Did Steve Job's Hurt or Help the Music Industry?

His good looks, charismatic personality, and success at Apple made him a multi-millionaire and a cultural legend before the age of 30.  Steve Jobs was a smart business man but some will argue that he had a big part in the economic fall of the record industry and the devaluation of music. 

Job's developed the first legal viable peer to peer music site that was user friendly and worked well with other devices.  Flexing his proven technology and wonderful charm, Job's was able to convince record labels to let his web site become the main distributor for music in the world.  During this rough economical time consumers were buying discounted music albums at Wal-Mart or Best Buy (Big box retailers) and downloading free music torrent files from the web in order to satisfy their music cravings.  At this point in time record labels were profusely hemorrhaging from their pockets, they needed a quick fix solution to get consumers to stop downloading free music.

I always say it's all about timing because Apple could not have come at a better time.  Record companies were now ready to take the leap into the digital age in order to stop the bleeding.  The answer was a fully integrated music software that allowed consumers to instantly buy and download music from the web at any time of the day.  Record labels bought the idea thinking this was the solution to their problems and got in bed with apple.

A fixed price of .99 cents per song was agreed by all parties in order to incentivize the consumer to move away from retailers and buy on iTunes.  The record industry has always been a volume business, the philosophy is sell as much as you can as fast as you can before the trends and fad's change.  .99 cents made sense to the record labels because once they hooked in the consumer they could eventually move to variable pricing.  Job's agreed to this price even though he knew .99 cents would not create much revenue in mechanical royalties.  In the music industry this deal was perceived as an abundant deal for the record labels and not so much for Apple Inc. but Steve Job's had something else in mind.

Today we now know who got the raw end of the deal and who really benefited from this collaboration.  Once the .99 cent song came out consumers were addicted and two things happened, the sale of single songs returned and consumers were now used to paying less for music.  Both were a problem for the record labels because consumers were only spending .99 cents for singles and no longer buying full albums on iTunes.  The single sales model was now beginning to show it's ugly face again.  Industry changing companies like Pandora began to show up streaming "free" music to our consumers. Remember the idea of eventually increasing prices on iTunes?  Well, this was no longer a good idea.

Clueless to the popularity of free streaming music record labels still increased a single song to $1.29 on iTunes.  This did not turn out to be profitable because most consumers began to migrate over to these free sites that provided on-line streaming music.

So how did Steve Job's benefit from this?
Well it's obvious he did not benefit from posing as a music distributor selling music to consumers on iTunes. Job's became successful from music consumers buying his hardware and software in order to listen to the music record companies were selling on his online store.  Job's was not in the music business he was in
the computer/technology business. 

What would you rather sell a .99 cents song or a $200.00 plus iPod, iPad, iPhone which requires apps and other add on's that create more and more revenue. 

Today record companies are beginning to see more revenue from on-line distribution due to the rise of other competing companies like Amazon.

The Future of Music Distribution

The start of musical distribution over the Internet was in play since the online release of Aerosmith's single ''Head First'' in 1996.  We went from retailers like Tower Records to online distributors like iTunes what does the future hold for music distribution. 

Technology and internet bandwidth only seems to be getting better and faster with time.  With faster internet speed consumers seem to gravitate more towards companies like Pandora and Spotify who instantly stream music to a device with few or no hiccups.  This type of distribution has become more and more popular with consumers today for economical and personalization reasons.  This business model is nothing new it already exists in a neighboring market called cable television.  Consumers pay a monthly subscription fee to the cable companies and they provide us with unlimited television. 

The birth of online distribution started with a company by the name of Napster.  Napster eventually was found guilty by federal court which resulted in an injunction.   Back in 1999 Sean Parker from Napster tried to make a last effort deal with the record companies to invest in Napster before the judgment was made by the courts.  Record companies refused the deal in order to shut down Napster and prove a point.  The deal was never made and all Napster users left and dispersed seeking new websites to download free music.

