By David Lowery

(Part 5 of a 5 part series)

What follows is based on my notes and slides from my talk at SF Music Tech Summit. I realize that I’m about to alienate some of my friends that work on the tech side of the music business. These are good well intentioned people who genuinely want to help musicians succeed in the new digital paradigm. But if we are gonna come up with a system to compensate artists fairly in the new digital age we need an honest discussion of what is going on. The tech side of the music business really needs to look at how their actions and policies negatively impact artists, just as they have pointed out the negative effect record company actions have had on artists.

Too often the debate is about pirates vs the RIAA. This is ridiculous because the artists, the 99 percent of the music business are left out of the debate. I’m not advocating going back to the old record label model, to an industry dominated by the big 3 multi-national labels. This is a bit of hyperbole intended to make us all think about this question: Is the new digital distribution paradigm really better for the artist?

Meet The New Boss, Worse Than The Old Boss? Part 5

So at last we get to the part of the new digital paradigm where things should work as promised. The independent artist on their own label who directly releases their recorded music through iTunes, Amazon Mp3 store etc. This is where we would expect to find the artists benefiting from the process of “disintermediation”. This is where we should find the artists that are capturing the lions share of revenue. This is where we should find that vibrant marketplace of small stakeholders competing with multi-national conglomerates. This is where the playing field should be even. This is what the tech visionaries promised us anyway.

What percentage of revenue from digital sales goes to an independent artist?

iTunes/Amazon 61%*

Google Play 70%

Bandcamp 85% -fees**

CDbaby 75%

Directly off the artists Website. 100%-fees

* requires using an aggregator like CDbaby. generally 9% fee.

** looks like Bandcamp pays after the credit card paypal frees.

So clearly the best thing for an artist is to sell fans digital downloads of their music directly off their own website. And indeed that is what most artists try to do. And the most engaged fans will go to your website and buy your music that way. Failing that you could also sell your music through Bandcamp or CDbaby and net a little more than you would on iTunes.

Here’s the problem with that:

Facebook, YouTube and Twitter ate our web traffic.

It started with Myspace and got worse when Facebook added band pages. Somewhere around 2008 every artist I know experienced a dramatic collapse in traffic to their websites. The Internet seems to have a tendency towards monopoly. All those social interactions that were happening on artists websites aggregated on facebook. Facebook pages made many band’s community pages irrelevant. It is so much more convenient for your fans. Think about it. Your fans are probably already on Facebook all day anyway. It’s so much easier for them to interact with other fans and artists on Facebook.

Most artists I know now mostly use their websites to manage their facebook and twitter presence. There are band oriented CMS services that automatically integrate with Facebook and Twitter. They turn your website news, tour dates and blog posts into facebook events, facebook posts and Tweets. Most websites function more as a backend control panel for your web presence. Yes some of us sell swag and downloads on our websites but unless you are a really really popular band, or you have a major record label that can help you promote your website , it’s generally a few hundred of the most ardent fans that ever spend anytime on a bands website.

In the mid nineties bands had complex websites and fulltime web masters. This is really rare now cause Facebook, YouTube etc has absorbed all our web traffic. Managing a unique website is not really worth the time you put into it unless you are a very popular artist. And the only reason fans would go to your website often is if you have unique content for your visitors.

Think of websites as TV networks or TV stations. A very popular channel has enough viewers and revenue to justify creating it’s own content. A little public station in a tertiary market does not. Admittedly not having unique content because you are too small is a self reinforcing dynamic. But it’s one that I have found is virtually impossible to conquer.

I spent 40 hours shooting and editing a video for the song “Raise ‘Em Up On Honey” and put it on my website. It received several hundred views on my website then slowed to a trickle. But the version on YouTube got tens of thousands of views. But I HAD to also put it on YouTube. It would have been stupid to have not. My fans are all on YouTube anway watching cute cat videos. They can see when I add a new video to my channel. Why bother going to http://www.davidlowerymusic.com?

A similar situation occurs with the process of selling music online. Our fans already have an iTunes account. They already have a credit card on file with Amazon. That small hassle of getting your credit car out of your wallet to buy music directly from the artist website is a giant hurdle that most people will not jump over. The internet has a tendency to monopoly because we are fucking lazy fat slobs.

