The Case for Reconstruction
Traditional labels are like prospectors or sports franchises. Their model requires them to pick winners and encourages them to dump losers. Contracts are based on the (false) assumption that the labels deliver some sort of economy of scale, and technical know-how when it comes to marketing music. They sign artists to deals that include investment for development, not only of product but artists themselves. But they cannot actually pick, breed or train stars, and in practice, the culture and history of the business almost precludes any sort of useful development. The concept of the sophomore jinx is a monument to the success of major label A&R. The problems with this model are manifold and should be obvious to all, if only in the results: Every major has historically failed to develop artists, and all profits are based on continuously churning catalogs of known, proven hits, usually acquired through dumb luck or licensing. Fortunately, one doesn’t have to deconstruct this mangled monster to see a better way.
Labels cannot pick winners and losers, but in a modular culture, anyone can recognize and respond to demand. Demand for products is linked to market niches and events, all of which are easily sortable by the databases driving our life. For instance, the sudden success of a local professional sports franchise creates predictable demand for merchandise of all sorts. That demand is broad-based, and not necessarily limited by official license channels. In the past, selling novelty singles and LPs in traditional music marketing chains has been a disaster: Returns tend to swamp sales, and devour most of the investment. Today a savvy label is selling the identical product in non-traditional venues (Starbucks, iTunes, supermarket checkout impulse buy), but with virtually no risk of return! Similarly, custom CD’s may be produced under license to be sold or given away as hand outs by lifestyle retailers; these deals are closed-ended and flat rate license, so there is virtually no risk, and known reward.
Given what we know about the needs of artists, the demands of the market, and the nature of our networked society, we can easily imagine deals that work to the mutual benefit of all involved, fairly compensating everyone for their contributions in a timely and appropriate manner. Other disciplines and industries have found great profit and success selling very similar products to music recordings. Awareness of those models, and the specific sales channels used suggest shortcuts in our endeavors.
Forget Winners, But Avoid Losers.
Labels cannot pick winners, but they can avoid losers through common sense and conventional business metrics. Given that recording is so affordable, many (most?) artists are capable and even willing to shop finished products, or at very least, preliminary mixes of finished recordings. Bird in the hand! A band’s merch table, previous album sales, and work ethic are evident, on display at every show (if not, a deficiency or need are apparent). Poor work-ethic need not eliminate a band from consideration, or relegate them to losers status. All shortcomings can be addressed in a systematic way, and associated costs can be factored into the larger equation. Signing the worlds most disorganized, and dysfunctional band to a deal can be a no-brainer: Other variables, like the band’s drawing power and fan base, license appeal of the artist or music, or even touring patterns or circuit suggest solutions. Again, recognizing markets and niches when you see them, and balancing demand with supply and availability of product to those markets are the key.
Shop and Buy Projects, Not Artists. And… never invest in Talent!
Multirecord deals are sucker bets without winners in today’s market. The label execs that sign artists to the deals rarely survive the contract, so a new team is saddled with someone else’s vision. The results of such arrangements are predictable failure. The old studio system of the movie world and major sports leagues worked like modern labels, in that stars were signed to long term deals, based on past performance and some imagined future potential. This is a numbers game at best, so the only way to prosper is with tricky legal deals and heavy handed contracts, reinforced by monopolistic market structure. While the marketing of a project is by definition a collaborative, team effort, the team is assembled through a vicious, adversarial process, and marketing is often disrupted by team owners juggling the lineups and key players on a whim.
Modern movies are marketed alone or in packages, with studios operating mostly as the ultimate middlemen, connecting disparate groups of independent operators. While they maintain lots and staff, movies are increasingly made by freelance specialists, each refining a slice of the craft to attract future projects. Making and maintaining these connections is a full time job. Producers and marketers of movie properties sell shares of production like stocks or bonds. The more credible and advanced the concept, the greater the value of the shares. This model can be easily applied to the business of record making.
Modular Labels & Scaler Deals.
In the age of mass-customization, one size never fits all in anything. Even in conventional labels, every deal is unique, however a consistent and modular structure can be much more fair and profitable for artist and label alike. There is a fixed menu of services available for every record, each with an associated cost. Some services are inappropriate or unnecessary for projects of a certain size, or in a particular market (for instance, live recordings of jam bands are useful products, but not so much for crooners and torch singers).
Given this reality, not only must we scale deals to match the needs of each project (as distinct from the artist), but we must be prepared to scale the label and possibly the artist as well! Everyone can make money off of a record that sells only 5000 copies, provided expenses are controlled and marketing is done with consideration of scale. It makes no more sense to mass-market a niche product than it does to bury a solid pop record in a sea of indie shoe-gazing. The appeal of an album or artist is not unknowable: how crowds respond, and how previous releases are sold tell you all you need to know to break even.
Every band’s needs are different. As creative capabilities converge, it’s increasingly normal for
Realizing Value Without Control
Risk and reward are hard to balance on speculative ventures like music. While no one can know whether any record will be a hit, any record can break even. But, the key is controlling costs, not people. This is accomplished by scaling the entire project. Control of people is always tricky, and rarely positive for both sides. People make deals with the best of intentions, and expect success, or deals would not be made. The roots of conflict are control: broad contracts that seek to protect parties from one another require mechanisms of control, intimidation and interference. When signed it’s assumed these are constructive forces, but that’s not really possible to assure, and rarely realized in practice. All the control necessary for an album project is possession of physical product and masters, along with the assigned right to collect and disburse profits of digital sales.
