SCOPE OF THE RECORDING INDUSTRY

SCOPE OF THE RECORDING INDUSTRY

The recording¹ industry overwhelmingly dominates the art and business of music today Once a piece of music is composed, not much of importance can happen to it in the marketplace until it is recorded. The lives and fortunes of composers, performers, publishers, agents, and merchants rise and fall with the sale of recorded music. If CDs and tapes sell well, all other sectors of the business prosper. When they flop, everyone hurts.

For an understanding of how the recording industry functions today, some historical background will be helpful (see Table 14.1).

PERSPECTIVE

Well over a thousand recognized recording companies operate in the United States, with releases on more than 3,000 different labels. Probably the best way to gain a true picture of the record business is to analyze it in terms of major versus independent labels. It is probably best to define a major label as any label that is owned and/or distributed by one of the handful of major distribution companies. Conversely, an independent label is any label lacking an affiliation with a major.

An understanding of this structure is important because the majors dominate the sales of records in the United states. Even though independents account for

The Capitol Records building in Hollywood. Photo courtesy of Capitol Records. The Capitol Tower is a trademark of Capitol Records, Inc. All rights reserved.

the overwhelming majority of the many thousands of different records released each year, majors typically account for between 80% to 90% of the total number of records sold. Looking at the radio charts, video playlists, sales charts, and so forth, at any time, it would be hard to find an independent release. This is because the majors are well funded, and this gives them a tremendous advantage over the independents.

MAJOR LABELS

The major distribution companies are owned by some of the larger multinational corporations in the world. The competitive advantage of being well financed manifests itself in myriad ways. The record business requires a tremendous investment in the areas of production, distribution, and marketing. The majors can afford to sign more artists and offer more money to sign the best artists. A commonly quoted industry statistic is that only one out of five records earns its money back. By being well financed, the major labels can ride out the frequent losses and wait for the big score. Moreover, artists are attracted to the large advances and the prestige of being associated with a label such as Sony or Mercury, the security of knowing there are sufficient funds for marketing, and the stability of an established company in a business where one of the greatest difficulties is getting paid. The major labels can also afford to fund more elaborate recordings with the best producers, musicians, and studios. And they usually have their own duplication facilities and can manufacture more units at a lower unit cost. More money also means the majors can put a lot more records into the marketplace and can afford the losses associated with excess inventory.

The advantages in distribution are also profound. The majors operate according to a branch system, with regional offices functioning in coordination with one another to penetrate the marketplace much more thoroughly than independents canthey can get many more records into many more stores. Another advantage major labels have is in promotion: When a big firm releases a new recording, it can assign its entire field force and merchandising personnel to that particular project. They can bring to bear 200 or more individuals actively working a particular release. Although major labels rarely assign their full energies to just one release, they can shift their field personnel whenever they find it necessary to push particular products. Because they sell more records, they can put much greater pressure on retailers to accept a lot of product, particularly from new artists. And major labels offer stability and longevity. This can mean that they are more likely to maintain inventories and continue distribution of recordings long after their first release. Smaller labels may find it impossible to offer such ongoing service.

In contrast, independent labels are usually forced to find a patchwork of different independent distributors throughout the country. Just like artists, independent labels have trouble getting paid. Independent distributors and retailers frequently have difficulty paying their bills, and it is not unusual for even the largest of them to go out of business. Independent labels are the last to get paid, and if an account is large enough to an independent label, the bankruptcy of a distributor can result in the failure of the label as well.

Last, the majors have a clear advantage in the costly marketing of records. Again, the structure of the majors allows many individuals to work together on distribution and marketing. It's a severe disadvantage for independent labels that independent distributors do not perform any marketing functions.

Radio promotion can cost $100,000 or more per single. Video production costs can range from $50,000 to the millions for one song. Retail placement and promotion can easily run into seven figures for a single album release. Add to this amount the cost of advertising, tour support, publicity, and the overhead for staff.

