The State of The Music Industry and the Delegitimization of Artists: Pt. 4 – The Growth Phase is Over? Improved Label Margins

November 5, 2010

– a Six Part Series

by Jeff Price

Part IV: The Growth Phase is Over? Improved Label Margins

Read Past Chapters
Part I: Music Purchases and Net Revenue For Artists Are Up, Gross Revenue for Labels is Down
Part II: The Impact of DMCA Streams and Why They Should Be Considered
Part III: How a Skewed Perspective Delegitimizes Artists

Upcoming chapters:
Part V: When Good Laws Turn Bad
Part VI: The Hills are Alive…..

Some state the past growth of music purchases was encouraging and exciting, but more recently the rate of growth for major labels has significantly slowed.  Don’t panic just yet, there are a few reasons for this.

First, there is a widening of what artist’s music is being bought. Music sales are less concentrated in the major label releases so their numbers are down.

Second, like the launch of any format (vinyl to CD as an example) some people re-buy what they already own in that new format creating a limited artificial uptick.  Although you can rip a CD and/or import vinyl to your computer or iPod, it’s easier and more convenient to click a button and pay $x for the digital copy.

Third, this sales trend focuses on music purchases and revenue generation from sales of music via paid download only.  The industry appears to be in a transitional state migrating towards a blend of paid downloads and streams (both on demand and DMCA compliant). Both generate additional revenue, exposure and potential fame for artists yet only the paid downloads are taken into consideration.

Fourth, this trend of download sales “flattening” discusses decreased revenue and sales but does not discuss the improvement of margins and efficiency for labels.  This is absolutely worth talking about.

In the “old” days, the costs and risks involved for a label to release music were much higher.  Labels needed to manufacturer physical inventory and hope it sold, if not, they had to eat the costs of the unsold CDs.

Labels also never knew exactly what they sold, only what they shipped; all shipped out inventory was on consignment and could be returned for a full refund (on a side note, RIAA certified silver, gold, platinum album sales were based on how many units shipped, not how many sold – yes, you could game the system to get a gold record).  This would wreak havoc when large numbers of CDs were returned by retailers for a full refund months or years after they were shipped. In addition to refunding the retailer their money, an incremental cost was incurred by the label for either refurbishing or destroying the returned CDs.

Now add on top of this $1.50 to $3.00 in “co-op” marketing dollars the label paid to the retail store for each CD it placed on its shelf. The store kept this money regardless of if they sold or returned the CDs for a full refund.  Labels were also charged additional storage fees by the distributor for unsold unshipped inventory as well as a “shrinkage” provision in their agreement with the distributor which would allow them to lose up to 1 to 2% of the inventory and not have to pay the label.  I kid you not.

In the digital world of unlimited shelf space and unlimited no-cost self-replicating inventory these risks and up-front expense are gone.  In addition, a sale is never lost due to a release being out of stock.

In other words, the digital world reduced album sales but it also decreased: costs, risk and marketing expenses for labels while increasing the amount of music being consumed, share and bought.  This increases margins and makes it a more efficient, predictable, healthier and sustainable business.  By adjusting bloated label salaries and modifying legal agreements to be more equitable, we may just be on to something. This, however, is just never discussed.

Part V of this series will discuss: When Good Laws Turn Bad

Join a live chat with Jeff Price, CEO of TuneCore, as he answers your questions about this article. Friday, November 5th, 2010 at 12pm Eastern.