Back in the day, not that long ago, record labels served four distinct needs for the artists they signed, without which it was impossible to have a meaningful career out of performing original music:

Production: They paired artists with songwriters and producers and gave them money to record records in big, expensive studios that sometimes took months or even years to make;

Distribution: Once the record was made, they loaded up millions of copies in trucks and shipped those records to all the important retailers. Their tight relationships with all the important retailers (Tower, HMV, Virgin, etc.) basically guaranteed them all important shelf space. No distribution meant no sales;

Promotion: They hired publicists and radio promoters and got the word out there about the record and the artist through interviews in major newspapers, ensured heavy rotation in major market radio stations, and got the video played on MTV. It was unlikely that an artist would ever find an audience without radio airplay, MTV support, or a big publicity campaign;

Professional Connections (Touring & Publishing): They helped artists promote the record by pairing them up with an agent that helped them get on the road to build an audience. Labels also helped artists by hooking them up with publishers (often in-house) which in turn connected them with film music supervisors, advertising agency execs etc. to further each artist’s earning potential and hence the money that the label made from their investment;

Just a quick glance at the four areas I describe above, show you that the cost of offering these services was enormous (it took an army of people and a boat-load of money to get past all the gatekeepers), which meant that in order to recoup one’s investment the sales needed to be equally high.

But in the past few years three major internet-enabled shifts have taken place that have effectively brought down this entire ecosystem:

1.    The digitization of music has made it possible for recorded music to be distributed online, for next to nothing, leading to commodization and the expectation that it should be free;

2.    Audiences, spurred on by the abundance of music on the net, have shifted their tastes away from mass-marketed, mass-selling artists, to more personally-discovered, niche-reaching music (major label CD sales are down by more than 45% since 1999);

3.    The internet has entirely evaporated the cost related to offering these services hence eroding the fundamental value proposition of the average label (witness the demise of many recording studios and large scale record retailers) but labels, caught with the baggage that legacy brings have been unable to move quickly to adapt;

I’ll talk more in Part 2 next week about how these changes have contributed to the rise of a whole new class of artists that I call the “Artistic Middle Class”  — and how these artists are using the net and their low-cost advantage to totally remake the music market.

Panos

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