The national impact of this force can put over even a weak recording. This issue is strongly disputed, some arguing that even heavily concentrated promotion cannot persuade the public to buy music that doesn't actually have it 'in the grooves.'But certainly, the powerful promotional forces of the major labels have much greater success with weak material than the smaller firms. Prominent artists are attracted to major labels primarily because of their powerful promotion departments and well-organized distribution networks. Artists are also attracted by the prestige of being signed by a major label. They would rather be known as 'an MCA artist' than as 'a Smith artist.'

INDEPENDENT LABELS

Fortunately for the independents, the sheer size of the majors has built-in disadvantages. First, they are conservative companies that tend to be out of touch with consumers and are slow to catch up with changes in musical tastes. Most important developments in music have started at the independent level: Rock and roll in the '50s and '60s; punk and modern rock in the '70s and '80s. Alternative and 'grunge'rock as well as rap and hip hop in the '80s and '90s. Independ-ent labels have been described by knowledgeable music industry professionals as the 'lifeblood of the business.'To discover 'the next big thing'in music, you need only look to the independents. Of course, the natural evolution and goal of some independents is to become so successful that they are ultimately bought out and absorbed by the majors for many millions of dollars.

Many of today's biggest major labels started out as independents. Many small firms have lived through high-risk periods to develop into very profitable companies. Three English labels that started very small and grew very rich before being bought out by major labels are Island, Chrysalis, and Virgin. Three U.S. labels that did the same thing are Arista, Geffen, and Sire. From the outset, these companies exhibited creative leadership and determinationa winning combination.

The majors are set up so that they must concentrate their efforts on the most popular music with the best sales potential. This leaves many of the more modest-selling genres and artists to the independents. Independent labels can also develop brand name awareness and consumer loyalty that is rare among the majors. Music fans will often purchase records from labels such as Alligator, Sup-Pop, Rounder, and so on, on the basis of their trust in that label's taste.

Another fertile area for an independent label is at the local or regional level. An independent can make necessary connections with the radio stations, publicity outlets, and retailers in a limited geographical area. Relationships are the backbone of this industry, and if a group can earn the good favor of a few regional program directors, editors, and store managers, a modest success can begin and grow from there, especially if the acts can play in the area. In fact, many groups start their own labels, and if they have a local following they might make more money doing it themselves than if they signed with a major label.

Developments in technology may benefit the independents. The affordability of recording equipment and proliferation of studios have brought the cost of recording down considerably. The refinements of CD manufacturing and the number of duplication facilities have brought the cost down to under $1 per unit. The Internet has made it possible for anyone to promote and distribute their recordings to the entire world.

SPECIALTY LABELS

Some of the most successful independents are specialty labels, and a number of these are in the classical music field, for instance, Nonesuch, Deutche Grammaphon, Westminster, Odyssey, and Angel. The classics have been and are still being recorded by the world's greatest artists, and classical labels are largely concerned with selling from existing inventories. Larger classical labels such as Columbia will, from time to time, tape what some people call 'new music,' the works of 'serious'contemporary composers.

Some specialty labels, particularly in the field of contemporary classical music, release their records 'privately.' They bypass more conventional distribution channels and seek to locate buyers of their sometimes esoteric product through the mail, addressed particularly to colleges and universities.

Other specialty labels limit their activities to certain demographic markets. They find ways to reach cultural enclaves or ethnic groups in particular parts of the country and work directly with retail outlets in those communities. Another kind of specialty label is Folkways, which offers a variety of folk, blues, ethnic, and jazz music, selling mostly by mail to schools and libraries.

One of the most successful types of specialty label sells gospel music. Some people refer to this repertoire as contemporary Christian music. Among the most effective promotional methods used by gospel record companies are the many personal appearances of their contract artists. Touring gospel singers draw large audiences and sell lots of tapes and CDs.

Once again, these labels are successful because they do not compete directly with the mainstream music concentrated on by the majors and because they do not rely as heavily on traditional and expensive forms of promotion, such as radio and video.

RECORD COMPANY STRUCTURE

Record companies range in size from the multinational major to the modest, one-person operation, and their structures vary accordingly. But whatever their structure, they must handle the kinds of tasks described, and certain generalizations can be made about how production, distribution, and marketing are organized and administered. Figure 14.1 gives an example of a typical record company structure.

