The basic recording contract upon which most of the popular music business has been based for the past 50 years is fundamentally broken.

This is not the sentiment of one of the countless critics who throw stones at the music industry from afar, usually for vague philosophical reasons, but rather the pragmatic opinion of a true insider: Tom Silverman, founder of Tommy Boy Records, which sold millions of records by hip-hop artists including Club Nouveau, Coolio, De La Soul, Digital Underground, Everlast, House of Pain and Naughty By Nature.

In a song called "Labels," The Wu-Tang Clan's GZA rapped in 1995 about Silverman, "Tommy ain't my mothafuckin' boy," as part of a general criticism of the same label system that Silverman advocates ending in the below interview with Wired.com. To be fair, GZA calls out a number of other hip-hop labels in that song, and Tommy Boy's practices followed the industry standards of issuing an advance, and generally never allowing an artist to recoup it in order to make money from the sale of their records. The money would always seem to get lost, somehow, before making it to the artist.

But Silverman has a new idea for how to save the biz and treat artists more fairly, by creating a corporations in joint partnership between artists and music companies that give each a 50 percent stake in the artist's businesses.

The problem, as he sees it, is that if nobody invests in music, we're all the poorer for it. He has a point. We all like (our own definition of) good music, but it's no easy feat for musicians to hone their craft or put time into songwriting while also working full-time jobs – not to mention the impossibility of touring in that scenario. (Just yesterday, as one of countless examples, Ted Leo of Ted Leo and the Pharmacists announced that despite the relative popularity of his group, it simply cannot afford to continue.)

Silverman hopes to spread the word about this new music business model at the next New Music Seminar, which originally ran during the industry heyday of 1980 to 1995, and which Silverman, one of its original organizers, rehabilitated last year with Dave Lory of Worldwide Entertainment Group.

In this exclusive interview, Silverman takes a contrarian view to the Long Tail theory as it applies to music, wonders why music sales are up in the land of Spotify and The Pirate Bay, and divulges a possible shady major label practice of buying iTunes singles with label money in order to hype music up the charts, among other things.

The crux of the interview is the idea that artists and music businesses should form joint partnerships that put them on the same side of the table, ending the adversarial nature of traditional recording contracts, and split everything 50-50 (including revenues not normally managed by labels), with artists, at long last, having easy access to the accounting side of the business.

This interview has been edited for length and clarity.

Eliot Van Buskirk, Wired.com: Before we get to what you describe as the failure of the "long tail" to support the traditional music business, and the reasons why 60 percent of music business jobs have already been lost, according to your publicist, what's the latest?

Tommy Silverman, founder of Tommy Boy Records and board member of A2IM, Merlin, RIAA and SoundExchange: This morning I did a Skype call with a music conference in Sweden, and Sweden was the only country where music was up last year, even physical discs – and it's the home of Spotify and of The Pirate Bay. Either the IFPI counted wrong, which is very possible, or there's something serious going on that should be investigated, because it's the only place in the world where physical sales were up last year.

__Silverman: __If it were the music, you'd know that there were three groups that were all the equivalent of Abba that came out last year, but there were not. In America, Michael Jackson died, we re-released all of the Beatles stuff, and we had Susan Boyle, the Black Eyed Peas and Lady Gaga – and we were still down 12.7 percent and 16-something percent physical. Where are the Swedish numbers coming from? Nobody in the audience could come up with an explanation for why things are up, so we're looking for some clues. Sales were also flat or up in the UK and a few other markets.

Wired.com: Well, Spotify's also available in the UK.

Silverman: Yeah, and if Spotify has enough penetration to make a difference one way or the other, it certainly doesn't show anywhere that it is available that it's knocking off the business in a big way, in terms of cannibalization. We at Merlin have a deal with them now, where we didn't before, and the numbers that they're paying the independent sector for the plays they're getting are much more substantial than we expected.

But the premise of technology being the great democratizer and allowing more artists to break through than before – actually, we've seen the opposite effect. Fewer artists are breaking than ever before, and fewer artists who are doing it themselves are breaking through than ever before. Back in the early '80s, when the cellphone was first invented, there were more artists breaking on their own, with no technology, than they are now, with technology. Why is that the case? And what can change to open the gates again, to allow artists to break through, whether on their own or with help?

