Deconstructing Pop Culture: Things We Know to Be Indubitably True about the Music Business
COLUMN: I thought I would make a list of propositions that everybody in the music business can agree on, regardless of their stance on various philosophical, economic and theological issues. In other words these are supposed to be completely neutral and not biased towards any particular ideology. If anybody disagrees with any of these, please let me know. Also please let me know if there are other candidates for indubitably true propositions that I've missed (I'm sure there are plenty of these). Even if not specifically stated, all of these are subject to the caveat that they â€œusuallyâ€ or â€œtypicallyâ€ apply â€“ of course there always are exceptions.
Music in General
1. There is no evidence that now in the early 21st century people like music any less than they did at any other time, such as, e.g., the 1960s â€“ 1980s.
2. One can undertake a wide variety of other activities while listening to music.
3. Whether a song becomes a hit or an act becomes successful can't be predicted in advance.
4. Not that many people care about â€œaudiophileâ€ sound quality.
5. The experience of listening to music that is streamed on the Internet most closely resembles listening to a radio.
6. The experience of downloading music on the Internet most closely resembles buying finished goods sound recording devices (such as CDs).
7. If given a choice, consumers will prefer â€œunrestrictedâ€ downloads to â€œrestrictedâ€ downloads. Examples of the latter are: serial copy management, restrictions on the number of downloads, or downloads that expire after a period of time.
8. Consumers are spending less on CDs than they used to. (Same with DVDs.)
9. For some reason consumers enjoy possessing (â€œowningâ€) consumer entertainment software in the medium of â€œthingsâ€ (e.g. CDs, or the number of songs one has stored on one's hard drive). Subscription sites have not been as successful as (say) iTunes.
10. The more CDs/downloads a consumer possesses, the less likely he/she is to listen to any of them on an individual basis. Many CDs get played once or twice and then simply sit on the shelf.
11. Often, consumers are attracted to an act for reasons other than its inherent musicality or musicianship. Often, they gravitate towards factors such as the musical composition (the â€œsongâ€) the act performs; aspects of its arrangement (such as the melody and the beat); or the act's lifestyle/personality characteristics. (Of course there are exceptions to this but often they occur in harder-to-reach niches.)
12. Consumer entertainment software is subject to high elasticity of demand. For example, in many instances, charging even $.01 for a download will eradicate whatever consumer demand exists. Many consumers prefer getting equally substitutable goods (price, quality, convenience) for free. Reciprocally, they are willing to pay more for marginal enhancements in any of those dimensions.
13. The music business is under pressure from other forms of entertainment such as videogames.
14. One of the most effective ways to promote an act is for consumers to hear it, typically on the radio or at a concert performance. Counter-intuitively, radio exposure stimulates consumer demand â€“ it doesn't displace it. Many people would like music they haven't heard if only they could hear it.
15. There isn't much consumer demand for jazz CDs and classical CDs in relationship to other styles or genres of music.
16. There is no particular connection between being a musician (songwriter, performer) and being popular. Works of art can be aesthetically valid even if they aren't mass-produced or appreciated by a mass audience.
17. Creativity fosters at the lowest possible level of corporate organization. It is not amenable to bureaucratization and (as opposed to the production or duplication of the work) has no economies of scale.
18. With the democratization of technology that began in the 1990s, master sound recordings can be produced relatively inexpensively. This trend started with the Alesis ADAT and the Mackie Mixer and has continued with the development of digital audio workstations and virtual instruments. Formerly, studio technology required a higher level of knowledge and expertise. (Note: this doesn't mean the master sound recordings in fact are technically proficient. However, that's usually not a big contributor to sales.)
19. Typically it costs more to make movies and author videogames than it does to make a master sound recording. Typically it costs less to write a book.
20. It is relatively easy for neophyte acts to obtain whatever services they require to record, manufacture, distribute, market and promote master sound recordings. Personnel and facilities can be retained for only a slight premium over the marginal cost to supply them. One thing that cannot be obtained on a sub-contracted basis is consumer demand.
