The money sponge
why can’t the Major labels sell enough records?

The money sponge

This is the article that won’t die, I wrote it in 2002 under the title Bloated Empire and updated it for 6 years. It got longer and I split off several other articles from it. Eventually I retired it but a lot of people still look for it so I gave it a quick tweak for 2011. I’ll update it further.


The music business is always changing but today things look bad for the Majors.

Since the 1980s independent artists have had direct access to affordable high quality recording and, since 1997, cheap record duplication and the global market.

A note about master copyright extension
Recording master copyrights pay royalties to record labels and performers. In UK law they currently last 50 years from the recording. The Gowers and Hargreaves reports advised against any extension but recording industry lobbying has now persuaded the EU to extend this to 70 years.

One for you, nineteen for me

So, why can’t the Major record companies make money from recordings?

It’s bizarre. Profit margins in the record business today are fragile and wafer thin (1). In the 1960s and 1970s they didn’t know what to do with their money. Where did it go? When they signed The Beatles, Parlophone had a staff of 4. It’s much bigger now—it’s swollen. They could argue they’ve got more artists and the world is more complicated but why does it cost so much to sell people something they want? The raw material is virtually free, consumers are fanatical, word of mouth is rampant and manufacturing is dirt cheap, so why do big label operating costs soak up over 95% (2) of the money?

Before music video, record companies used to get a lot of free promotion—radio and TV even pay to play their records. Making videos for television in the 1980s was an easy way to exploit that free promotion and the glut of content spawned its own channel: MTV. The deep pockets of the record companies funded a blowout, and as people began replacing vinyl with CDs the labels simply spent more. They got very fat, and it didn’t cost any more to make each record.

Acts like Wolf Parade, Arctic Monkeys and before them The Darkness, Marillion, Wilco and many others have shown how to get a better return, on a shoestring. People will always buy music they really want based on nothing more than enthusiatic pump-priming and word-of-mouth. The Major labels spend billions (literally) running a corporate machine that barely breaks even.

Big stars earn a lot but big record companies spend more. A few artists earn as much as Major record label bosses, but most earn less than the office staff. The big labels are better paid than most of their content providers.

Record companies were notoriously tight-fisted in the Sixties—The Beatles were on a penny royalty for years. It was the same in the Seventies and into the Eighties but those decades of high margins and back catalogue sales have vanished in the money sponge. CDs are cheaper to make and distribute than vinyl, but they cost more. Downloads are even cheaper than CDs but cost the same. Many artists are still on the equivalent of a penny royalty but Major labels have forgotten how to make a profit, and traditional sales are falling. Unit sales rallied in 2002/3 but the revenue slide accelerated after that.

The record industry should be swimming in money. The global population of CD players underpins the largest ever market for records at around 2 billion, and it’s still growing fast. Cars, PCs and DVD players all play CDs too. At the same time production costs for physical and virtual records have plummeted to an all-time low. In any other industry this would be boom time.

It’s the business, stupid

Instead, the audio recording stood still and became the poor relation. Almost every other sector of the entertainment industry (books, films, games, etc.) is making regular, healthy profits and their stars dwarf today’s music supernovas.

The modern record industry fails too often and the half-life of its stars is dwindling. Record companies aren’t independently wealthy, their overheads, wages and profits must be covered by fans buying records, videos and merchandise. It’s the business, stupid! The massive artists of the past were discovered in the rough old world and made buckets of cheap money. Today’s pale imitations are absorbed, groomed and directed at enormous expense by so-called experts who fail to get past square one with 4 out of 5 (3) of the records they release. A heaving basement in lunchtime Liverpool says a lot more than an industry audition, a TV phone-in vote or a marketing report.

Advertising is useful to trigger word of mouth, but promotion budgets have gone through the roof and sales are still in free fall. The conclusion is obvious. There is no buzz; people aren’t buying big label records. The electricity is missing. How can music industry pros not know the difference?

Record companies have grown weary of simply making and promoting records, today they expect to design the content too. They kid themselves they still have the power by forcing the market further below the age of discrimination every year. Market figures show that older people buy more music (4) so it doesn’t make sense to focus on the young. Almost everything the Majors do is predictable, derivative and increasingly unpopular. Today’s ephemeral cookie-cutter acts don’t make back catalogue, and kindergarten rock is already here. The cash cow has been turned into baby food.

There might be some hope if the record industry would take a look outside but their world is small. Record companies lunch with publishers, pluggers lunch with broadcasters, they all lunch with lawyers, journalists, politicians and Internet pundits. The music press, TV and radio are obsessed with Major label records (a tiny minority of the total records released and an insignificant fraction of world music).

Chiselling points

Instead of growing the market and improving the goods the industry has specialised in squeezing what they’ve got. The music industry, its workers and friends fight a daily battle to increase their share of the cake.

