Better Late Than Never? Music Industry Starts Adapting to Digital Age

When Shawn Fanning created Napster in 1999 it set off an explosion of file sharing across college campuses nationwide.

While the act of file sharing created careers for previously unheard of independent bands like Dispatch, more established acts like Metallica and Dr. Dre, along with the Recording Industry Association of America, insisted people were stealing music and actually sued individual file sharers.

Undeterred, millions of Americans continued trading mp3’s and burning CD’s for their family, friends, and co-workers. For ten years the music industry has been left dumbfounded by this brutal attack on their business model and album sales continue to plummet.

When news came last August that a private equity financier named Guy Hands paid $6.3 billion for EMI Records eyebrows were raised. Some of his previous investments included gas stations throughout Germany and hotels and pubs in Britain. By no means a lightweight, Hands Private Equity Firm Terra Firma had earned his bosses over £1.5 billion profit since 2002.

At EMI Hands immediately set to work trimming costs and in the process stepped on many toes. He discovered some employees were disguising write off’s for “drugs and prostitutes” as “fruit and flowers” so he started making employees provide receipts for every expense.

In January of this year Hands announced EMI would be trimming 2,000 jobs and critics responded saying Hands’ restructuring of the company appears out of touch and ruthless at best.

Despite his lack of empathy for artists’ sensitive egos, and his blatant disregard for industry veteran’s extra-curricular activities, Hands displays a keen awareness in his embrace of online digital strategy.

In addition to slicing the EMI workforce by one-third, Hands’ response to the erratic climate of the music industry and the rising tide of digital sales has been to cut costs by reducing artist advances and to pay less for marketing music.

Popular acts like Paul McCartney have left the label over disputes related to copyrights and this past week rumors have been swirling over the departure of the Rolling Stones. However, since EMI owns the publishing and licensing rights to the Rolling Stones catalogue (a major source of their income) it would be pointless for the group to leave.

A dispute last fall over an advance worth £10 million caused British rock band Radiohead to leave EMI and the band followed suit with a strategy unheard of in the music world. Radiohead released their new album In Rainbows online allowing fans to pay “whatever they wanted.”

While Radiohead kept the official tally a secret, industry analysts suspect they sold close to 1.2 million digital downloads of the album before physical copies were later released. Radiohead front man Thom Yorke said the band made more in digital sales for In Rainbows than in all previous digital album sales combined. After In Rainbows was released in physical form it shot to number one on the music charts in both the US and the UK, debunking popular criticism over their strategy that undoubtedly led to file sharing or so called ‘piracy’ of their album.

It is clear that Hands isn’t relying on his personal popularity at EMI to sell music, and he certainly isn’t relying on the traditional music industry model of selling physical copies of albums either.

At a gathering of band managers last autumn Hands said Rupert Murdoch had scoffed at his acquisition of EMI by saying, “Myspace is going to be the future of music, not record labels.”

As if adhering to Murdoch’s assessment, a confidential business plan from Mr. Hands’ investment firm reports an additional way to reduce costs is to use social networking sites to ”source new acts and as a means to test public reaction to individual acts.”

Despite their differences, both Radiohead and Hands are examples of how industry leaders are adapting to the digital revolution affecting the music industry.

Other artists have adjusted to file sharing by simply giving their albums away for free, effectively using their music as a promotional tool towards other means of generating income. Prince placed three million copies of his new album in London’s Sunday Times last year then proceeded to sell-out 21 straight concerts. Through his actions Prince discredited album sales as a source of income, and instead put his faith in concert ticket sales and other monies he earned from publishing and licensing royalties associated with merchandise.

Another example comes from EMI artist Coldplay. In April they released their new single Violet Hill for free as a digital download. When they released their new album last week they went to number one on the charts and reported over 302,000 sales (more than the next five albums on the charts combined). However, the number is still down from the 464,000 album sales for their last release over the same period.

How does this information relate to less established artists?

In May of this year the PEW Internet and American Life Project released a study showing 64% of music buyers discover music from family, friends, or co-workers. Social networking Web sites have made family, friends, and co-workers more connected and the advent of newer technologies like the mp3 has made it much easier to share music.

Digital sales are improving and according to the latest figures by the Recording Industry Association of America online digital sales have increased from 0% to 23% of the market share over the past five years. Keep in mind a Nielson study from December 2007 shows only 71.7% of American’s regularly use the Internet and only 21% of the world regularly logs on. Those numbers will continue to increase at a dramatic rate.

These examples from Radiohead, Prince, and EMI illustrate it is very important for artists to maintain their publishing and licensing rights because in the new digital age artists can’t expect to generate as much of an income through album sales. It may be time for artists to consider their album as more of a promotional tool and to focus their efforts on securing licensing deals through movies, advertisements, TV shows, video games, and related means. While these options were once called “selling out” they may be your only shot at a comfortable music career.

Social networking Web sites, an effective communication strategy, and word-of-mouth marketing are just several specialties a PR Firm like CFM could offer in promoting an artist’s musical reach to greater audiences while simultaneously trimming a bloated advertising budget.