The music industry’s new business model

By Ludovic Hunter-Tilney 9/10/10 Financial Times

Something strange has happened to pop music since I began reviewing it in the late 1990s. In the past, how you listened to music played second fiddle to what it sounded like. Only finger-sniffing audiophiles cared whether you listened to Nirvana’s Nevermind in 1991 on vinyl, cassette or CD. To everyone else the point was the album itself.

No longer. Nowadays the format of music, the way it’s sold or listened to, overshadows everything else. MP3 players, internet streaming services, MySpace, mobile phones: music is everywhere. Good news for listeners but perplexing for record companies, who are seeing revenues from recorded music dry up as the old ways of doing business crumble.

Three years ago, Radiohead released their album ‘In Rainbows’ online – telling fans that they should pay whatever they thought the music was worth

It’s symptomatic that the most significant album of the modern age, the 2000s equivalent of Nirvana’s Nevermind, should be Radiohead’s In Rainbows, whose importance lies not so much in the excellence of its songs as in the ground-breaking way it was sold – or not sold. Because there were no hard copies and no cover price: instead In Rainbows was released online as a pay-what-you-want download. In 2007, the year of its release, global revenues in recorded music were $19.4bn. Speaking to Time magazine before the album came out, Radiohead’s frontman Thom Yorke explained that: “Yes, it probably would give us some perverse pleasure to say ‘Fuck you’ to this decaying business model”. By which he meant the music industry, which looked on aghast as one of the world’s biggest rock bands opted out of the record label system. Worse, Radiohead were offering fans the chance to pay whatever they chose to download new music.

Three years on, Radiohead are back in the studio. In the meantime the music industry’s problems have worsened. In 2009, global recorded music revenues dropped to $17bn. The end of May this year was the worst week for album sales in the US since records began, in 1994. In July Thom Yorke warned apocalyptically of its being “simply a matter of time – months rather than years – before the music business establishment completely folds”. His advice to young bands: “Don’t tie yourself to the sinking ship, because believe me, it’s sinking.”

. . .

It’s a sunny afternoon at the Glastonbury festival. Brian Message, one of Radiohead’s trio of managers, is sitting at a rickety wooden table in a field expanding on Yorke’s anti-music industry argument.

Message is one of the new school of music managers. Where the old school version was a spivvy schemer brokering dubious deals in a seedy Denmark Street or Lower Broadway office, the man opposite me is a 45-year-old former accountant who cut his teeth at Arthur Andersen. His look – jeans, T-shirt, shades, suntan – suggests a busy itinerary on the summer festival circuit. But the lingo is more MBA than MDMA, with terms such as “asset class” and “revenue streams” peppering his conversation.

“Under the new way of doing things, you’re a chief executive of an artist’s business with multiple revenue streams that go across multiple countries,” he says. The accountancy background used to make him feel awkward, but in today’s volatile music industry it’s proving invaluable.

Message, a dab hand at business plans (“It’s not something I’m proud of”), is pioneering a new model for the music industry. With companies struggling to adjust to a steady decline in their primary source of revenue, sales of recorded music, he argues the industry is suffering an investment crisis. But this crisis is also an opportunity for the likes of Message to enter the game as investors.

His links with Radiohead date back to 1994, when he met the band’s original managers – Bryce Edge and Chris Hufford – while working at Radiohead’s then label, EMI. The three men bonded over grumbling discussions about the music industry. Labels, they complained, were interested only in short-term profit, not an artist’s long-term development.

In 1995 Message left EMI and joined Edge and Hufford as Radiohead’s co-manager. While his partners deal with Radiohead’s day-to-day business, Message leads a sister company, ATC Management, launched in 2002 to manage other bands. Over time, ATC has branched into funding and trying to break a roster of acts, just as a record label would. But there is a radical difference. Instead of signing away copyright ownership of songs in exchange for an advance and royalties, as happens in most record deals, the bands Message signs get to keep ownership of their work. The contract is a so-called “360 deal”: all income – from records, concerts, merchandise, commercial tie-ins, everything – is split between band and backers, after the initial investment has been repaid.