There were only 225 rookie artists in 2008, and less last year, that broke 10,000 albums for the first time – not that that's the only arbiter of success, but it's one of them. That year, there were only 10 new artists that broke through by doing it themselves. If you can't sell 10,000 albums in digital and physical combined, you're still relatively obscure.

And social networks have been a really big disappointment in terms of moving the needle in either exposure or sales in any meaningful way. There are a lot of myths in technology that everybody wants to believe, because everybody wants things to get better.

Wired.com: Well, part of the "long tail" theory is about more bands selling smaller numbers. What if you go under that 10,000 number?

Silverman: All those together don't make up for the drop. For example, in 2008 there were 17,000 releases that sold one copy. Last year, there were 18,000, and something like 79,000 releases that sold under 100 copies. Under 100 copies is not a real release – it's noise, an aberration. In any kind of scientific study, it would be filtered out. It's like a rounding error. That 79,000 number represents almost 80 percent of all the records released that year.

80 percent of all records released are just noise – hobbyists. Some companies like TuneCore are betting on the long tail because they get the same $10 whether you sell one copy or 10,000. Who uses Photobucket and Flickr? Not professional photographers – those are hobbyists, and those are the people who are using TuneCore and iTunes to clutter the music environment with crap, so that the artists who really are pretty good have more trouble breaking through than they ever did before.

Wired.com: And Apple loves it, because now they get to say they have 11 million songs while the other stores have six or seven, so they have no incentive to stop that.

Silverman: In January, right before the LA New Music Seminar, I talked to Chris Muratore from Nielsen/SoundScan, and I asked how many releases there were in 2009. He said labels and distributors had projected about 132,000. Later, SoundScan said 97,000 had actually sold. So it's possible that around 35,000 releases didn't even sell one copy last year. That means not even the artist or their mother bought a copy, and all those artists are out there gigging, they're all on social networks, they're all doing stuff to clutter the marketplace.

The artists that have broken through, look who they are: Corey Smith, a singer songwriter [more on him below], Bon Iver, with 200,000 in sales, and guys like Tech N9ne, a rapper from the Insane Clown Posse school – these are people who would be doing this if there were no internet at all. They're not tweeting, they don't give a shit about any of that stuff. They're out gigging, that's what they do. The word is spread through the shows – they're not marketing through the internet. The internet is a medium like air, which carries sound, and you just need to make the right kind of noise for it to get through.

The internet is a medium, like air; you just need to make the right kind of noise.Wired.com: I'm working on another story about marketers who try use social networks to pay people to spread stuff to their friends, and that seems to be very similar to musicians and labels trying to push stuff on Twitter. You cannot create an organic thing online. That's a great analogy, that the internet is like air. You can't put a big fan in it and expect people to pay attention to the music as a result.

Silverman: I guess you could put toxic gases in it and maybe that would change the environment. I guess what they do in China is they find a way to filter it, to prevent certain kinds of sounds from going through. That's a way that they could change it. Deep packet inspection could possibly change the fluidity or the transmission properties of the medium.

But look at Susan Boyle. She had no other medium and sold more albums than anybody in America, and all it was was an audition tape that came across from a British TV show. 100 million views on YouTube sold three million records. She doesn't do anything on the web, and her company didn't do anything on the web, but her message was transmitted through it.

Wired.com: Well, they're doing it now. I met with the Fremantle guys [FremantleMedia produces Britain's Got Talent] a couple of months ago, and I had made fun of them for not making a single cent off of those 100 million views. They said, "Oh, we do that now." But the horse is out of the barn; they're not going to get another 100 million-view video on YouTube.

Silverman: They're not going to get one, but somebody's going to get one. But it won't happen because a company is inventing things or working it, or trying to affect the outcome, like labels trying to hype the charts in the old days – which they're still doing now, by the way. People are telling me that the majors have teams of people who actually buy singles on iTunes to try to drive it up the charts – buying their own songs. It blew my mind. I mean, we're not learning anything.

Wired.com: That is incredible. I wish I could figure out how to prove that – they're not going to tell me. I guess they would only lose 35 percent of that money.