Chief Executive Officer (CEO)

The CEO or president is often a strong entrepreneur who started the label and who had the vision it reflects. CEOs come from a variety of backgrounds, but two stand out. Lawyers often assume this position because the record business relies in large part on contracts and copyrights. Producers are also quite often in charge of labels because they know the music. This is particularly true in country music and urban music. Whether or not CEOs are lawyers or producers, they must have their respective abilities: They must know the 'art of the deal'to negotiate favorable business arrangements, and they must have good 'ears'to determine commercial recordings. They are often strong leaders, like David Geffen, Clive Davis, and Ahmet Ertegun.

Artist and Repertoire (A&R)

The A&R department is concerned first and foremost with finding and signing new talent. The staff needs to keep informed, through a network of contacts, submitted demo tapes, the independent music scene, industry publications, and/or going to clubs to hear new music. After an act has been signed, the A&R department remains involved on a number of different levels, including assisting artists in developing a particular project and/or their careers; administering the many production, budgetary, and other details of an album; or just acting as liaison between the artist and the label. If the label is large enough, separate departments may be established to handle these specific tasks, such as Artist Development, A&R Administration, Artist Relations, and Production on both the audio and video side.

Business and Legal Affairs

Since this industry revolves around contracts and copyrights, record companies usually have legal departments to negotiate and draft agreements. These range from artist recording agreements to licenses issued by and to the record company for the use of copyrighted materials. This department must also do its best to minimize the frequent litigation that occurs in this industry. Some larger companies have a separate department for business and legal affairs or smaller departments to handle specific tasks, such as licensing or copyright departments.

Accounting

Record companies require a large and sophisticated accounting department to handle the incoming and outgoing royalties. Accounting may also be heavily involved in the development and administration of recording budgets, inventory, and manufacturing with separate departments designed for each, such as operations and finance departments.

Distribution/Sales

Whether a record company is a major or independent, it must have personnel who either oversee or are directly involved with convincing retailers to buy its records. Maximizing sales and controlling inventory are absolutely necessary to a label's success.

Marketing

While sales and marketing are often linked, the marketing role is so important and so distinct that it usually functions separately and is divided into several areas of specialization.

Radio Promotion. This is the very heart of the marketing of most records in most genres. The radio promotion department is in charge of getting radio airplay and charting; there is little chance of success without them. Some large labels subdivide this department by genre of music.

Video Promotion. This department attempts to get video airplay for artists.

Publicity. In-house publicists manage media exposure through TV appearances, magazine articles, newspaper reviews, and the like. Many labels are concentrating more and more on publicity since it is so much less expensive than promotion.

Advertising. This department arranges the advertising for a label and may be part of or work closely with the distribution/sales department since much of the advertising cost is shared between label and retailer (co-op advertising).

Creative Services. The creative services department is responsible for designing and producing any materials necessary to execute a marketing campaign such as posters, point-of-purchase materials, album artwork, and window displays.

Product Management. Found in most medium and large record companies, product managers coordinate and oversee all aspects of a current release, including packaging, advertising tours, publicity, promotion, and sales activities. This entails close liaison with personnel from other label activities, for instance, A&R, sales, and creative services.

International Department

The global nature of the record business is such that most record companies now have international departments to oversee foreign sales and ensure effective communication between domestic and foreign affiliates. For some companies and some genres, foreign sales can equal or exceed domestic sales.

Publishing Affiliates

All record labels own or control at least two publishing companiesone connected with the American Society of Composers, Authors and Publishers (ASCAP) and one signed with Broadcast Music Inc. (BMI). Labels with aggressive publishing wings may seek to persuade their contract artists to grant them publishing rights to the music the artist records for the label. Although a publishing company may be owned by the same parent company as its affiliated record company, the publishing company is expected to show profit from its own operations and may sign many artists who are not on the recording company's roster. An exception may be found with publishing companies that are affiliated with very small labels. These companies may exist primarily to handle the publishing of that label.

PIRACY, COUNTERFEITING, BOOTLEGGING

Since the 1960s, the piracy, counterfeiting, and bootlegging of recordings has been a worldwide problem of overwhelming proportions. Some observers fear that copyright abuses of this kind may run some legitimate companies out of business. Piracy is the sale of the unauthorized duplication of prerecorded product. Counterfeiting is the unauthorized manufacture and distribution of copies of prerecorded product that are packaged to look like the original product. Bootlegging is the sale of product created from the unauthorized recording of live or broadcast performances.

