The Recording Industry in the digital age, a fresh new start?

Recently, the music industry has gone through the biggest changes since the phonograph came into general use in the early XX Century, and all these changes have profoundly impacted the way we listen to music and its availability, for the good and the bad. Since the advent of the phonograph, the music market has been heavily based on the physical support sales, and the transition from vinyl to CDs didn’t change too much the business model: after all, it was only a matter of a different material. Going through different highs and downs during the years, the music market has been relying on the physical support production for decades, at least until the digital platforms revolution.

 

For example, if we take a look at the US sales database from the RIAA website, there’s no doubt that in the last decades the music industry benefitted from a wide array of different physical supports, from vinyl to cassette, CD and DVD. Until early 2000's, recorded music was available only on physical supports, and in the 70’s the vinyl accounted always as the biggest revenue source, reaching its peak in 1978, while the CD had its golden age in the 90’s and early 2000’s, obliterating the LP format.

In 1978 the vinyl format (including LP/EP and vinyl singles) accounted for 62.2% of the total revenue, while cassette and 8 track combined (this last one never too much popular outside of the US) totaled 33.8%. 

After over a decade of success from the late 80's to the 90's, the CD format knew its annus mirabilis in 2000, and  accounted for a staggering 93.3% of the total sales (including singles), leaving only 4.6% to cassettes and LP sales. it must be noted that the music market in other countries has always been influenced by the US trends in terms of physical support sales. Source: https://www.riaa.com. 

As you can see, all these statistics have one main thing in common: the music industry used to rely heavily  on the physical support sales for its revenue. In other words, the only way to listen to the artists’ recorded work was through a physical support, either LPs’, cassettes or CDs. Due to the nature of the music business model, until the late 90's the average listener used to have only a limited number of recordings available, except few music lovers willing to spend thousands and thousands of dollars on LP's.

Buying one record every month was a sort of investment, since only one LP or CD was two to three times more expensive than the digital subscription with Spotify, Apple Music, or any other player out there. Going to the music store was an exciting experience, and the final choice on a specific album was based not only on personal taste, but on a multitude of other factors, like music magazine reviews, your friends and store employee suggestions, and sometimes even the look of the artwork. New album day was a very special one!

This relative shortage of recordings available for the average person was an incentive to listen repeatedly to the few ones owned (or sometimes borrowed...), and in some way appreciate deeply all the nuances of the album. On the other side, unfortunately, having access to old recordings or new niche artists was sometimes impossible: in other words, whoever like me experienced the transition from the physical support to the digital download era, including the years of Napster (you can call it digital piracy), experienced the good and bad from both.

 

The digital revolution didn’t take over without some troubled years: the music industry was, after all, living pretty large with physical support sales, totaling only in the US a staggering $14.6 Billions in revenue. But the new century brought already the first subsidence signs, with a loss of $300 millions compared to the previous year, and this was only the beginning of a decade of revenue famine (and lawsuits from single artists and RIAA against the file sharing websites). From 1999 to 2010, the total revenue went down to $7.0 Billions, meaning over 50% less than the previous decade!

Everyone downloading from Napster or BitTorrent contributed, in a wrong way, to the shutdown of the old model, while favoring in some way the transition to the actual one: in other words, the file sharing piracy, criticized and rightfully prosecuted by the music industry and all major artists, has been the illegal medium to the new model. During these last years there has been a partial recovery of the industry, mainly due to the paid subscriptions of digital platforms, that grew from a tiny 1.2% in 2005 to 40.1% in 2017, when compared to the total revenue. On the other side, if we look at the relatively new digital subscription market from the artist perspective, we have to note that, with the exception of few big names, the artists still struggle to make more than few pennies, even after a relevant number of digital downloads.

The following table, published on the Trichordist (article here) speaks more than a million words.

With a rate of $0.00397 and $0.00783 per stream, respectively on Spotify and Apple Music, there’s no doubt that the artist will need millions of streams to make a living income.

 

In a CNBC article (you can read it here) there’s an interesting theory about how the major digital platforms should get rid of the record labels as intermediaries, and finalize deals directly with the artists, in order to improve their low digital stream rates. The theory makes perfect sense, and the digital platform have probably reached the financial stability to compete with the old record labels, even if this theory would work only in reference to the new music acts.

 

In other words, cutting off the record label as intermediary might be a good way to increase the revenue for the new music artists, while still paying royalties to the old record companies for the previously licensed music. If we take the biggest player Spotify as an example, we can see that their business model has been very successful so far for their incredible users growth rate while being, on the other side, not so profitable from a strictly economic point of view (Spotify net income was negative at USD -426.4 Millions in 2017 – source of Wikipedia). From the artists’ perspective one less intermediary can only be a good thing, but we need to be extremely positive that the new model of business will be generous enough to share a bigger cut than what has been historically recorded since the advent of the phonograph, and not just in the US market.

 

For example, in the early XX Century the Brazilian music market was growing at a considerable rate, and the biggest name in the music industry was at that time Casa Edison, the first Brazilian recording Company founded by Fred Figner, an immigrant entrepreneur born in the Czech Republic. Between 1911 and 1912 he netted US $227.000, while paying pennies to the artists on his payroll; during the same period, his biggest artists earned only USD 58, the average pay for a recorded song being only US $6,50. Source: Making Samba by Marc A. Hertzman.

Coming back to the present day, we can say that technology has drastically changed the way the final user listens music, while keeping, on the other side, an unacceptable revenue disproportion between artists and intermediaries (namely recording Companies). Artists need to advocate for their rights, asking for a more sustainable living income based on the digital downloads. Let us all be hopeful that this new music business model, based on massive digital catalogues from the big recording Companies, will prove to be more virtuous when compared to the previous ones…

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