Music Industry Brief
Industry brief: Music recording I
In the music business is one is a set of recording companies that produce over 20,000 new recordings each year, The object of the recording companies is to get these titles on the shelves of retailers and then to get them off the shelves into the hands of the public.
These shelves are very full. And not only are recordings in every type of music contending for shelf space, but they are also contending with over 100,000 backlisted titles. So that the Black Crowes are not only competing with Eminem for space in the Tower Records shelves; they are also fighting with five decades of predecessors from Chuck Berry and the Beatles through to Metallica and Aerosmith.
It costs several million dollars to record and launch any major new pop album these days. And audience tastes are unpredictable, so many of these launches are for naught. Music companies are saved by the occasional big hit among the many flops. But winning shelf space and mind space while prolonging shelf life is harder than it’s ever been. And now comes a new threat – digital distribution of music over the Internet, as fans have been sharing recordings and avoid buying recordings off the shelves.
Music then is in transition. It’s going from a tangible that you buy off the shelves to an intangible, something that’s on the Net and available to anyone who can in turn record them on tape or CD. This “de-materialization” of music has the big five companies worried, and with good reason. Will music stop being a product and return to being a service?
The Big Five
In the last ten years, the rate of concentration in the $40 billion music industry has been breathtaking. Five companies have taken over vertical and horizontal control over almost every aspect of the industry. These five own virtually every record label you can name — a curious leftover term from when music came on vinyl records with actual paper labels in the center). Many of these labels with histories back to the Victrola days (like RCA Victor and Parlophone) are now under the control of a handful of international entertainment conglomerates that have learned to prolong shelf life and dominate shelf space ruthlessly. Although changes in the way music is delivered are a threat to the giants, they have the financial, legal, and technological muscle to minimize their losses and maximize their gains.
There a are five major record label conglomerates, who control over 80% of all the titles produced in the United States and comparable percentages in the rest of the world. They are Warner Music, EMI Group, Universal Music Group (UMG), Bertelsmann Music Group (BMG) and Sony. These also own distribution companies that control over 80% of the wholesale market. They are also becoming a bigger presence in the retail sale of recordings. Furthermore, they have rights to much of the copyrighted music, often not the artists who originally wrote the music. The oligopolies are growing and concentrating. And it seems every time an independent begins to build new markets, it soon gets bought out by one of the big guys
The pace of consolidation is increasing. A few years ago there were a big six in the industry UMG (Universal Music Group) is a merger of Polygram and MCA brought about in 2000 by Seagram/Universal which in turns has been taken over by French media/water conglomerate Vivendi (now dissolving). Time Warner and EMI announced merger plans in 2000, but that was held up by European antitrust laws. It’s not hard to imagine that one or more of the remaining companies will get swallowed up by another. There are steady rumors, for example, that BMG is looked to be sold or merged.
Of course, Universal Music Group is on the block, the biggest of them all. While it is unlikely for antitrust reasons and cash flow problems that any of the others will take over UMG, neither do they want an energized new competitor. After all, UMG is the largest of them all, and has been growing steadily in sales volume, even in the downturn.
But UMG has few suitors, and the reason is the general decline of the business. From 1988 to 1996 the industry grew at a rate of 8% a year. Since 1996 it has shrunk by a total of 17%. The two reasons are music piracy and just plain unexciting music from the recording companies, though they will never admit the latter.
The Internet has and will continue to be a great disruptor in the industry, All the threats by Senator Hatch and the recording industry trade group, all the lawsuits against individual college students, will not work. The industry shut down Napster, but file sharing has found other routes. The only sane moves by the industry have been to finally enable reasonable file download services, such as Apple’s, but they may be too little too late. The industry looks like it is in the midst of being redefined, and the big five are at their most vulnerable thanks to the disruption.
Here are descriptions of the Big Five (as currently constituted) with some notes.
| Company | AOL-Time-Warner |
| Recording Group | Warner Music Group (WMG) |
| Market Share (2001) | 12% |
| Labels (select) | Atlantic, Atco, Elektra, Asylum, Reprise, Maverick, Rhino, Sire, Warner Brothers |
| Publishing division | Warner/Chappell Music |
| Distribution division | |
| Manufacturing division | WEA |
| Retail | Columbia House (part, 50%) |
| Artists under contract (select) | Faith Hill, Linkin Park, Madonna, Red Hot Chili Peppers, Seal |
| Other media holdings (select) | Warner Brothers (film), WB Network, Time Warner Cable(television), Time-Life (magazines) Warner Books (books) |
AOL-Time-Warner says that this piece of their empire is not on the table, though so many others are. Warner/Chappell, with over a million titles, is a major money-maker.