65%

So iTunes and Amazon which account for approximately 83% of the digital music market, so this duopoly share about 61% of revenue with the independent artist. But let’s assume that the artist manages to sell some music directly off their website and a few other slightly more generous stores like http://www.bandcamp.com or CD Baby. So let’s round up the artists share of digital download revenues. Let’s round it up to 65%.

This is pretty damn good. It dwarfs the revenue that record labels shared with artists. And indeed there are some spectacular success stories of artists selling their music directly to fans and making a lot of money. Imagine how much Radiohead made off the album they sold directly to their fans.

These are the stories that you hear when the tech true believers, the eVangelicals ecstatically shout “Things have never been better for musicians!”

While that is true for these musicians is it true overall? Is it better for musicians as a group? I mean cause I can say the same thing about lottery winners. I can find three or four Jackpot winners and say “Things have never been better for Lottery players”. And this would not be true because we are not accounting for all the losers. The house or the lottery always wins. But their are just enough winners that people keep playing the game. And this is exactly how the new digital paradigm works. It’s a lottery. A few musicians win every year. But overall money steadily flows to file-sharing companies, YouTube, AdSense, Google, Apple, Amazon, Spotify and the record labels. Artists haven’t been liberated. We’ve been enslaved in a new and fancier way. It’s been sold to us as freedom. Michael Robertson of Mp3tunes has been on a crusade to “liberate” artists like Pink Floyd from their record companies. Liberate them how? Take their songs and share them on Mp3tunes then share NONE of the revenue with Pink Floyd? Why would they do they that? At least EMI pays them something.

Meet the new boss, worse than the old boss!

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But the music business has always been a lottery. This is nothing new. It has always been ruled by unpredictability and luck. That’s why you often hear something like this attributed to Ahmet Ertegum:

“The secret to the music business? Throw ten records against the wall and see what sticks.”

Never mind that I can find no evidence that he ever said this. This is clearly how the music business has worked for a long time. It’s built into the very structure of the business. In the 1960s when a music scene would pop up someplace like San Francisco (Haight Ashbury) or Boston (The Bosstown Sound), record companies would come in and sign anyone with long hair and a guitar. They did the same all through the 70s, 80s and 90s. That’s what they did during Seattle’s Grunge Bubble. Historically the companies that tried to be selective, pick the stars were no more successful than the companies that were not selective. From this record companies learned to spread their bets around. In this way record companies have long resembled hedge funds, VC funds or “black box” trading firms that buy 100’s of longshot bets, losing on most of them with the few winners paying spectacular returns.

The crucial difference between the old boss and the new boss is that the old boss the record labels saw that it was in their interest to invest in the creation of music. Further they knew success in the music business was highly unpredictable. Therefore they spread their investment around. They didn’t do this out of the kindness of their own hearts, they did this cause it was a in their long term interest. And it was the surest way to make money. So up until the early 2000’s record companies essentially overpaid the 9 “losing” artists and underpaid the one “winning” or hit artist through their system of advances for each album. It was a semi-socialist system. A system in which the superstars revenue subsidized all those new and developing artists. The destruction of this revenue and risk sharing system is another important reason why artists are poorer now.

Slide 25. How risk sharing/revenue sharing made record label artist royalty rates a “floor”.

This is what people do not understand. When they look at the royalties that the record labels paid artists it doesn’t seem like a lot. It seems unfair. Until you consider the guaranteed advances. Let’s say the artist was to be paid a lowly 12% royalty by contract. That compares unfavorably to the 61% of revenue that the independent artist gets from iTunes. But the artist is always given an advance and usually the advance assumes moderate success. But 9 of those 10 bands did not achieve great success even moderate success. It was never expected that all 10 would be successful. So the result was that the record label artist actually received a lot more than that contractual 12%. The unsuccessful artist may have received an advance that was equal to 90% of the gross revenue generated by that recording. And most artists were unsuccessful. So your average record label artist was actually receiving way more than 12%. The artist royalty rate is actually the floor. It’s the minimum share of revenue the artist will receive.

