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Faced with shrinking profits, record labels are touting a new approach

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IT HAS become a familiar refrain. For years record labels, citing tumbling CD sales
blamed on internet piracy, have decried the decline of the music
industry. The reality is rather more subtle, as Edgar Bronfman, the
chairman of Warner Music, a big record company, pointed out last month.
“The music industry is growing,” he told an investor conference in New
York. “The record industry is not growing.”

Indeed. Seven
years ago musicians derived two-thirds of their income, via record
labels, from pre-recorded music, with the other one-third coming from
concert tours, merchandise and endorsements, according to the Music
Managers Forum, a trade group in London. But today those proportions
have been reversed—cutting the labels off from the industry’s biggest
and fastest-growing sources of revenue. Concert-ticket sales in North
America alone increased from $1.7 billion in 2000 to over $3.1 billion
last year, according to Pollstar, a trade magazine.

Frustrated
record companies have responded by trying to get their artists to spend
more time promoting records and less time touring and endorsing
products, says Jeanne Meyer of EMI, another big
record label. “Sometimes you’ve got a tug of war going on,” she says.
Yet the more labels spend on marketing pre-recorded music, the more
they raise their artists’ profiles and boost their other, more
lucrative, sources of income. Pre-recorded music, no longer the main
cash cow, increasingly serves merely as a marketing tool for T-shirts
and concert tickets. The best seats for The Police’s world tour this
summer cost over $900; the group’s entire catalogue on CD costs less than $100.

Record labels have come up with a remedy: the “360° contract”. Instead of settling for a cut of CD sales,
they increasingly offer artists broader contracts that encompass live
music, merchandise and endorsement deals. Such deals, also known as
multiple-rights or all-rights contracts, are particularly important in
regions with rampant CD piracy, such as Africa,
Asia and Latin America. “The market has made it necessary—we’ve got to
look for something else,” says Manuel Cuevas, an industry executive in
Mexico City. His company, the Mexican subsidiary of a major label,
decided earlier this year to adopt the 360° model. “It’s a discussion
you have with every new artist now,” says EMI‘s Ms Meyer.

Although
record labels like the idea, artists are unsurprisingly less keen. Few
established artists have accepted 360° deals, though the labels trumpet
the exceptions, including Robbie Williams, the Pussycat Dolls and Korn.
It is more profitable, the artists say, to stick with artist-management
agencies, which have traditionally handled the job of cultivating
careers beyond the realm of recordings.

Management
agencies are also considered to have more respect for their artists’
interests. Record labels, for example, have been criticised for
obtaining rights to the names of artists and bands for use in internet
addresses. Some clauses stipulate that name ownership applies even
after contracts expire or artists die. This can prevent musicians from
launching websites to promote tours, sell merchandise, and communicate
with fans as they see fit. “Record companies don’t exactly give many
artists the warm, fuzzy feeling,” says Gary Bongiovanni, the editor of Pollstar.

Musicians
with small fan bases and little business experience are much more
receptive to the idea of 360° deals. There is no shortage of aspiring
artists, and some will become big names. Juha Ruusunen, the founder of TWU,
a small management agency for heavy-metal bands based in Jyväskylä,
Finland, says European labels have begun to sign up new talent with
360° contracts. As record labels move more aggressively into the
artist-management field, Mr Ruusunen worries that his agency might
struggle to compete.

Building a
roster of 360° talent, one deal at a time, is slow going. It is quicker
for labels to buy artist-management agencies. Last month Universal
Music made a £104m ($205m) offer for Sanctuary, a struggling British
label with a management arm that represents musicians including Elton
John and Robert Plant. Sanctuary also owns two other artist-management
companies and runs Bravado, a merchandising operation. Sanctuary’s
shareholders will decide whether to accept Universal’s offer, which is
considered generous, this month.

For its part
Warner Music has expressed interest in Front Line Management, one of
America’s biggest agencies. And last month Warner announced the
formation of Brand Asset Group, an artist-management joint venture with
Violator Management, a firm that negotiates roles for rappers in films,
advertisements, video games and TV programmes,
and licenses their names and images to promote drinks, books and
clothes. (Its clients include 50 Cent, Diddy and Busta Rhymes.)

The shift
away from recorded music is due in part to the recognition that touring
and merchandise are more lucrative. But it may also be a consequence of
internet piracy, as free downloads give music fans more money to spend
on other things. Jwana Godinho, the director of Música no Coração, a
concert promoter in Lisbon, thinks many music lovers have a “mental
budget” that they are prepared to spend on music, and have switched
their spending from CDs to tickets and merchandise.

The logical
conclusion is for artists to give away their music as a promotional
tool. Some are doing just that. This week Prince announced that his new
album, “Planet Earth”, will be given away in Britain for free with the Mail on Sunday,
a national newspaper, on July 15th. (For years Prince has made far more
money from live performances than from album sales; he was the
industry’s top earner in 2004.) Outraged British music retailers were
quick to condemn the idea. As far as the record industry is concerned,
it is madness. But for the music industry, it could well be the shape
of things to come.