required by their shop) in order to be able to sell from the vast IODA catalogue, whereas for a smaller digital distributor like ourselves, we end up doing the work ourselves because the retailers are usually unwilling to put in the work required to import a smaller catalogue.
Of course you have to ask yourself whether having your catalogue available in every little digital retailer is important to you. As of 2005, Apple was said to have 70% of the digital retail market share. This is probably lower now, with all the competition from other retailers that have entered the market, e.g. Amazon MP3, but you can probably cover 90% of the market with just a few retailers, especially if your label’s genre is well-represented by a certain site, e.g. Juno for dance music.
At one point, Apple was actively looking for labels to submit their music to iTunes via iTunes Producer, an application that looks and acts much like iTunes. iTunes Producer is supposed to make it easy to send Apple your content and controls the ripping, metadata entry and upload phases of content delivery to iTunes.
Another business model is that used by Consolidated Independent (CI) in London. If you negotiate a contract with a digital retailer, they can do delivery for you. The main advantage to this is that once your catalogue is submitted, you still retain control over it. This contrasts with digital distributors who still retain control over your catalogue because the retailer has no direct agreement with you. If you change your digital distributor, your catalogue has to be taken down and re-submitted.
As far as I know, none of the other retailers is really interested in dealing with smaller catalogues because it is simply too much trouble for too little gain.

Industry rule number four thousand and eighty
Record company people are shady
So kids watch your back
Because I think they smoke crack
I don’t doubt it
Look at how they act.”

A Tribe Called Quest
“Check The Rhime” from Low End Theory