During the Napster age record companies did not want to transition over to distributing music through a peer to peer concept.  They did not believe that consumers would transition from CD’s to MP3’s as quickly as they did.  If record companies would have made the deal and bought Napster they would have had over 25 million users in the palm of their hands.  Fast forward Thirteen years later and record companies are spending millions to have over 25 million users on one site only if they would have made that deal with Napster they would be ahead of the game.

Who knows what the future of music distribution holds, will the record companies continue to devaluate music sales by pricing single songs on iTunes for $1.29.  Will companies like Pandora keep streaming music for free only to sit back and watch the consumer get used to not paying for music.  One thing for sure is that music distribution has definitely created a big problem for record companies.

How do you think music distribution will evolve in the future?

Re-inventing the record deal in a digital era: 360 deals, what’s that?

The collapse of our economy and the rise of the digital era introduced new business models to the music industry.  Lack of record sales from the record companies has allowed the concept of a 360 deal to be the primary practice in signing artists today.  This deal allows record companies to collect non-traditional revenue from the artist in other scopes of the entertainment industry like live performances, film/TV, music publishing and endorsements.

What used to be a 10 to 15 page signing contract turned into 60 to 70 pages depending on the artist and their clout.  The industry buzzword “360” has led many people to believe that this type of deal is partial to the artist and it only benefits the record companies.  What most people do not know is that this type of deal has long been around particularly with independent record labels and disguised in record deal contracts as a clause called cross-collateralization.

In order to understand cross-collateralization I will give you a very basic description of an artist contract.  Artist/songwriter deals usually involve a cash advance to the artist which in turn needs to be recouped by record sales in order for the artist to start getting paid.  If the artist gets a $50,000 advance, record sales must be high enough to pay $50,000 in mechanical royalties to the artist in order to recoup.  If the royalties only add up too $40,000 the record label can collect the additional $10,000 from the artist through other revenue streams like live performances in order to recoup the loss.  This cross-collateralization clause is similar to a 360 deal only difference is that the cat is now out of the bag.

Some suggest a 360 deal is beneficial for the artist because of all the resources that come with it, just take a look at the band Paramore.  Since Paramore started in 2004, the band members have worked their ass off by non-stop touring and building a fan base.  The demand to see Paramore keeps rising due to cross market promotion and marketing.  Paramore signed a 360 deal with Fueled by Ramen in 2005 and since has never looked back.  The advantage of a 360 deal is that most record companies are affiliated with many other companies in all spectrum's of business.   So it is much easier for an artist to get a fashion deal or a TV deal because of the affiliation.  Paramore’s management quickly landed deals with retail stores like Hot Topic (There is one in every mall) to showcase their records and merchandise.  Yeah, at the time they were only getting a very small percentage or nothing at all of the sales but if you step back to see the big picture you will be able to compute all the promotion and consumer awareness they receive from these deals which to their advantage turns into a longer career and more money.

In my opinion 360 deals are not as awful as everyone makes them seem to be.  I actually think record labels don’t go far enough.  Investing in an artist is one of the worst investments in business because you are entrusting all your money on a living thing and anything can go wrong.  The artist could croak at any time, maybe go crazy or find themselves incarcerated; there are plenty of circumstances that can devastate an investor.   Not only is the record company taking a big plunge by investing in the artist but they are also going to use all their resources to make them successful. 

Management/record labels like Roc Nation are great homes for artists since they are a subsidiary of Live Nation (LYV).  Live Nation report’s estimated revenue of $5,394,381,000 a year, they have close to 1,000 subsidiaries all over the world in all the different markets utilized to make an artist into a multi-millionaire.

Al Branch from Billboard said that “The full service entertainment firm of the future will not only bankroll the ideas of superstars, it will hire qualified executives to maximize the resulting profits”.  This type of business model is an extension of the 360 deal.  In the near future 360 will not just be a term used for record deals it will be defined as an encompassing business model for the record business.

My Perspective on digital recording and distribution

The digital era has definitely influenced the music industry in a positive and creative way.  It has made the record companies not only sit back and take a real hard look at their current business models, but to consider discarding them and starting all over. 