A work-for-hire model allows creative and technical contributors to a project to be fairly compensated for actual work. Negotiating discounts for work performed, or arguing over imaginary points for sales that have not happened is not the only solution, just a status quo that benefits no one, and limit the success of projects. Start with a fair market rate for every service provided. Forget the discounts, throw away the points. Insert a simple risk-compensation mechanism in their place. The sooner one is paid their fair market rate, the less they are owed. As time passes, the cost of those services accrues interest at a fixed, known pace. No tricky accounting gimmicks, no points. Pay now, or pay later, it’s always the artists choice.
The choice extends far beyond production personnel, to the label itself. The artist may buy-back all inventory, and repurchase rights at any time. Again, the rate is set up front, and is always known. If another label has a better deal, both label and artist are protected. The label gets it’s original investment returned in full, with a fair profit for their effort. The artist is always free to take better deals.
To prevent artists from leaving, the deal should get sweeter with success. As work-for-hire is paid off, profit for artist and label increases. The label has a strong incentive to maintain a fair, competitive margin. If the margin is too low, the label’s ability to sell product is hindered. Too high and the other offers look competitive.
Inventory is a challenge. One must press enough to create, then meet the demands of unexpected success, yet anything over that is a waste. Fortunately, once the basic manufacturing parts have been created for a release (masters, label art, film etc), turnaround time is quite short. These days discs can be drop-shipped to retailers from the plant, and turnaround is generally less than 2 weeks! Still, the initial order quantity is critical. Too many or too few copies when you need them are equally problematic.
There are several factors that can establish a baseline for sales, with minimal consideration to quality of music, production and packaging. An established artist or band will generally be able to sell a consistent number of copies for each title they release, using the same approach. This number can be used as a starting point for an initial order. It’s not smart to add pre-orders and other anticipated windfalls to the original quantity. There’s no real benefit to maintaining a large inventory, and significant risk. The more novel the niche, the less dependable it is as a revenue stream.
With bands, the benefits of experience and longevity are offset by the risk of break-up. The longer a group has been together, the less time you have until they break up! This risk is minimized in several ways. Having a finished master, or at least a set of final mixes to evaluate is more important with established bands, since this provides a context for the new work, and some means to predict sales. Younger bands have less of a track record, but often more buzz, which can be leveraged and enhanced within a project. By enabling these groups to get the most out of their budgets, and setting modest sales goals they can make products they’re proud to sell, and take advantage of the expertise of those around them. In short, good habits can be set for a career, through enlightened self-interest and opportunity. The risk with younger bands is that they can be easily discouraged, or worse, distracted by major label leeches offering bad deals with greater ego appeal.
Point-Of-Purchase Accounting
Starbucks, CD Baby and iTunes are modern sales models. Best Buy, Sam Goody, Tower, et al represent a backwards approach to an otherwise soluble problem. New models treat records like other retail goods, purchased to be sold. Old models treat them as a tease, to be ordered and returned, greatly complicating accounting and minimizing every artists exposure to their true fans. Modern models use technology to modulate cost directly with demand. Archaic models attempt to predict and manipulate entire markets. They can do this because, unlike modern outlets, the old school is built on the industrial model: they make money selling identical, cookie-cutter copies of a single property to millions of people. This spam-the-market approach is anachronistic. Leveraging scarcity in a world of plenty is not a winning formula. Identifying niches, and selling music products as special and unique makes far more sense.
Starbuck’s is one of the largest retail sellers of music. Their markup is absurdly high, relative to the competition, and their selection is extremely limited, in other words, the opposite of Wal-Mart’s music formula (every milk toast artist who ever put out a record, at the cheapest possible price). No doubt Wal-Mart has made billions for the labels, as the McDonald’s of the music industry (clean restrooms assured!). But Starbucks has made dozens of artists by knowing their own customers and introducing them to new and old sounds that match their tastes. Wal-Mart will never break a new artist, but worse, they will never offer a fair profit for the most established and hottest artists. Through accounting tricks, stiff-arm negotiation, and inattention, the margins for these sales are barely worth the trouble to artists (although labels can and do profit by their association).
iTune’s is another example of a highly profitable, artist-building model, that is resisted by labels, who have poisoned their artists minds with collective attorney-think. iTunes is unfriendly to middlemen and margin-feeders because there’s no inventory, no costs, no deal to cut or physical product to move around and mark up. Put a song in one end of iTunes music store, all that comes out are profits to be divided. By contrast, every major label alternative is a black hole: Subscriptions only seem like a great deal, until you ask how you get paid. Fractional pennies (or no pennies at all, for younger artists) don’t compare to the better part of a dollar, and a persistent connection to a fan. Compared to the iTunes store, Napster, MusicMatch and every major label driven online initiative is a cheesy, old time scam.
Clearly modern labels have many new avenues to sell records and help artists develop artistically and professionally. By starting with a project-based focus, rather than multi-record deals, the modern label removes a lot of incentive for artistic meddling. The New Deal encourages everyone involved to work every angle by directly linking compensation to success. The only metric for success is unit sales. Every pressed disc and every download represents real money. The modern label’s primary mission is to centralize inventory and collection, and clearly communicate an honest accounting to all parties. The label must be the honest broker of information, and seller of discs. Upon demand, every party to the deal has a right to know where the product is, what has been sold, and what remains.
We suggest a new, unique feature for this Point of Purchase accounting model: An implicit buy out is available to every party in the deal, in the form of actual product. For instance, a major label might wish to sign an artist, and acquire license to a catalog item under The New Deal. In the bad old days, this simple, sometimes reasonable request often initiated legal battles, and crippled artist, label and catalog alike! The New Deal would allow artists to purchase unsold inventory at a pre-agreed cost-based price. The longer that inventory sits unsold, the higher the ultimate buyout price, which grows at a fixed rate, acting as interest to modulate risk and provide reward to everyone concerned.
Dave Davis
Comments(0) 
