Big labels believe their lock on talent will survive the transition to free

By March 9, 2009Music

Mike Arrington has a great write up on a lunch he had with un -named executive from a major record label which throws some light on why the music industry continues to look so clueless.

According to this executive:

The labels fully understand that recorded music, streamed or downloaded, is going to be free in the future (we’ve argued this relentlessly). CD sales continue to decline by 20% per year, and the only thing that’ll stop that trend is when those sales reach zero. Nothing will replace those revenues.They also understand that recorded music will largely be little more than marketing collateral, meaning that the Internet services being sued today for copyright infringement will be embraced in the future as ways to get the word out on hot new music. These services pay for the privilege today (either through high streaming rates or in court), but in the future they’ll be the ones getting paid by labels. Think radio payola at a whole new level, and there won’t be any more talk about social networks giving stock to labels and artists. Money will flow the other way, as it should.

No argument from me on the trend towards free and where the money will be made in the future, but surprising (and a little refreshing) to hear it from a record label executive.

This raises the obvious question of why the labels seem to be fighting the future rather than embracing it, and in the process alienating (even making criminals of) just about all of their future customers.

Apparently the answer is that they believe they hae a lock on the creative talent, and that in the next 3-5 years they will have all their artists on 360 degree contracts where they take a slice of all of their income streams.  At that point they will switch to more fully supporting services which give the music away for free.

In the meantime (however) there is too much money on the table for them to turn away.  As Mike says VCs have directed a ton of money to labels via their startups (up front payments and litigation costs) and Apple, Myspace Music, Imeem, Last.fm and others all pay royalties per stream/per download.

The bet the labels are taking, therefore, is that their lock on the talent is such that pissing off all their customers isn’t too much of a risk (or more properly that the risk is small enough that the short term money is worth risking their future’s for).

If all of this is correct (and some of the comments on the TC post take issue with it) then it is a demonstration of breathtaking arrogance by the labels, but it is also a strategy they might get away with.

Despite the fact that artists have had no love for their labels for a long time their hasn’t yet been a breakthrough startup which has reorganised on the A&R end of the value chain, and getting signed by a label remains the ambition of most new acts (Myspace has changed the way that labels and artists find each other, but the important point here is that they are still trying to find each other).

I wrote above that the labels might get away with this strategy – I sincerely hope that they don’t remain interested in companies that are trying to stop them!  To this end I think startups like SliceThePie, Sellaband, Bandstocks and also SoundCloud have interesting businesses.  Parts of We7 also play in this area.

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