(I know this is probably really confusing to you civilians. Am I really saying it’s better to be un-recouped as an artist? Yes it is. Quantitative finance geeks will see this as selling a series of juicy “covered calls”. Being un-recouped means you took in more money than you were due by contract. You took in more money than your sales warranted. And there was a sweet spot, being un-recouped but not too un-recouped. For instance I estimate that over my 15 year career at Virgin/EMi we took in advances and royalties equivalent to about 40% of our gross sales. In other words we had an effective royalty rate of 40%, despite the fact that by contract our rate was much lower).

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So under the old school record label system MOST artists had a much higher effective royalty rate than the contracts would lead you to believe. This was directly a result of this socialistic risk sharing/revenue sharing scheme that record companies devised. It was directly the result of the record companies financing the recording of albums through it’s system of advances.

But wait these “effective” royalty rates were still mostly lower than that 65% that the independent artist receives under the new digital distribution model. Right?

Well yes. but under the new digital distribution model the independent artist is now shouldering all the risk and expenses.

With the exception of a few lottery winners, the independent artists that seem most successful under this new digital model seem to fall into two categories:

1.Established recording artists recently freed from major label contracts.

2.Artists playing to a specific non-commercial niche. For example Black Metal.

Both types of artists don’t have to spend a lot of money on marketing, advertising, radio promotion or publicity. These expenses can be huge!

The ex-major label artists are able to sell significant albums as independents because they are able to rely on their brand that was built with years of record company money. Niche artists only have to promote and publicize themselves to a very limited tightly grouped audience. But if you are not in one of these categories the independent artist route is tough.

In 2010 there were 75,000 albums released. Of those about 60,000 sold less than 100 copies. Only approximately 2,000 sold more than 5,000 copies. Slightly less than 1,000 sold more than 10,000 copies. And you got to figure most of those artists were on record label artists.

An album that sells 10,000 copies for the independent artist would gross around $65,000. From that $65,000 dollars the independent artist must pay for recording, a publicist, radio promotion, advertising, photos artwork and on and on. You quickly realize that the independent artist is unlikely to be better off under the new system. In practice the independent artist is unlikely to net anywhere near the 65% we estimated.



Rock and Roll Animal Spirits.



Then there is the matter that the independent artist must raise the capital to record and promote the record. The record label artist has the advantage of receiving a loan of sorts from the record company. The independent artist must either scrounge together the money or borrow the money. But imagine being an independent artist and trying to borrow money from someone to make a record. In this day and age no one is ever gonna loan an artist money specifically BECAUSE of widespread illegal file-sharing. Digeridiots pounding tables and shouting “intellectual property is not property” makes the investment environment even worse. I mean would you loan anyone money to make an album these days? I wouldn’t. I don’t even know if I would loan myself money to make an album in this day and age. This air of uncertainty, this “animal spirit” as Keynes would term it discourages investment.

There is also a strange quirk of human nature studied by behavioral economists called Prospect Theory. Among other things it predicts an individual artist will risk much less of their own money on an uncertain venture ( like recording an album) than a company would risk. Actually Prospect Theory and what derivatives traders call Volatility Theory can explain the entire structure of the music business. But I digress.

Basically these two things combine to starve the independent artist of capital.

This lack of capital available to the independent artist makes it highly unlikely that the independent artist will sell many records.

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I think I’ve demonstrated how important it was to the old system that record labels shared risk and invested capital in the creation of music. And that by doing this the record labels “accidentally” shared more revenue with the artists. But I’ve yet to explain why it is that The New Boss refuses to share risk and invest in content creation. I mean the old record labels eventually saw that it was in their long term interest to do so.

My only explanation is that there is just something fundamentally wrong with how many in the tech industry look at the world. They are deluded somehow.

Taking no risk and paying nothing to the content creators is built into the collective psyche of the Tech industry. They do not value content. They only see THEIR services as valuable. They are the Masters of the Universe. They bring all that is good. Content magically appears on their blessed networks.

I’m using this language for good reason. There is a quasi religious tone to many tech convention speeches and press releases. What other industry constantly professes utopian visions for all humanity? What other industry would dare proclaim they were liberating artists? Students? Workers? What other industry thinks they are mystical shaman “Let’s send our magic objects, our laptops to poor children in third world countries”. What other industry genuinely believes they (and only they) possess the lapis philosophorum? They have even created their own God. A Superhuman intelligence that they (naturally) have created. The singularity. Their egos know no bounds.

Not only is the New Boss worse than the Old Boss. The New Boss creeps me out.