The recording process went from spending a significant amount of time and money recording in a big studio, to being able to record and distribute an album from our own bedrooms.  Digital technology has changed a lot; from the way we record music to the way it is distributed.

Back in the so called “analog days”, music was typically recorded in an established industry standard.    In general, musicians and engineers were using the same tools and equipment to create a particular sound.  You typically needed a guitar, piano, bass, and drum set in order to compose a song.  However, as Hip Hop began to emerge and become more popular, so did a new style of creating sound.  Sampling and drum machines along with other computerized sounds were now the primary measures used to create a beat.  Today we can still hear a full piece band; however, those bands are also now incorporating these new types of synthetic sounds into their songs. 

 For example, take a look at the rock band Korn, a typical rock band, composed of a singer, drummer, guitarist and bass player, who have had many hit’s in the 90’s, utilizing the typical rock band sound.  Just recently, Korn, released a comeback album incorporating Electronic Dance Music (EDM) from Superstar DJ/ Producer Skrillex into their tracks.  Some might wonder why a successful band would stray from their basic musical roots, however, in order to stay relevant with the times, change is necessary.

If you take a look at today’s most popular music genres, Hip Hop and Electronic Dance Music are at the top of the list.  EDM is now making a huge comeback from the 90’s due to the rapid advancement of music technology. 

Programs like Logic have made it simple to record from a PC and upload the file to most networking and/or music distribution sites.  An independent DJ can now produce their own music out of their own bedroom using synthesizers, drum machines and a laptop computer. 

If this type of technology was not available today we would not have all the available music that surrounds us today.

The significance in digital technology does not only stop with the recording of music; it also has great importance in the distribution of music.   Digital Pressing and Distribution Deals are now available to all artists.  As an artist you can make a distribution deal to companies like Tunecore.com and they will distribute your music to digital retailers.  These types of deals are more at a modest level but beneficial to an artist who wants to get their music heard that does not have a deal from companies like BMG. 

Prior to the days of iTunes, physical retail stores were your primary means to purchasing music.  Typically, a song would be played on the radio, if someone liked that song enough, they would have to make time to go out and purchase that song at the store.    However, now days, with the development of the internet and online music, an individual can purchase a song within seconds while still wearing their pajamas. 

In addition to record purchasing speed, technology has also made it easier to cater to the specific needs of the consumer.   Digital distribution has opened up new sale strategies that were not available in the past. 

Purchasing individual songs of an album was not always an option unless it was the official single put out by the record label.  Providing the consumers the ability to purchase single songs rather than entire CDs is beneficial to the industry. 

After doing some research on iTunes I found that Chris Brown’s new album “Fortune” released three singles before he released his actual album.  There is no doubt in my mind that Brown fans purchased these three singles in order to have his latest material.  Chris Brown has just released his new album along with the three previously released singles that his fans have already purchased.  When it’s time for his fans to buy the entire album iTunes will give them two options.  The first option is to buy the complete album at $9.99 or a second option to buy each song at an individual price of $1.29.  The consumer is faced with a dilemma, due to the fact that they already have 3 out of the 14 songs.  After doing the math if the consumer buys the 11 songs individually in order to prevent their library from having duplicate songs it will end up costing them $14.19.  The best option is obviously option one it is more economical for the consumer to just buy the entire album.  The business strategy here in my opinion is that it allows for additional royalties to be paid out.

According to IFPI.org an on-line music statistic firm, global revenues to record companies grew by an estimated 8% to $5.2 billion in 2011.  This is a much faster rate than in 2010.  According to IFPI estimates “With strong consumer demand for both single track downloads (up 11 per cent by volume), digital albums (up 24 per cent by volume) and fast-expanding subscription services. The number of users paying to subscribe to a music service leapt by 65 per cent in 2011 to 13.4 million worldwide.”

In my opinion there was a small period of time when the record companies where being affected by the new technology.  Based on the IFI statement, it looks like things are back on track.  Overall in the long run, digital technology has benefited the music business by providing more options to innovate business strategies and reach a broader audience of consumers.