From the dawn of the digital era in 1999, with the introduction of Napster, the U.S. recording industry has seen a cataclysmic decline in income, from $14.5 billion at its peak to less than $7 billion in 2013 (accounting for inflation, a decline of over 65%).
In the last three years, however, income has not decreased as much as in previous years. Music streaming services have started to catch on with consumers, particularly Spotify, which pays approximately 60% of its gross income for recorded music (and another 10.5% for songs). Pandora, the leading internet radio company in the U.S., now has over 70 million active users and pays over half of its gross income for recorded music.
The question is: Will streaming help the record business recover its past financial glory? I think not.
Regrettably, even if digital streaming services continue to gain subscribers and/or ad income, the Internet and digital apps (including those that enable ripping music and video streams, and others that link directly to pirate sites) make it so easy to acquire free unauthorized music -- especially for young people who are adept at using technology and who are not in the habit of paying for music -- that the recording business will probably never return to its former financial success.
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Over the same time frame as this massive industry contraction, income from music publishing (income from songs including public performance, mechanical royalties and synch fees) has been stagnant. Although performance revenue has increased, mechanical income from record sales has dramatically declined.
Paradoxically, the only part of the music business that is more successful now than in the pre-digital era is live performance. Tours by leading artists, such as U2, Lady Gaga, Beyonce and Jay Z, easily gross over $100 million, and celebrity DJs can earn well over six figures for appearing at an EDM festival. Digital, even when it’s free, can never replace the live experience, even if it costs over $100 for a nosebleed seat, or a spot on a field surrounded by thousands of fellow fans.
I predict that income generated by the recording and music publishing industries will either stay flat or may modestly increase in the next several years. On the other hand, tours and concerts by famous performers will generate even more money for them, the promoters, venues and ticket sellers. Unfortunately, the big money will still flow almost exclusively to the best-known acts. Indeed, the disparity between the haves and have-nots among creators will only increase, with rich artists getting even richer, from concerts and branding (e.g, endorsements and more subtle forms of partnerships between big companies and celebrity artists). Even with respect to monies generated from streaming services, it has reported that only the most powerful artists with the most leverage have been able to negotiate a meaningful pay-out from the labels.
For new and unsigned artists, digital technology has had, and will continue to have, very mixed results. Anyone can now produce a record on a laptop and get their music before the ears of the masses via CD Baby, TuneCore, or other digital middlemen. But the aggregators are the ones making most of the money. It turns out that these new “bosses” (such as the aggregators), social networks such as Facebook and web stores like iTunes, which all allow an artist to reach a worldwide audience, are even worse for artists than the old guard (the big record companies).
Tech companies give an artist the opportunity to reach a worldwide audience, but they don’t provide any of the positive things that major record labels used to (and still do, but for far fewer artists). For instance, none of these companies pay for recording costs, including hiring talented producers. They also don’t help an artist make great looking videos, get their music on commercial radio, book them on TV shows, and most importantly, give them up-front advances so they can quit their day gig.
Unsigned artists should also continue to be wary about using any of the thousands of digital "tools" offered by various online services that will take their money while offering no guarantees of getting them to "the next level." At least the bad old record companies would give artists money up-front -- not the other way around.
The digital era, on the other hand, has created real opportunities -- but those opportunities have turned out to be more significant for entrepreneurs than for musicians. For instance, when Dr. Dre and Jimmy Iovine launched Beats Music at the beginning of 2014, they seemed almost foolish; streaming services have hardly made a profit, pretty much across the board. But a few short months later, they sold the service, (and its profitable namesake headphone business) to Apple for $3 billion, making a great deal of money for themselves and their partners (including Universal Music).
One of the things I enjoy most about my current practice is working with digital music entrepreneurs. Just a few weeks ago I finalized a deal for use of music in a new app that is going to compete with text messaging services such as WhatsApp, which sold to Facebook for $19 billion dollars in cash and stock. My client’s app, unlike Whatsapp, will allow people to use music in the context of free texting. Just a few short years ago, there were no such things as apps!
The technology is constantly evolving and the opportunities are emerging as fast as the technology changes. Except most of those opportunities are in favor of entrepreneurs and celebrity artists, not unsigned musicians.
Steve Gordon is a New York-based entertainment attorney with over 20 years of experience.
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