Record labels traditionally have had three core responsibilities: produce music, market music and distribute music.
But what happens if one of those duties is taken away?
It's an interesting question to ponder in the digital age, as more labels outsource digital distribution-that is, hire a third party to deliver digital songs and albums to digital retailers and streaming services like iTunes, Amazon, Rhapsody and Spotify, and supply mobile operators with ringtones, ringback tones and full-track downloads.
The ramifications are more than just cost savings. They could also affect the very future of the digital music business, potentially for the better.
The most significant milestone in this transition came in June, when Universal Music Group replaced its entire digital distribution system with that of INgrooves in North America, a company in which it is also an investor. With Sony Music Entertainment and EMI Music using Sony DADC for digital distribution, that leaves Warner Music Group as the only major to do things in-house.
Why would UMG do this? Cost is certainly a factor, as it's cheaper to pay another company to build and manage a distribution platform that's used by other clients than to build and maintain one yourself. (INgrooves also handles the digital distribution activities of several independent labels like Razor & Tie, Nettwerk and Fat Possum and is the back-end provider of ReverbNation's artist distribution features.) But this is more than a dollars-and-cents discussion. Compared with the logical challenges of shipping, storing and racking CDs, digital music delivery might seem relatively simple. But it comes with unique challenges that require a robust delivery platform. There are price variables, multiple formats and bit rates to contend with. There are also varying international rights to consider, as well as metadata and multiple royalties to keep track of-all of which need to be automated in a database that can quickly adapt to new formats and technologies.
Smaller companies like INgrooves that focus solely on digital distribution can dedicate more attention to the technology behind these distribution platforms.
Digital distribution "is not viewed as a core competency for the labels, although they've done an admirable job," INgrooves CEO cqRobb McDaniels says. "It's been progressively difficult for them to keep up with the pace of innovation in the marketplace."
TuneCore, which is best-known as a digital distribution solution for DIY acts, also provides distribution for several indie-label clients.
"If you're going to be a music company, you need to have the efficiency of digital distribution," TuneCore CEO Jeff Price says. "You have to do it in a very fast and on-the-fly manner. I can get something live for them within a half an hour, and they can't do that with their own systems."
Here's where it gets more interesting. Digital distributors like INgrooves and TuneCore aren't just interested in label and artist deals: They're chasing publishers and songwriters, too. For instance, in late July INgrooves struck a digital distribution deal with performance rights organization SESAC. Last September, TuneCore teamed with ASCAP. Expect to see more such pairings in the future.
The goal here is to condense the various rights associated with selling or streaming music into one system, a one-stop shop for digital services to obtain all the legal agreements needed to add music to whatever they plan to offer fans.
"I'm more interested in someone that controls all their rights, as opposed to a limited number of rights, because we're interested in doing direct licensing, so you can come to one place and get the master, the performance, the mechanical," Price says. "You can circumvent [performing rights organizations]. You can pay people more quickly with more money."
This would be a boon for digital services struggling through the music licensing process, often chasing different rights-holders to sign the necessary deals. Aggregating both recorded music and publishing rights into one platform would make the licensing process significantly easier.
But more labels and artists would have to start using these digital platforms for that to have any significant scale. UMG, the largest record label in the world based on market shareaccording to soundscan?, is already largely there. Time will tell if other labels will follow.
"When you look at where they are today versus 10 years ago, one of their three main functions is now something they're comfortable outsourcing," McDaniels says. "That's a pretty dramatic shift."••••