21. A â€œmarginal actâ€ is one that either is unlikely to recoup the amount of the advance paid to it by the record company, or, even if it recoups, is unlike to be significantly profitable. (â€œMarginalâ€ doesn't mean they aren't aesthetically valid â€“ it just means that from an economic standpoint they are at a point on a curve where marginal cost exceeds marginal revenue.) Many acts signed by record companies are marginal (using this definition) â€“ a figure that often is quoted is nine out of ten (although even this may be understated).
22. Generally speaking acts aren't scalable. It's necessary for somebody to spend a certain amount of time and money developing, marketing and promoting them, regardless of commercial potential. Record companies typically are not willing to spend as much time now developing marginal acts, as they formerly may have been.
23. It's usually difficult for a marginal act to make money touring. In many instances it's difficult for the marginal act even to break even.
24. Only a few acts achieve pop culture celebrity status. While not necessarily marginal, the rest present a considerable degree of risk. For example, it's easy to overspend marketing and promoting them, in an attempt to engender consumer demand that either doesn't exist or can't be developed for less than its marginal cost.
25. Being a pop culture icon usually doesn't have that much to do with performing music. It is far more related to media presence and all of the other component parts of the star-making machinery. More and more, this also is so for everybody else. Many acts now are spending as much (if not more) time marketing and promoting themselves, than being musicians (songwriters, performers). To do so successfully involves acquiring skills, which have little to do with being a musician (songwriter, performer).
26. MTV-style videos now by and large are not as effective as they used to be to promote acts.
27. The Internet makes it easier to comprise virtual affinity groups. There is a sense in which the heavy metal fan on Sunset Boulevard may be closer to his/her counterpart in Tokyo than he/she is to his/her next-door neighbor.
28. The Internet proliferates affinity groups that would be considered marginal on a territory-by-territory basis. For example, it's theoretically possible to aggregate all lovers of Bavarian polka music or Greek balalaika music. In principle it should be less costly to market to these aggregated groups.
29. Every artist needs a website and a presence on social networking sites (Facebook, MySpace, etc.).
30. It can be difficult for individual artists to access consumers on the Internet. While in principle any artist should be able to accumulate and aggregate constituents (fans), many require marketing intermediaries to do so successfully.
31. It is proving difficult to monetize social networking sites.
32. Unless an artist is an international pop act, it's unlikely that sales in foreign territories will exceed 10% of domestic sales.
33. With â€œoldiesâ€ acts, people only want to hear the â€œhits.â€ They usually aren't all that interested in hearing new material.
34. With regrouped â€œoldiesâ€ acts, most often it is the configuration led by the former singer that will experience the most commercial success, because the singer is most closely identified with the song.
35. Without recording artists there would be no record companies.
36. Large record companies have a fixed cost apparatus (personnel, facilities, etc.), which they have to amortize over net revenue.
37. Large record companies are good at performing corporate functions requiring economies of scale (manufacturing, distribution, credit, collections).
38. There is no particular reason why the business model for record companies should remain stable. Other areas of American industry recently have experienced seismic dislocations, e.g. banks and car companies.
39. Record company revenue from non-physical goods is not increasing as fast as revenue from sales of physical goods (CDs) is declining.
40. The main assets record companies own are master sound recordings. From both a practical and an accounting standpoint, finished goods in any form (e.g. CDs) are a liability. They are subject to overproduction to meet anticipated consumer demand that doesn't occur. They are subject to obsolescence (and component costs, e.g. for insert cards, are subject to even further obsolescence). They are subject to return by customers (wholesalers, retailers) if they don't sell.
41. One of the main roles of record companies is to act as a financial intermediary between consumers and the act. In this capacity, they buffer the act from the risk of failure in the marketplace by paying for recording costs and giving advances against royalties. Advances are recoupable from royalties as they are earned but not reimbursable in the event the advance is not recouped. Advances have to be amortized over the number of units sold by the record company and other revenues received.
42. The amount of advance a record company is willing to pay to an act frequently is a good indicator of its belief in the act's commercial potential.
43. Record business contracts do not guarantee a successful act a percentage of gross receipts in the same way movie business contracts guarantee a successful actor a percentage of gross receipts.
44. A stable of marginal acts (see above definition) presents a significant return on time problem for the record company, in that it doesn't know (at the starting gate) how to allocate limited promotion and marketing resources. For this reason it must develop a kind of â€œearly warning systemâ€ to detect commercial momentum, and triage quickly those acts that do not develop commercial potential at an early stage.