| Company | EMI |
| Recording Group | EMI |
| Market Share (2001) | 13% |
| Labels (select) | Capitol, EMI, Blue Note, Parlophone, Angel, Chrysalis, Virgin |
| Publishing division | Capitol EMI Music Publishing |
| Distribution division | EMD |
| Manufacturing division | |
| Retail | HMV Group, Columbia House (record club, 50%) |
| Artists under contract (select) | Sarah Brightman, Garth Brooks, Janet Jackson, Liz Phair, Rolling Stones |
| Other media holdings (select) | WEMI Television (television) |
EMI is the only major music company that is not part of a conglomerate. For that reason, its declining sales and profits must hurt all the more. The bright point is the music publishing division, which is the largest in the world, with over a million song titles.
| Company | Sony |
| Recording Group | Sony Music |
| Market Share (2001) | 15% |
| Labels (select) | Columbia, Epic, Sony, Arc of Light, Vivarte, Soho Square, Mambo, Dragnet, Harmony Records, Legacy Records, Loud Records |
| Publishing division | Sony/ATV Music Publishing |
| Distribution division | Sony Distribution |
| Manufacturing division | Sony Disk |
| Retail | Columbia House (part) |
| Artists under contract (select) | Aerosmith, Tori Amos, Placido Domingo, Ricky Martin, Pearl Jam |
| Other media holdings (select) | Columbia, Sony Studios (film) |
Sony is the number two music company, but its growth has stagnated. Sony’s ownership is a product of its its foray into the media world, a decision from which Sony never derived the hoped-for synergy.
| Company | Vivendi Universal |
| Recording Group | Universal Music Group (UMG) |
| Market Share (2001) | 24% |
| Labels (select) | MCA, Geffen, DGC, Mercury, Polydor, London, Vertigo, Verve, Wing, A&M, Island, Motown, Decca, Interscope, Deutsche Gramophone, Phillips, DefJam |
| Publishing division | |
| Distribution division | Polygram Distribution |
| Manufacturing division | |
| Retail | |
| Artists under contract (select) | Andrea Bocelli, Warren G., Nelly, Willie Nelson, Shania Twain |
| Other media holdings (select) | Universal Studios (film) Canal Plus, USA Networks (television) |
UMG is the world’ largest music company, and its growth over the past year has far outstripped its rivals’. Yet it’s parent company is in trouble, and it may yet be sold, if anyone wnats it enough.
| Company | Bertelsmann |
| Recording Group | Bertelsmann Music Group (BMG) |
| Market Share (2001) | 10% |
| Labels (select) | RCA, Arista, Wyndham Hill, New Talents, Arte Nova, Zomba, Bluebird, Jive, Bad Boy |
| Publishing division | BMG Music Publishing |
| Distribution division | |
| Manufacturing division | Sonopress |
| Retail | BMG Music Services (record club) |
| Artists under contract (select) | Denyce Graves, Jennifer Love Hewitt, Avril Lavigne, R. Kelly, Britney Spears |
| Other media holdings (select) | RTL (radio), magazines, newspapers, Random House and many others (books) |
BMG saw a significant decline in sales in 2001. Bertelsmann certainly wants to get rid of it, but with UMG on the block, it will be hard.
As noted before, not only have the big five recording companies grown horizontally by spreading worldwide and grabbing labels in all kinds of markets, they have also expanded up and down the supply chain, from manufacturing to retailing to Internet and other retail sales. For example, Sony has been one of the largest manufacturers of compact disks for years, and BMG now has the biggest music club membership in Europe, while Sony and AOL-Time-Warner own parts of Columbia House, a major U.S. record club. And they all have their own music publishing businesses, where they control the rights to the vast majority of popular music from “Happy Birthday” to “Material Girl,” and get money every time someone records an old song, plays it on the radio, or uses it in a sound track. In this way the control our whole ambient music experience.
As in all other businesses, the growth of the oligopoly in music is an attempt to exert control of our three factors. These companies don’t get bigger because of some manifest destiny. They get big because only the biggest firms can control their own fates, even within the notoriously volatile music market.
Most of all they want to control shelf space. While they might fight against each other, together they determine nearly all of what gets on the shelves at music stores, at the record clubs, the online sources, and what gets played on the radio. Smaller firms can hardy get on the rack, and then can hardly get a timely resupply. Examples:
- Thanks to consolidation in the retail chains, they can have a big impact at a high level at such national companies as Borders, Tower, Sam Goody’s, and few others, by offering specials and constantly managing relationships at the highest levels. (Indeed, they recently made a major court settlement based on price-fixing with the major stores.) They can influence how their recordings are displayed, they can help determine what goes on sale and when, and they can grab their share of the precious shelf space that stores command. In other words, they act the same way as Kraft, Pepsi, or Budweiser operates in the supermarket, only with even more concentrated power.
- They form an oligopsony for all musical artists in the world. They alone can guarantee international distribution for albums, especially in places like South America and Asia. They, and no one else, have the power to make sure that a hit becomes available across the world. Likewise, they alone can bring music from other countries (World Music) and give it exposure in the U.S. and Western Europe.
- They can own and manage the record clubs that are very popular way especially for college students to buy music.
- They can own their own distribution companies, so that small labels that want national exposure need the majors to get just-in-time delivery to the store shelves. Even the occasional independent hits at some point pass through the major recording companies’ fingers.
