Record Companies Must Embrace Changing Digital Landscape

Charles Darwin would be proud. Today's harsh music climate is certainly putting his survival-of-the-fittest theory to the test. In this do-or-die atmosphere, artists are increasingly being forced to p

Charles Darwin would be proud. Today's harsh music climate is certainly putting his survival-of-the-fittest theory to the test.

In this do-or-die atmosphere, artists are increasingly being forced to pursue new avenues of income that go beyond recording deals, as the traditional business model for artist/label deals evolves.

Observers predict that this will result in music companies signing fewer recording and publishing deals, lowering sales expectations and reducing staff as part of across-the-board cost-cutting.

At the same time, artists will see more cross-marketing with other entertainment or consumer goods companies, an increased focus on TV and a greater dependence on live-performance income.

Clearly, the Internet has become the catalyst for major changes ahead.

"The creation of new income streams, such as the Webcasting royalty, can increase an artist's chances of success, even though he or she may not be signed to a major record label," says Dina LaPolt of LaPolt Law in Los Angeles, whose clients the Outlawz, the BellRays and Tribe 8.

Performers must continue to fight for artists' rights, given the decreasing role of the major record companies in artist development, says LaPolt, who is a member of the attorney-manager advisory board of the American Federation of Television and Radio Artists.
Indeed, some observers believe that the Internet is sounding the death knell for the traditional artist/label model.

On the Web, music can be recorded and distributed far more cheaply, so the intermediary role once played by record companies may eventually no longer be necessary.

Record companies are "irrefutably dying. The economics of their industry are unsustainable," says Eben Moglen, a law professor at Columbia University in New York.

Other critics, however, are not so quick to predict the demise of the record industry. They note that the current uncertainty largely results from the attempts of major music companies to control start-up business models for digital music distribution, at the expense of artists and consumers. Those attempts have resulted in a disparate and daunting mix of digital music business models.

But if record companies and artists work toward a more collaborative business model, the music industry's demise may turn out to be no more than a greatly exaggerated rumor.

If necessity is the mother of invention, then the Internet has quickly become a mother of music marketing.

For example, artists increasingly are promoting their music on film and TV soundtracks as a means to develop their careers, says Richard Rappaport of Adorno & Yoss in Miami.

Another hot trend is the use of music copyrights as mobile-phone ring tones, says Michael Elkin, a partner with Thelen Reid & Priest in New York.

"Each time a digital delivery occurs, say, for a Rolling Stones song, there's income to be split between the label and its artist," says Elkin, who has successfully litigated actions on behalf of artists against, Napster and

The Internet can also spawn revenue from pay-per-view concert cybercasts, which artists and labels then divvy up.

"This will generate digital performance money to be paid to copyright owners, and artists will lobby heavily for a greater share of this income," Elkin says.

Another consequence of the changing business model and the rise of the Internet is that A&R may become a devalued part of the major-label system, says Christian L. Castle, a senior counsel with Akin Gump Strauss Hauer & Feld in Los Angeles.

"Signings will be more about artists with proven track records on indie labels than picking talent in a producer-driven world of artists who may actually be on their third or fourth album by the time they release an album on a major," Castle says. "Hence, the artists don't need anyone other than maybe a producer to help them," says Castle, a former senior VP of business affairs at Sony who advises Bob Dylan, DreamWorks Records and DreamWorks Music Publishing.

Interestingly, despite millions of dollars that major music companies invested in controlling digital music distribution in its earliest days, the first successful digital distribution models came from such entities outside the industry as Liquid Audio (1996), the Rio mp3 player (1998), and, more recently, Apple's iTunes and iPod projects (2003).

The lesson from the Apple model is that digital distribution demands that major labels embrace radical and fundamental change by integrating digital technology and distribution into recording, marketing and promotion-- virtually every aspect of their business, observers say.

Unlike many other industries that successfully have embraced the Internet, the music industry was dealt a particularly bad hand on the regulatory front. But Congress can fix this, should it decide to step in.

"Our government's utter failure to vigorously enforce the nation's copyright laws has allowed an unprecedented level of piracy, which, in turn, has created a near-pathological fear in the industry of any digital business model," Castle says.

The result, observers say, has been commercial paralysis and denial at the strategy-making levels.

"Imagine if the U.S. Customs Service told General Motors that they were free to sue illegal importers but that the government wouldn't help," Castle says.

The good news for the industry is that within its ranks are many creative people. Corporate policy and long-standing business practices have restrained their creativity in dealing with the digital music challenge. But that creative power must be unleashed and quickly, by allowing innovative business models, observers say.

The imperative is apparently starting to sink in at the senior levels. Castle recalls, "One major-label executive told me recently after Steve Jobs' presentation at the iTunes Windows launch: 'Anyone who gets in the way of this should be fired.' "

Indeed, by one estimate, if only the recapture of a modest 10% of the illegal file-sharing market were converted to legal paid downloads, the result would be substantial growth in music company revenue.

The technology and systems exist to accomplish this goal, which may be enough to reverse the fortunes of the industry.

But executives say that growth will only happen if copyright laws are enforced, if the entrepreneurial passion of employees is allowed to flourish, if artists are truly treated as business partners and if music buyers are respected and included in the process.

In short, the future of the music business will be strong if change is not only embraced, but demanded.