Probably the most comprehensive international studies of the problem are made by the World Intellectual Property Organization (WIPO), headquartered in Geneva. WIPO's research shows that the worldwide sale of pirated, counterfeited, and bootlegged merchandise has a retail value of billions of dollars. The seriousness of illegal record copying varies widely from country to country. In some parts of the world, no copyright laws exist; in other regions, the laws may be there but are not enforced.

In the United States, progress has been made toward reducing if not controlling, record piracy and counterfeiting. But most recent reports of the Recording Industry Association of America (RIAA) stress that the problem is far from solved in this country. At every recording industry meeting, leaders prod each other to reduce this problem that hurts everybody in the legitimate business, particularly copyright owners.

But progress in the right direction continues: A variety of package-marking or coding devices has been developed to protect against counterfeit merchandise. In 1984, an amendment was passed affecting the Generalized System of Preferences (GSP), which provides preferential tariffs and duty-free treatment to Third World nations, where many of these abuses occur. The amended law provides that a nation that refuses to cooperate with the United States in crackdowns of pirating and bootleg operations will be denied, at the president's discretion, future preferential treatment under the GSP. This law helps induce Third World countries, out of self-interest, to cooperate more fully with efforts to control copyright abuses of this kind.

In a further effort to address the problem, in 1992 the U.S. Congress enacted the Audio Home Recording Act, which amended the 1976 Copyright Act by allowing home audiotaping and by implementing a royalty payment system and Serial Copy Management Systems for digital audio recordings. As a result of this amendment, royalty payments must be made by any person who imports, distributes, or manufactures digital hardware and software. (Some other countries also require compensatory royalties on the sale of blank tape and/or recording equipment.)

Challenges Presented by New Technologies

The problems of piracy, counterfeiting bootlegging and home taping have been exacerbated by digital technologies. It is now possible to have access to almost any and all music through the Internet. There are many sites that offer the opportunity for anyone with a computer to download music illegally through technologies such as MP3. These transactions deprive the copyright holders, artists, and songwriters of any compensation for their work. RIAA and other industry coalitions are working to ensure that the laws are sufficient to prohibit this activity.

For example, in 1997 the Net Act was enacted id address criminal copyright issues that have to do with the Internet,' especially pirate bulletin board systems and Web sites, defining the 'willfulness'element needed to establish criminal liability: when a person intended to violate copyright law. This act deals only with criminal liability, however, and has no impact on civil liability for copyright in- fringement. And the Digital Millennium Copyright Act implements two global treaties designed to protect creative works in the digital era. It prohibits the manufacture and distribution of devices used to circumvent technology that protects sound recordings and other copyrighted material. This prohibition provides a mechanism for securing copyrighted music online.

The more pressing and difficult concern, however, is to police the illegal practices. This is accomplished by monitoring the Internet and finding and prosecuting the criminal providers and consumers of this illegal material. An equally vigorous effort is being made to design and integrate these technologies into the record business so that they operate to the benefit of the record companies, the artists, and the consumers. It may be the most challenging issue confronting the industry.

NATIONAL ACADEMY OF RECORDING ARTS & SCIENCES

The National Academy of Recording Arts & Sciences (NARAS) is known to the public through annual telecasts of its Grammy Awards. NARAS's regular membership is limited to persons professionally active in the artistic, creative, or technical side of the industry (composers, performers, producers, engineers, etc.). Associate membership is open to those in the recording field who are only indirectly involved in record production. Some of NARAS's associate members are students planning professional careers in recording. Applications are accepted at NARAS regional offices, located in major cities.

Grammy Award classifications and voting procedures change from time to time, and information on current practices is announced in the trades and, occasionally, in the general press. Receipt of a Grammy Award is prized, not only for the prestige but because the attendant national publicity often helps boost recording sales.

NOTE

1. The terms record, album, and single have become generica compact disc or an audiocassette of an artist's music is still often referred to as a 'record.'