“We’re trying to get away from a copyright trading model more towards a venture capitalist approach with artists,” says Message. Think of it as Dragons’ Den with guitars – with Message as the thoughtful-looking entrepreneur sitting with fingers interlocked while some young beat combo pitch their wares (“So, we’re kind of like The Smiths meet Funkadelic…”).

“More and more managers are having to take more responsibility to put money up front,” Message says. Adam Tudhope, for example, began his career managing the platinum-selling Keane. Two years ago he put £40,000 of his own money into Mumford & Sons, a fast-rising London band now signed to Island Records. “Every band is going to need £20,000-£40,000 for the first two years of their life, and then they’re probably going to need £200,000 for the next stage of their career,” he says. He didn’t want to risk his own money on the £200,000 stage with the Mumfords: thus the record deal.

Message has done the same with some of his acts. ATC put about £60,000 seed money into the London singer Kate Nash, who then signed to a major label and released a hit album in 2007. This year another chart-topping ATC act, Eliza Doolittle, in whom the company invested roughly £100,000, also joined a major label.

The manager-impresario runs through the spiel. “OK Artist, we’re working together, here’s some money, we’ve got to make some music, got to get it out there, find an audience. Once we’ve got some traction we might sign you to a record deal, or if you fancy going it alone somehow we’ve got to find the money to make it happen’.”

Going it alone means sidestepping the record labels. The music industry is dominated by four so-called majors – Universal Music Group, Sony BMG, Warner Music Group and EMI. There have been challenges to their supremacy before, as when punk’s DIY ethos led to a mushrooming of independent labels in the early 1980s. But the music industry’s business model – in a nutshell, paying for recordings in exchange for copyright ownership – has remained fundamentally unaltered since Elvis’s time. If Message is correct in his diagnosis of the industry’s problems, and successful in his proposed cure, that model may soon cease to exist.

As the afternoon sun beats down over Glastonbury, he outlines his vision with evangelical persuasiveness. “It’s for those people who want to take the hard road. It’s a difficult road, but for those that want to take control, believe in themselves as a business and are prepared to do that hard road, it’s a liberating process.”

The talk of creative freedom is beguiling. By an uncanny coincidence, Prince’s “Sign o’ the Times” blasts out from a nearby sound system. Yet somewhere in the recesses of my mind, like a rock critic lurking dyspeptically at the bar at the back of a gig, a misgiving stirs. How far can the “little man entrepreneurial spirit” that Message admires take a band?

David Joseph, chairman of Universal Music UK, is yet to be convinced. “What I love about the ATC model is the theory of competition, the thought that anyone can do it themselves, which makes you absolutely question everything and try harder,” he says. But he goes on: “The idea of people saying, ‘We can do it ourselves, we don’t need you any longer’, it’s a fantastic thing to wake up to every day, to prove them wrong.” And with the likes of Lady Gaga, Amy Winehouse, Eminem, Rihanna, U2, Universal seems to have ample proof that the old model still works for many big names.

Joseph reiterates his point by likening the choice facing managers of up and coming acts to that of parents choosing where to educate their children. “Universal are there representing Oxford and Cambridge, he says. “And if anyone else wants to take a gamble on a Bexleyheath comprehensive school, they’re welcome to.”

In the past the majors were pop’s gatekeepers as well as its Ivy League. They owned many of the recording studios, such as EMI’s Abbey Road studio where The Beatles recorded. They ran the distribution networks getting music from factory to shop. They had pluggers and press officers to deal with the DJs and journalists who shaped taste.

Cheap technology has transformed all that. Aspiring musicians can nowadays make decent quality home recordings on a four-track recorder costing £150, a sum that would barely buy a couple of hours in a professional studio. They can upload their songs to the internet and send them to retailers, social networking sites, song streaming services and so on. The majors’ stranglehold on the way music is produced, distributed and promoted is weakening.