- When they see a small label have a breakaway success, they can overwhelm them with cash and buy them out and the artist’s contract. One area where this has happened in hip-hop, where corporate types have been happy to let those closer to street tastes to identify and consolidate the tastes of the audience, and bring up the artists until they are at a point where the majors could handle them.
- They can work with local concert promoters to set up tours with favorable conditions for the artists who they want to push. They can rearrange the beer and soft drink sponsorships that finance the tours. This fits in well with the fact that the best venues for performance in the industry are controlled by an even small number of concert promoters and bookers.
- They can have a big influence as radio play lists are decided on, especially since the radio industry is consolidating and centralizing decisions in fewer and fewer chains. This is not to say that they can force a hit or keep a loser on the air (the cruder kinds of payola are history), but they can get air time for what be overlooked otherwise or help build momentum as a hit takes off by making sure that the radio programmers know what’s up. After all, the first step to getting to be a hit is getting heard. While cash payola may take place, there’s no longer a need for the penny-ante variety. Big recording companies can wine, dine, and influence programmers at major chains. They also exert pressure as major advertisers for all their products, musical or not, on the same radio chains. Plus, increasingly, the decision-making more centralized. The great American story of singers like Loretta Lynn driving around the country to personally request disk jockeys to play their songs is long dead.
- Finally, they hope they can take on the whole Internet challenge or any other threat through major legal help and through the ability to put increasing pressure on governments, especially copyright violators. They may eventually take control of the online distribution industry, at least as much as they can control it. Meanwhile, their lobbying association The RIAA (Recording Industry Association of America) allows them to work in concert in spite of antitrust laws. They have already had major impact on copyright laws, and are trying to have Congress pass ever more restrictive laws governing use of copyrighted materials.
Getting on the shelves of the record stores is not enough. Most music sits around unsold. Even if it has some success, that success can be very short-lived. As a result, the Big Five recording companies seek to guard themselves against the notorious changes in fashion that determine the shelf life of individual titles. Again, they can’t really decide in advance what will be a hit, and though they back artists with advertising campaigns and concert tours, public taste is fickle.
Take for example the Spice Girls, a meteoric success which crashed and burned, now long as dead as disco. For a few years in the mid-90s swing was in, now it’s out. We’ve seen a series of rappers come and go with one big hit, then nothing. Even Britney Spears and Christina Aguilera are losing altitude. More than ever, stars are moved quickly into and out of the spotlight. Hence the popularity of the VH1 TV shows “Where are They Now?” and “One Hit Wonders.”
On the other hand, some things are perennial. The Beatles were a few years ago at the top of the charts with a re-release of some of their music. Paul Simon released a hit album after he seemed to be washed up. Billy Joel had a modest hit playing his own “classical-style” music, and they keep selling the Eagles albums. These are great assets for the recording companies, as they don’t have to start the hype campaign from scratch. In the case of the backlist, they realize almost pure profit.
But there are many ways to prolong the shelf life of any even moderately successful piece or genre of music. The recording companies do this in several ways:
- First, they can sign a large number of new “artists” in different genres so that a dip in one artist or category is compensated for by wide coverage. Thus they have the bases covered when a new trend breaks out.
- If they do have a hit, they can prolong its life by intense marketing, promoting radio play, organizing concerts, running displays in stores, arranging television appearances (in some cases, most notably Time-Warner, on their own stations) and so on. All these take the kind of money that’s only available from a big, strategic company.
- They can maintain back lists of the titles that steadily maintain sales – thus Sony which owns the Beatles backlist has the money pouring in still, from newly released recordings, from old standbys, and other uses. The release of a set of thirty-year old Beatles hits (the album “1″) became on of the top-selling albums ever, outdistancing the hottest releases from new groups. All of majors have stable of similar, if slightly less productive, cash cows. After all, all the upfront costs have been paid along ago. Companies are also digging out unreleased tapes by older artists like Dylan, even reconstructing recordings sessions or concert tapes that never made it to vinyl.
- They can switch media – in fact, the replacement of LP collections by CD collections in early 1990s were a major financial boost for the companies in every area from rock to jazz to classical. Now it looks like CDs may give way to DVDs, and mini-disks are a possibility. That’s not to mention personal digital recorders (A threat and an opportunity).
- They can own their own manufacturing companies so that they can reduce costs and improve inventory management, making sure they have just enough copies of each title.
In fact, whatever dangers digital music has, for the major music companies, it will certainly make their backlists even more valuable, if they can protect their copyrights. Apple’s new song download software has been a bonanza for companies. Selling songs for 99 cents is an uncanny way of recycling the old stuff at no cost in distribution or marketing. It’s also like selling cigarettes one at a time for a total price three or four times the cost of the pack.
The new digital music economy, whatever its perils, offers the Big Five a chance to prolong the life of their vast library of recorded music, The question is how to do it without having to send thousands to jail, the course the Big Five and the RIAA now seems intent on.