The record industry treats its suppliers, customers and the public with contempt. What will they do when they run out of new ways to chisel points? Perhaps they will have to find real talent that stands on its own feet. For thousands of years musicians made money without making records. It doesn’t make sense pouring so much effort into a handful of here-today-gone-tomorrow artists who barely break even on record sales. TV, film and games musicians earn far more than the old-fashioned record pushers.

Every big label artist has to carry an army of label middlemen. In the long history of music, the record industry is just a tick of the clock. No business has a right to live in the past.

The music industry is not the world

Middlemen made the record industry complex but it’s really very simple under all the mumbo-jumbo. In a thousand ways their elaborate network of mutual self-interest will break down as the money runs out. Musicians and their agents could easily negotiate non-exclusive, one-off deals. Today’s musicians are much more savvy about their rights, licenses, publishing, packaging, distribution, and of course new media. Left to their own devices indies can often manage the business and the connection with their fans more effectively. They don’t need the all-or-nothing corporate label nanny. With so many other ways to reach their market they don’t want a premium price PR service that is bloated, devious and ineffective.

Where are the songs?

Media saturation and playlist power prop up a celebrity production line that has forgotten how to find and use great music. Instead, they invest in the same pop formula for the next wave of 10 year olds, the same sub-porn for adolescents and the same faux-punk for college. Music in the rest of the world has a million different flavours and real passion.

Technology, fashion and ideas change but the music industry invents nothing. A billion and one genres (jazz, swing, bluegrass, rock and roll, progressive, punk, rap, hip-hop, etc., etc.) have been created by the man in the street. The music industry always arrives just in time to fire up mass production. It never leads.

Fashion defies control and prediction. There are no absolute genres, just changing shades of taste. The tradition of music is bigger than the product-driven, culture-lite, post-modern, low-attention-span industry hype. I don’t think the next generation is stupid or that all the good songs have been written. Why is the UK generally exiled from the US charts (6)? It’s simple—all style and no substance. No decent songs. And why can’t we sell the UK number one record to more than 0.1% of our population? The same reason.

A note about the singles revival
Single sales have recovered since 2003, the high point of album sales in the UK and the launch of the iTunes Music Store. These are not single sales in the old chart sense, they are single tracks and include many from albums. Over the same period Internet retail and sales-tracking has expanded but DIY sales are not fully monitored. UK acts have also returned to the top of the USA charts since I wrote this article.

Making the Internet work

Somehow, the music industry always has a crisis with new technology—first printing, then recording and broadcasting, and now the Internet. Major labels can’t seem to make the Internet work but independents can. While the Majors fumble with overwrought delivery systems, music on the Internet is growing steadily.

The Majors, through the RIAA and BPI, are doing their best to strangle all this at birth. They would rather meet the future on their own terms with albums of filler tracks at high prices, and without a middleman like iTunes or Amazon. They particularly fear truly independent radio and distribution. Their own artists are kept on a short leash until their contracts run out, renewals are no longer automatic, artists have options.

Meanwhile DIY, independent and ex-Major artists make their own records. Small labels make single album and distribution deals. Online retailers no longer dare demand the rights to recordings and songs (as they tried in 2002). Indie acts frequently manage their rights through publishing administration and licensing. Hordes of music fans, unrepresented by the chart monoculture, are finding and evaluating what’s really out there. The music industry is not the world.

The old players think sales are dropping because of piracy but now people try before they buy and avoid filler tracks and dud albums. The falling cost of recording and distribution increases diversity. Major labels have lost their grip on the throat of commercial music, they simply aren’t up to the job. They currently burn more than 95% of the turnover and at 100% they’re bankrupt.

Of course, I could be wrong.

(2011 edit: so far, 9 years later, they are proving me right.)

Footnotes: record industry profits, cost, quality, market, etc.

Here are the sources for some of my assertions above.

1. Major record company profits are thin

So far this year (Autumn 2005) Major record company profits look like this:

So the Majors currently average less than 3% (without subtracting the amount WMG and Sony/BMG actually lost) against a background of cost-cutting, mergers and staff layoffs. Things will look slightly better after Christmas but not a lot. Record retail is also in crisis with most sales through supermarket chains and traditional stores assisted by DVD, games and merchandise.

In other words, for every 3p profit, the record industry spends 97p to get CDs into the hands of high street shoppers.

(Big record labels also make money from music licensing, royalties, video sales and other activities but on this evidence it hardly seems worth the effort.)

2. Big record label operating costs are 95%

In one or two places I mention the high operating costs of the music industry. This is a problem because as costs approach 100%, profits approach zero. My estimate is about 95%—here’s how I get that figure.