45. Record companies must amortize their investment in marginal acts over those (much fewer) acts that become non-marginal, i.e. that recoup and develop significant profitability.
46. A label's â€œbigâ€ artists tend to subsidize all of the label's â€œmarginalâ€ artists. This may be a misallocation of entrepreneurial rents, which is one reason why the contractual model for â€œbigâ€ artists has evolved into more of a reverse-distribution-deal, where the artist simply pays the label a fee to manufacture and distribute (e.g. Garth Brooks, Madonna, Metallica). These deals are not particularly profitable for record companies (there is only a slight premium of marginal revenue over marginal cost).
47. If given the opportunity, most artists would prefer to receive a large advance against anticipated royalties (instead of no advance, or a small advance). Evaluating an artist's marginal profitability in light of the amount of the advance is the record company's single most important financial calculation. This dilemma has the potential to lead the record company into a moral hazard problem (says the act: â€œif you believed in us, you'd be willing to pay us a larger advanceâ€).
48. Contracts that present themselves as â€œjoint venturesâ€ between the act and the label frequently end up realizing the same economic result as a conventional royalties contract. In fact the act may end up being worse off because the record company can charge the â€œjoint ventureâ€ for failed marketing initiatives, overproduction of finished goods, and similar charges, that usually are its risk.
49. Historically, record companies have attempted to mitigate against development risk by contracting for multiple albums to be delivered over a period of years. On the other hand, the basic contracting model in the movie business is one movie at a time (possibly with loose and highly contingent options for a prequel or a sequel).
50. Record companies do not necessarily have the in-house expertise to commercially exploit all of the rights they acquire in a â€œ360 deal.â€ From the standpoint of economics, it is inefficient for somebody to acquire a right but then not exploit it (in the sense that it is lying fallow and might generate revenue if somebody was able to commercially exploit it with a premium of marginal revenue over marginal cost). Sometimes the most valuable use of such an unexploited right is to â€œblockâ€ others from attempting to exploit it (in the sense that the main component of marginal revenue over marginal cost is the unexploited right's contribution to the marginal profitability of other, exploited rights). Sometimes the record company is willing to enter into some sort of licensing agreement where the record company receives an advance, which it then shares with the artist or applies against the artist's (unrecouped) royalties account.
51. Only a tiny fraction of music copyrights (both compositions and masters) have any future value. The vast majority of them â€“ well in excess of 99.9% â€“ are worthless. (Stronger version: as a business model, the so-called â€œlong-tailâ€ theory of copyright value is invalid except on a grossly aggregated basis, or as a cultural paradigm.) There is no evidence that if record companies spent money marketing and promoting non-demanded copyrights they suddenly would become valuable; nor is there any evidence that the artists who wrote or performed the underlying works would do a better job at marketing and promoting them than record companies. There simply no longer is any consumer demand. (Stronger version: record companies could safely revert these copyrights to the creators of the works with no marginal financial consequence.)
52. Promoting concerts (like Live Nation or Anschutz Entertainment Group) is a low-margin business. The promoter acts as a financial intermediary between the act and the consumer, often guaranteeing the act upwards of 90% of gross receipts.
53. Concert promoters (Live Nation, AEG) do not own any intellectual property rights. All of them are retained either by the act or (more typically) by the record company.
54. There is no evidence that concert promoters (e.g. Live Nation) who have entered into â€œ360 dealsâ€ with large acts (e.g. Madonna, U2, Jay-Z) will be able to exploit whatever rights they have acquired any more efficiently than record companies. There is no evidence these acts would have contracted with anybody else to promote their tours.
55. There is greater elasticity of demand for tickets than one might expect if one simply considers their face value.
56. Many large music retailers (e.g. Best Buy, Target) sell CDs at cost or at a slight premium over cost, as a loss-leader for other higher-margin goods.
57. Record company return policies protect music retailers from the risk that an act will not be successful in the marketplace.
58. Music retailers are subject to many market conditions that have nothing to do with music, e.g. the economy, disposable consumer income, demand for consumable goods, etc.
These premises lead to certain conclusions (inferences, not deductions) about the record business as now constituted, which I will explore in a later post.