Message to the labels: Forget Horizontal and Vertical… Think “Adjacent”

Over the past few weeks conversations with a variety of musicians, managers, technologists and label executives have revealed a common theme. Emerging digital music distribution models require record labels to seek out new ways to capture value from the artists they sign, develop and market. The value that labels capture through publishing and licensing is no longer commensurate with the value they create developing an artist’s “brand”. If labels were able to participate in merchandising and touring revenue, artist and label incentives would be better aligned. Look for more labels to demand 360 degree relationships with their artists so that they can participate in a broader range of monetization opportunities.

The popular conception has been that the music industry is an evil bear that takes over 70% of the dollars an artist generates and locks artists up in a contractual prison. In many cases though, artists maintain control over lucrative merchandising and touring revenue streams. In this model, incentives for the artist and label should, in theory, be aligned. The more a band tours and pushes merchandise, the more money they make from touring and merchandising. AND the touring and merchandising acts as a fantastic marketing vehicle for album sales, benefiting the label (and the artist).

Now introduce digital music into this industry “balance”. At first, digital music seemed like another (though frightening) distribution and retailing model that could, in effect, conform to the physical distribution model, but with lower packaging and inventory costs. There would be online distributors (with a diminished role given the absence of physical inventory) and digital retailers. Apple’s FairPlay Digital Rights Management made it at least palatable for labels to try digital music retailing. In the meantime file sharing networks were doing two things at once. #1.) they were making it possible for people to access and sample music on an on-demand basis at no cost (to the downloader). #2.) they were removing the incentive to actually purchase legal physical or digital instances of desired music. The music industry chose to battle file-sharing on the face of their copyright, rather than evolve their business model to take advantage of this new way to interact with fans. (Here is a great piece on the value of “free grazing”.

Labels are now seeing the power that social tools like MySpace, YouTube and distributable widgets have in getting artist’s work in front of more people in more contexts. Lots of albums “leak” onto file-sharing networks, but widget / embedded player models are offering a more controlled way for labels to let fans “graze” for free. The ability to sample wider varieties of music, without breaking the law, promises to grow music publishing revenues. But much of the value may be transferred to the businesses adjacent to music publishing since all of these free ways to interact with songs can begin to provide a disincentive to music sales. So touring and merchandising revenue streams stand to gain from more liberal online promotional models.

Artists should want their labels to use new technologies to market them without hesitation. Labels should want to push every button to get an artists band in front of their target market. 360 contracts, which give labels participation in the entire revenue cycle of an artist open up this type of creativity. For 360 contracts to take hold, the entire industry will have to acknowledge their importance and introduce them to the next generation of emerging artists.

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