Its official! The major music labels have abandoned the traditional business model where the goal is to sell music. With the emergence of successful streaming services like Spotify, Google Play Music, Yala Music, Deezer, and probably twenty-plus others, it is impossible for a company to make money if it depends solely on consumers purchasing music. Not only are sales (both physical and digital downloads) down, but the revenue generated through streaming services is only a fraction of what sales use to generate back in the “good ole days”.
So, why are labels more profitable than ever? Because they have figured it out. Successful music companies now make the lion share of their revenue from branding artists, serving as content providers for the Internet, mobile phones, and tablets, integrating the use of music with emerging technologies, entering into collaborations with non-record companies, and coming up with creative marketing and promotional campaigns to reach new audiences. This past year I have done music deals with a bank, an automobile custom car company, teen-focused websites, a book series, and multiple YouTube channels. The deals are creative and much more lucrative to the music client then selling a bunch of CDs.
Examples on a bigger scale include Pharrell William’s involvement with the wildly successful “Despicable Me” franchise (and the Minions), Jay Z’s coordinated album release during the NBA Finals with Samsung, Beyonce’s surprise release of her latest self-titled “visual album” with no traditional set-up. The latter was more impressive (sorry HOV, but it is your wife) because of its unorthodox method, the numbers (it moved over 600,000 units in its first week) and this tactic likely saved her label a few million dollars in advertising, marketing and promo expenses!
These recent paradigm shifts, and the consolidation of the major record labels (only Sony, Universal and Warner Brothers now exist in the United States) have made branding the norm for breaking new artists or keeping established artists relevant. This is also creating new and different opportunities for independent music companies whereby they can mimic what the majors are doing and snatch up sponsorships and endorsements that the majors find too small.
The following are some key tips that independent music companies need to follow in order to stay relevant in today’s music industry:
1. Make Sure That Your Company’s Business and Legal Affairs Are In Order
The first step for any business is to handle its essential business and legal affairs. Particularly, you need to make sure that the following company affairs are in order: 1) ensure that your company has the proper legal structure to minimize legal and tax liabilities and maximize profits, 2) protect your company’s intellectual property and intangible assets, such as domain names and confidential information, 3) secure agreements, clearances, and waivers with all company artists, producers and third parties with whom the company does business, 4) form or retain a publishing company designee that is affiliated with a performing rights organization, 5) raise sufficient marketing and promotional funds to adequately finance releases or collaborate with a complementary partner, and 6) staff your company with competent industry professionals that can operate the business. These are the fundamental activities that need to be maintained on an ongoing basis.
2. Focus Your Company’s Efforts on Digital Distribution
The margins for physical distribution are low. The number of brick and mortar retail stores has decreased, automobiles are now being manufactured without CD players, and the younger generation has grown up accustom to downloading and streaming music. If the Majors are struggling to consistently sell 100,000 physical units of their albums with multimillion-dollar marketing budgets, then it is highly unlikely that your company is going to achieve significant physical sales. It makes more business sense to secure digital distribution through a digital aggregator and allocate more resources toward your company’s marketing and promotional efforts with the primary objective of driving traffic to the on-line stores, using the music to brand your artists, and looking for opportunities. Most deals with digital aggregators are limited to digital distribution so you can still pursue a worthwhile distribution deal for physical product, if desired, (maybe for touring) but the success of your product should not be dependent on physical distribution.
3. Expand Your Business To Revenue Share Opportunities
Your company should be set up to capture multiple revenue streams. You cannot compete by depending solely on the income generated from recorded music for the reasons stated above. Your company needs to stay ahead of the curve by creating collaborative opportunities, and cross-marketing and promoting music with other services and products, such as, television shows, motion pictures, live performances, clothing, books, periodicals, Internet sites, video games, cartoons, merchandise, concert tickets, food, and sponsorships. TV shows like The Voice, The X Factor, American Idol, Glee, and Dancing With The Stars have created many licensing opportunities. Touring revenues continue to be strong as Live Nation and AEG Live had good years. Online radio, Video On Demand (VOD), and Subscription VOD like Netflix is also growing rapidly and licensing music. And, as mentioned, the number of streaming services has exploded in the past couple of years.
I believe that it is feasible for independent music companies to create shared revenue opportunities like the ones cited above on a smaller scale. The large deals are going to be geared towards the more established artists and companies that have a broad following, but I am already seeing smaller companies that are not in the recorded music industry team up with record companies to cross market and promote their products, such as smaller concert venues, clothing companies, food and beverage companies, mobile apps, online stores, coffee shops, and even adult entertainment clubs. The industry is wide open, so any creative combination that makes business sense to both parties is possible.
4. Make Sure Your Agreements Capture All The Rights Your Company Needs To Be Successful
Make sure that your form agreements are up-to-date so that your company will control the rights that are necessary to be successful. The “standard” agreements typically used by independent music companies are limited to securing recorded music rights. These agreements have to be broadened to capture, or at least provide the option to capture, rights that will allow your company, or a third party, to participate in other revenue streams. Also, with the creative deals that are being done today, there really isn’t a “one form fits all”. When I draft agreements I may combine as many as five different forms create a hybrid agreement that properly memorializes the deal.
Another point is that all of the Majors and larger indie distributors like RED, Caroline, and InGrooves have embraced in some form or fashion the concept of “360 Deals”, which consists of a traditional recorded music agreement plus an additional grant of rights of non-record related revenue streams. 360 Deals can take form as a single deal or multiple deals, where the label is entitled to share in one or more revenue streams from activities or services, including management (through an affiliate), touring, merchandising, publishing (the publishers have also consolidated and are under the same parent company as the labels…Sony/ATV recently acquired EMI Music Publishing, and Warner Chappell is the other giant), technology (Internet and mobile phone content), or any other passive opportunity in which your company, or its artists, may engage. If your business plan includes entering into a deal with a Major, then you need to control these rights.
5. Federally Register Your Company’s Intellectual Property
Copyright registrations protect creative works such as recorded music, written compositions, album cover artwork, video concepts, and photographs. Trademark registrations protect names and designs that identify products or services such as your company name, your company’s artist or group names, logos, and slogans. Given the fact that it is now very easy for anyone to view or listen to your company’s intellectual property through the Internet (i.e. website, Facebook, Twitter, YouTube, Instagram, Vine), it is imperative that you protect it. The Internet has severely weakened common law ownership (known in the music industry as “poor man’s rights”) to copyrights and trademarks because it is hard to prove the date of creation and scope of protection. Federal registration of your company’s intellectual property will save you money in the long run because your rights will be documented and easily enforceable.
If you want to be the next success story in music you will need to think outside the box of the traditional model and have your business in order so that you can take advantage of deals as they present themselves.
He practices intellectual property and business law, and represents clients within the segments of media, entertainment, technology, action sports, and lifestyle brands. You can contact him at firstname.lastname@example.org.