Record Companies, RIP

Unless you’ve been around the music industry, it looks pretty straightforward, if perhaps not particularly honest. A record company picks out a performer, makes a record, promotes it, it sells millions of copies; the musicians make millions of dollars, go on tour, make another album, do drugs, have a major meltdown, go into rehab, clean themselves up, relapse, and end up another bad example on a E! Television biography or a reality TV show. In the mean time, dozens or hundreds of equally talented, equally attractive people work day jobs talking about French fries while dreaming of what it will be like when they are discovered.

But why? Why don’t more groups get discovered? Why is it such a crap shoot finding a contract? Are there reasons beyond sheer perversity and greed?

Well, let’s consider the economics of the record business, at least the twentieth century record business. Consider a relative newcomer, with a few local gigs that had done well enough, but not enough to let him stop working a day job. I don’t have anyone in particular in mind, but just to be specific, let’s call him “Elvis.” To make a record, he’s got to get studio time, which might cost a month’s wages or more; then, with a good manager, and good promotion, maybe he gets a contract with a major record company. (At this point, younger readers might want to go look at how analog, vinyl, traditional records were made. Go ahead, we’ll wait.)

“Elvis” goes to a recording studio with some backup musicians, and a couple of technical people, including one called the “producer” who actually has a lot to do with how the album finally turns out, and is really an artistic collaborator as much as a technician. The studio cost a lot of money to build; the musicians have families to feed too; the producer expects to be paid, and may get a cut of the sales as well. Once they’re done, the record company has spent some thousands of dollars just getting the master recordings. Then the master recording is turned into a master disk (this is why it’s called “cutting a record” — the master disk is literally cut into a metal plate using a specialized lathe) and vinyl records are pressed using the master. At the same time, album covers are designed, printed and manufactured; the albums are assembled.

All of this costs a lot up front, so the record company has to invest in a fairly large pressing to have a hope of making their investment back. What’s more, a free copy — a “demo disk” — is sent to every record store and radio station in the country, so they have to make a bigger run than you might otherwise expect. (I grew up in a music store about this time; we got demo copies of everything from Rusty Warren’s “racy” burlesque routines, to the Metropolitan Opera.)

So, before you sell a single album, the record company has made a pretty significant investment; their whole business consists of finding someone they can promote into selling a lot of records. They don’t all have to be blockbusters — “novelty” records, classical music, and other smaller-run records get made — but every record has to have a good chance of making back the original investment. “Smaller” records can’t be made with the same level of attention; the costs are just too great.

Out of a ten dollar album, the payment to the artists may be fifty cents. Record companies necessarily are organized around manufacturing and transporting physical disks all over the country; logistics and manufacturing are the dog, the musician is the (rather cropped) tail.

Which, by the way, should tell you just how much money the record companies made on Elvis.

Now, let’s come back to twenty-first century reality. A few months ago, Radiohead released an album, sans distribution deal, sans disks. Nothing but a download location on their website and a request that people who downloaded their music pay them whatever they think the music is worth. More than half of the downloads went for free, according to Forbes; on the remainder, Radiohead grossed between $6 and $10 million. “Sure,” you think, “but they would have made twice that if they’d been paid for all their downloads.” And that’s true, but it misses the point: even with a very good deal, going through a record company and going “double platinum” by selling two million copies, Radiohead might have grossed $2 million. After paying production costs and such, and after reserves for returns, they might have netted half that.

By giving their music away two thirds of the time the time, they may well have made ten times as much cash in hand.

Other artists are noticing this: Trent Reznor of Nine Inch Nails used a similar approach and grossed $1,6 million dollars in the first week, and $750,000 on sales of a special downloads and gift package combination alone.

At the other end of the spectrum, my nephew Scott, who is turning into an impressive guitar man indeed, has 400-odd friends on MySpace, and puts up tracks that he records on his Macintosh computer, using Garageband, with his guitar and a midi keyboard. Some of his MySpace friends are professional musicians from as far away as Brazil; others are extremely cute girls his age. (Why oh why don’t mathematicians get friends like that?)

He can record a professional sounding track in his bedroom at home, publish it on MySpace, and people the world over can hear it. On another MySpace page, an obscure young woman who turned to escorting is caught in a political scandal, and suddenly sells nearly a million downloads of one of her songs, at close to a dollar each.

The well-known artist end of the scale may not seem like much of a surprise: economically, it’s made sense for years for big-name artists to form their own distribution companies, if only because then the accountants work for the artists, not the record company. But the availability of Internet bandwidth and massively powerful home computers has changed the economics of music production and distribution so that a teenager in his bedroom can record, produce, and distribute music on a nearly even footing with the big name artists. It used to cost hundreds of thousands of dollars to produce a full album, after counting in studio time, mastering, and so forth; now a completely professional job can be done with a $2000 computer.

The record companies are still organized primarily around making and transporting physical disks, and make most of their profits on the media. (Think not? If the record company’s margin on an album is 20 percent, and the royalties are five percent, the profit on the physical media is three times what they pay the artist.) It’s not, and has never been, so much a “music industry” as it has been a “music packaging industry.”

In the mean time, the real world changed. It used to be that you didn’t worry about “piracy” because it would cost as much to make physical copies as it had cost the record company — the cost of entry was too great. Now, a CD can be burned for a few cents, and an album can be transmitted over the Internet for — well, my relatively expensive high-bandwidth cable modem service costs me two dollars a day; an album will download in a few seconds. Net cost? About six ten-thousandths of a dollar, $0.0006. It used to cost between two and three dollars an album just to get the product to a customer. Now, twenty for a penny.

Anyone who tells you they know how the Internet is going to change an industry is not very well informed, possibly a fool, and very likely trying to sell you something. But we can see the “shape” of the new music industry now, even if we don’t know the details. Physical CD sales have dropped tremendously; the record companies blame this on piracy, but Radiohead has shown people will still pay for music, just not packaging. iTunes is a major distributor; even more exciting, at least for musicians, companies like Pandora, Amie Street and Nimbit are making it possible for musicians to publish, promote, and distribute music completely free of the music-packaging industry.

There is a new business model coming, one that will be built around the musicians and their works; promoting them, getting them visibility, letting people know about them. It will be good for musicians themselves, and not just the big name acts: with a potential audience of billions of people, very small acts with a tiny tiny percentage of the potential audience will still make the artists more money then they could have made in day jobs.

It may take a few more years to destroy the current record companies, and of course some few may be able to remake themselves into real music companies. The music packaging industry, though, is dead. It’s just a matter of time.

Charlie Martin is a Colorado computer scientist and nearly-successful screenwriter who contributes to the Flares Into Darkness political blog as ‘Seneca the Younger,’ and blogs under his own name at the aggressively non-political Explorations blog.