Silverman: 30 percent. So if they buy 50,000 songs, we're talking $50,000 less 70 percent, so it would cost about $15,000. For $15,000 in a week, they can buy 50,000 more song downloads, which could drive the record up three or four positions on the chart. And they hype of it all would make people believe it, and then the next week it would be real, which is what always used to happen.

I was hoping that your Chris Anderson's manifesto was going to show us that we could get music that rose to its natural best level on its own, without being hyped, but with the majors fighting for relevance and trying to figure out ways they can control it by gaming it, instead of just focusing on getting the best stuff and giving artists what they need to make their art better.

Wired.com: So is that what you view as the solution to this? Just emphasizing quality and not really trying to do marketing anymore?

Silverman: No, I think you have to be out there. You have to spread the word to get exposure, but I think the problem is context. When you're in a glutted environment, you need to differentiate yourself more than ever, so you need a great story. Story is context; it's not content. The songs on Susan Boyle's record are forgettable, and her performance is just okay. There are a million singers who can sing that well at least. It's just the story that sold it. If people could learn from her, regardless of what kind of music they did – "How can I make my story so that when people hear it, they have to spread the word?" That would activate the medium more effectively than trying to get another 50,000 followers on Twitter, which doesn't seem to do much at all.

Meanwhile, we're not thinking about music. The whole industry is thinking, "How do I keep up with technology?" when in the old days, we used to focus on "What's the coolest sounding music?" and invest in that – something cool breaking out of somewhere nobody ever looked before. We'd look under a rock, and say "Wow, this group is pretty cool, let's try it." We'd be wrong nine times out of ten, but one time out of 100, we could be, like, really right, and come up with something like The Ramones, who would end up becoming important or relevant, if not profitable.

Wired.com: So you're saying the problem today really is that they're not going to find the one out of 100 that's going to solve the problem for everything else.

Semi-Precious Weapons play the opening night party at the February 2010 NMS in Los Angeles (Photo: Julianna Young for NMS).

Silverman: The venture capitalist rule of thumb is to have one out of every ten investments pay off at a 10-to-1 level, three or four to break even, and one or two to make some money. They expect to lose on five or six, because that model pays off at a very high level. Every label is a venture capitalist, but now, one super-hit – like a Lady Gaga – doesn't even pay for two stiffs, after they cover overhead, marketing and everything else. The industry is risk-averse now, and rightfully so. One of the issues we're tackling at the New Music Seminar is how we can change the risk/reward ratio, so that investors can get back into music again, and I don't mean only labels. It could be Terry McBride's [Nettwerk] group – he's got $20 million in funding – or managers, or any of the other music business people, like Tiny Ogre [a spin-off of Wind-Up Records that already offers deals modeled on the concept below].

You're going to see a lot of new models, but we have to turn around the business proposition for investors in music, because [otherwise] it becomes a self-fulfilling downward spiral. The less people spend, the less they sell, the less they sell, the less they invest, the less they invest, the less they sell, and it just keeps going down.

That's the way we are in America – maybe they're not that way in Sweden or England yet, maybe they're still acting the way they did in 2000. In America, there's so much fear that people aren't taking risks, but it's the risky stuff that breaks through. Hip-hop wouldn't have broken as a genre in this current environment. Who's going to be upping the ante in this business? There has to be a new model, so that's one of the things we're going to focus on at the New Music Seminar: What's the new model, and what's the legal agreement between artist and investor that's going to pay for that model?

Wired.com: What are your ideas on how to enable risk taking in the music business again?

Silverman: There are two ways to do it, and you have to do both. You have to reduce the risk and increase the reward. The model that looks most promising is to set up an LLC, just like a movie company – they set up an LLC for each movie. Every artist is a business, and has its own corporation under this model, and all of that artist's creative equity goes into that – not just music, but everything they do. Whether it's live, or merch, or whatever, their brand goes in there. And the investors who are investing and trying to promote on the other side – they own half. So it's more like a business. An equity partnership.

The good thing about it is, the artist and label-slash-investor are on the same side of the table. As long as they want to maximize profitability, nobody makes money unless everybody makes money. In that respect, you can't fuck an artist, because you fuck yourself.