Operating cost is simply additional money needed to get the basic product to the customer. In our case the basic product is the performance and the customer gets a mass produced retail CD (videos and other stuff aside).

For a start, no artist gets over 20% of the gross. That’s 80% operating costs straight off the bat. Nothing the record company does (apart from taking a profit, below) is anything other than operating costs. Loaning and writing-off advances is an operating cost. Shipping freebies to DJs and journalists, promotion and tour support are operating costs. A big office in London is an operating cost.

Next, most artists don’t get anything like 20%, more likely 3%. Let’s split the difference between the 15%ers and the 5%ers and call it 10% (cancelling the higher market share of the few against the lower points of the many).

So the running total is 80% plus 10% (90%). But even that doesn’t cover operating costs because artists pay some out of their 10% (often recording costs, packaging costs, etc.). Retaining the artist and buying their rights is also an operating cost. These sums aren’t trivial, so my guess is about half, say 5%. That’s how I get the overall 95%.

Profits, if any, would obviously come out of that 95% and make the record companies look better. Multi-national profit figures are not for the faint-hearted (witness Enron, Xerox and Worldcom) but here’s my stab. The music arms of the entertainment giants generally make single-figure percentage profits and sometimes losses, so a few percent here or there isn’t going to overturn my argument.

You can do a similar calculation based on the costs and retail price of a Major label CD and it comes out about the same. If you still think 95% is a bit steep consider Footnote 3: up to 90% of signed artists make no money at all. So when I said most artists get 5%, make that zero. True, they might have got an advance—but that’s just a cut of someone else’s costs.

The cost of CD manufacture is 3–5% of the full retail price.

3. Four out of five acts signed by big labels fail

May 2000: In testimony to Congress, Hilary Rosen of the RIAA provided industry evidence that more than 4 out of 5 releases fail. She muddles up Major label and independent figures, but this is what she said:

“Typically, less than 15% of all sound recordings released by Major record companies will even make back their costs. Far fewer return profit. Here are some revealing facts to demonstrate what I’m talking about. There were 38,857 albums released last year [1999], 7,000 from the Majors and 31, 857 from independents. Out of the total releases, only 233 sold over 250,000 units. Only 437 sold over 100,000 units. That’s 1% of the time for the total recording industry that an album even returns any significant sales, much less profit.”

It’s my guess she threw in the independent releases to bump up her numbers, and it’s more likely that the independents made a profit on many of their releases—a child could make a profit on sales of less than 100,000. Nevertheless, the industry claims its failure rate is more than 4 out of 5 (almost 6 out of 7).

Update, September 2002: Cary Sherman claimed in testimony for the RIAA that 9 out of 10 artists who get signed never make money. It’s getting worse!

Update, February 2003: At the Future of Music Coalition conference Jim Cooperman of BMG claimed that a Major label act has to sell 2 million albums to break even. He also gave figures for 2002:

So the situation is much the same as 1999, except that (according to Cooperman) only 0.2% of all releases break even.

4. Most records are bought by the over-thirties

55% of music sales are to buyers over 30 (IFPI report, 2005).

5. The royalty system rewards the big players

Today’s royalties and charts do use some comprehensive data but they are still tied to yesterday’s industry-centred model of music consumption. Heavily skewed by BBC stats, chart return shops and terrestrial radio, they’re out of touch and locked in a feedback loop with playlists. If you get played anywhere other than national media your chances of royalties are slim.

The royalty systems themselves are about a hundred years old, based on out-of-date concerns. Back then artists needed to prop up falling music hall and sheet music income with a cut from the new media (piano-rolls, records and radio). But today we want our records on the radio and the Internet. We want to sell mechanical copies. How many artists want a per-user royalty on Internet radio or online retail?

Independent CDs already outnumber the Majors by 5:1 (around half the UK platinum albums are indie) and that’s only recognised releases, a fraction of the total. The UK has a growing independent retail sector based on CDs and downloads that rarely get traditional exposure. For these acts the charts and the royalty system are irrelevant.

Royalty distribution could be made more democratic with automated tracking in new media and state-of-the-art payment systems. ID tracking and electronic payment for low value, high volume transactions are common processes in the rest of the business world where full accounting is the norm. (The PRS deal with YouTube—which was allowed to operate without licenses for years—is secret and requires no detailed usage returns even though the data is electronic. It is widely understood to be favourable to Google.) The obscure and partial distributions of the collection societies are out-of-date. Errors in PPL, PRS and MCPS databases (and interminable problems getting them corrected) are completely unnecessary.

The gridlock of national radio, charts and air-play is an increasingly narrow tool of media fashion. None of it reflects the uncontrolled direct access that millions of artists now have with their audience.

6. UK exiled from the US charts

In March 2011, for the first time in 25 years, UK artists held the top 3 positions in the American album charts after a historic drop in record sales across the board.

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