“Record labels know how to drive hits,” Message says. But in an age when revenues from recorded music are on the slide, the hit-based approach is growing obsolete. UK industry revenues rose 4.7 per cent to £3.9bn last year, boosted by the popularity of live music. But album sales were 3.5 per cent down on the previous year. It’s worse in the US, where album sales in the first half of 2010 were 11 per cent down on the same period last year. Japan, the world’s second biggest market, is registering similar falls. With recorded music revenue falling and other forms of income such as concerts getting more lucrative, the balance of power between talent and labels has shifted.

. . .

In the 1990s, Prince fell out with his label Warners and embarked on an eccentric campaign to end his contract, scrawling “Slave” on his cheek and changing his name to a symbol. His career never recovered.


Now, however, big stars can look outside the majors. In 2007, Madonna left her label to sign a “360 deal” worth $120m with the promoter Live Nation. Jay-Z, Nickelback and Shakira have subsequently joined her.

Radiohead wanted to leave their label after 1997’s OK Computer, the album that elevated them to the top of rock’s premier league. At that point they were three albums into a six album deal with EMI, but, according to Message, felt their long term future would be better served elsewhere.

“You could see the management of EMI over the years trying hard to keep the share price going under the spotlight of media attention,” he says. “Everything became very short-term, it was all about ‘What can we do for the next quarter’s results?’ That’s a very tough place to be when you’re sitting saying, ‘I’ve got a vision for this artist for the next decade’”.

Radiohead finally left in 2007, soon after the controversial buy-out by the hedge fund Terra Firma, which bought the label for £4.2bn. EMI claimed the band wanted a deal worth £10m – something the Radiohead camp denied.

“The boys are very sensible,” says Message. “They kept a little war chest so they could have the flexibility to do some things themselves.” Thus the In Rainbows gamble, devised by Edge and Hufford. Radiohead would keep all the revenue raised themselves – and have, for the first time in their career, copyright ownership of their songs.

There was widespread scepticism as to whether it would pay off. A month after the album came out a survey suggested 62 per cent of In Rainbows’ downloaders chose to pay nothing for it. The CD edition, which followed several months after the download, followed a more conventional mode of release, licensed to record companies throughout the world in one-off agreements. Message says the band “did very well out” out of the album, though exact figures are kept secret.

Faithless’s Maxi Jazz

So it was that a new phrase entered the music industry lexicon: “doing a Radiohead”. The dance music outfit Faithless, managed (though not funded) by ATC Management recently followed suit. Their self-financed and self-released album The Dance entered the UK charts at number 2 in May – and has thus far sold more than 100,000 copies.

“On every level it’s been a profitable experience,” says the band’s leader Rollo Armstrong. He put out Faithless’s first album on his own label in 1996 and remembers the thrill of selling 16 copies in the first week. Subsequently the band signed to SonyBMG and clocked up a solid run of top 10 albums but then progress stuttered. Their last album for Sony, in 2006, reached a lowly number 30.

Major labels, says Armstrong, “can totally ruin your life, but they can also speed everything up, put everything in fast-forward. To see a major label swing into action is still quite an impressive sight.” The downside is the danger of being neglected. “There’s only a certain time span, a certain window of opportunity for your record to do really well, and if doesn’t happen in that time then they’ve got a lot of other records on their schedule.”

The Dance is Faithless’s first post-Sony album. Although Faithless didn’t copy In Rainbows’ honesty-box payment scheme, Radiohead’s example was fundamental to the band’s decision not to seek another record deal. “I remember thinking, we’re not as big as Radiohead but we’re big enough to do what they’ve done. We have a big enough fanbase, we can tour places, we sell enough records that we can really control our own destiny.”