____ Wired.com____: Well, that's a very different music industry.

Silverman: One of the biggest problems with the old model, which has been going for 50 years, is thinking, "We're the labels, they're the artists, and we make money even if they don't make money. We reduce our risk, they put their blood, sweat and tears into it, and we only give them money when we sign them and when they deliver a new album."

In between, the only place where they get money is from their booking agent, because they're touring. They all love their booking agent, because their booking agent gives them a check every month, or every week, and we only give them a check every year and a half when they deliver a new record – and most of that money goes to their lawyer, manager, the taxman, and making the record. Not much of it ever goes in their pocket, and that's been true for 20 years. Unless they have a five million seller, most of that money goes into that project. Of course they don't like the labels, because they're not getting that reinforcement of regular cash flow. They see the labels making money, and them not making money on records.

It's a silo mentality. If you have your portfolio managed by four different companies – one for your stocks, a different one for your bonds, another one for your real estate investments – there would be no kind of concept about "let's take money out of bonds right now because of what's going on and put it into stocks because things are getting ready to explode over there," or "let's start to sell real estate because the banks are about to fail" or whatever, and moving things around to maximize profitability. Instead, you've got the publisher deal, the label deal, the manager, and maybe there's a merch deal. They're not thinking like one entity – they can't manage the creative portfolio and output to maximize returns. It makes much more sense, if you have a good team, to have it all under one roof. You may decide you want to purposefully lose money on the album so that you can make money in some other area.

Wired.com: How does this differ from the 360-degree deal that we've seen, or what EMI is doing by becoming a comprehensive rights organization, where they do the publishing, the merch, the record, and everything?

Silverman: The 360 deal is a traditional adversarial record deal of the old fashion. You get 12 points, or 14 points, and we recoup everything. "Here's your check at the beginning – you're not going to get paid again." Everything I said that was wrong with the business is still included with the 360 deal. Plus, they take a grab of 20 to 30 percent of touring and merch.

Wired.com: Which they didn't have before.

Silverman: They're trying to increase their return to justify the amount of risk they have to take because of the fall-off in record sales. It's not a joint venture, it's not true sharing – it's "us versus them." It's not transparent, it's not equal, they're not creating an entity together – it's not the same. I would describe ours as a holistic deal, whereas they want to grab rights at 360 degrees. I don't think there's anything wrong with that, but it doesn't answer the adversarial issue. Labels look at it only from their perspective, and they have to think of it from the artist perspective too. With this new deal, we can start flowing cash to the artist, once they're profitable, on a monthly basis or semi-annually, when we account. All of the money goes into a pot, and we at the label make money at the same time that the artist makes money.

Everybody making money together is so fair, that as long as everything's transparent, nobody should really complain about it. However, a really successful artist might make less money with this deal, because in the old days, in separating these things and decoupling them all, those artists could actually find a way to make money.

Wired.com: Who would it be making this happen? Are these people going to be at your seminar? Are you expecting companies to change or be formed as a result?

Silverman: Yeah, they're going to be there – the lawyers and companies are going to be in these closed-door summit meetings talking about all these various issues. Those are going to be by invitation only, because there will be lots of artists trying to figure their way through, and new managers. We have five movements focused on what they're doing – teaching them about fan relationship management, how all fans are not created equal, the fan-relationship pyramid and how to move artists up that pyramid to greater levels of activity.

[Another focus is on] redefining success. It doesn't matter if you don't have a top ten record anymore – it just matters that you make enough money. There's this artist Corey Smith, whose manager was on one of the movements at the New Music Seminar in LA in February. [Smith] was a school teacher. This guy who manages him got him up to a million dollars a few years ago in business, and he gave away all the music. He gave away the digital music everywhere he could in order to build the touring revenue. The manager was able to get the guy up to $4 million per year in billing, across all the areas.

The guy doesn't tweet [actually he does, but only to 2,442 followers]. He goes fishing with his kids on the weekends, because that's the life he wants to live. He's doing exactly what he wants, he's making 100 times what he could make as a school teacher, by playing his songs around the country. Although he may still only sell a couple hundred tickets in New York, he sells 2500 in the Carolinas at art centers and things. It doesn't matter how you do it – the point is, if you're doing what you love, and you're your own boss running your own company, playing your music for a living and making more than you'd probably be making in a job, what could be better than that? That's the definition of success.

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