Indeed, Armstrong estimates the band will earn more from The Dance than any of their earlier albums. At a major label, a top act gets about a quarter of the price of each album in royalties and publishing rights (after repaying their advance). This time around, Faithless get everything bar the retailers’ cut.

In the UK, The Dance is being sold exclusively for a year by iTunes and Tesco. Fiat paid for their latest single’s video and have named a limited run of cars after the song. Music snobs deride Tesco CD purchasers as mindless consumers reaching automatically for the nearest Susan Boyle; a Fiat midrange saloon is a long way from hipsville. Armstrong, however, is unrepentant. “I never want to compromise the music, but once it’s made I want everyone to hear it, because obviously I think it’s brilliant. I’ve always had that philosophy: use every opportunity to get your music to people.”

It’s one thing for established bands like Faithless to cut themselves adrift from the record label system but quite another for a new band. “It’s still very early days,” says Message, “and people can rightly level the criticism, ‘Well it’s alright for Radiohead to do it, but what about the little bands?’.”

It’s early evening at Glastonbury and we’re off to see a group he’s invested in, Band of Skulls. They’re a three-piece outfit from Southampton playing on one of the smaller stages on the festival’s sprawling site. Positioning himself towards the back of the marquee Message sparks up a cigarette and nods along to the music. He spends as much time observing the audience as the band.

It’s an encouraging sight. The tent is packed with fans punching the air and jumping along to the Band of Skulls’ hard rock. “It’s all very new to us, but sing along if you know it,” says the singer diffidently. The punters oblige. Less diffident when it comes to playing their instruments, the trio end with a cataclysmic guitar-and-drum finale.

Message first saw Band of Skulls play in London in 2008. “We all thought America would love this, it’s great quality rock and roll,” he says. The band were launched in the US last year with a low-budget debut album costing under £20,000 to make, recorded in Radiohead’s Courtyard studio in Oxford. Having attained “traction” (another Message buzzword) in North America, including a song on the second Twilight movie soundtrack, the band are now beginning to get noticed in their homeland, with a headlining date at a 2,200 capacity venue in London next month.

. . .

Still: it’s not exactly A Star Is Born. “What we’re talking about is day to day trench warfare. It’s about winning a fan. It’s about selling 300 albums this week, anywhere in the world,” says Message, speaking a week later at ATC’s London offices. Stripped wooden floors, white walls and large windows convey the open, optimistic air of a start-up. About five staff are working at cluttered desks. A bottle of Bacardi pokes out from the bottom of a drinks cabinet, a memento of the old days of rock and roll.

The manager of one of the Message’s acts, The Duke Spirit, turns up in the offices to play some new songs. “We had to beg, scrape and borrow to get this done,” says Message. There’s not much cash in the Duke Spirit pot right now. A growling guitar riff and cool female vocal fill the room. “It sounds dirtier,” Message comments approvingly. “Classic female-fronted British rock, no reason why it couldn’t be a big global thing.”

ATC spent £1m last year investing in acts and is likely to spend £500,000 this year. By major label standards, these are tiny amounts. A 2007 report estimated the majors spend about 30 per cent of their total revenue discovering, developing and promoting talent. However, the need for chart hits to keep the turnover flowing means acts signed to major labels suffer a harsh failure rate: it’s estimated that as many as nine in 10 don’t turn a profit.

In contrast Message’s operations resemble a cottage industry, treating bands like artisans and trying to find a niche for their products. Band of Skulls drummer Matt Hayward says: “It’s been relentless for the last year and a half.” Following their Glastonbury appearance the band have flown off to tour Australia; then it’s off to Japan; then back to Europe for the rest of the festival season; then it’s time for a European tour. Then it’s back to the studio to record a follow-up to their debut album.

Hayward offers a hard-headed assessment of the hoops a young band must jump through nowadays. Rock romantics should look away now. “You have to look at new ways to make money out of it because people just don’t buy the records like they used to. You need to find new avenues and you can’t be too precious about it anymore.”


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