Greed catches up with the major labels

It's always darkest before the dawn. This could be said about the music industry, only the phrase is historically uttered by the guy who lives through the night, while at the moment the major labels are bleeding like a hemophiliac with a razor fetish.

The numbers are grim. Figures released by SoundScan this summer for the first half of the year showed a 20 percent contraction on CD sales and a 9.3 percent fall in total music sales, including digital downloads. This follows a 6.2 percent drop last year, and a 22 percent drop in music sales since their peak in 1999.

The phenomenon isn't limited to America. Germany has seen music sales cut in half since 2000; its industry is suffering from file-sharing and a massive epidemic of burned and counterfeit CDs, which are funneled into Eastern Europe. Music sales worldwide are expected to sink 11 percent in 2007.

Responsible for a disproportionate amount of music sales (around 70 percent of the market), the major music labels are feeling the pain most intensely. It's especially acute because over the last few decades they have built their business model on the back of a handful of multiplatinum albums, which paid for everything. The majors — burdened with the dead weight of bad contracts and failed commercial acts — saw their fortunes nosedive when sales of their chart-toppers fell precipitously. For example, Warner Music Group's stock price has fallen from a height of $30 a share to under $7 a share since last spring.

It is past the point of arguing about blame; to their credit, the labels seem to have realized this. "We used to fool ourselves. We used to think our content was perfect just exactly as it was," offered Warners boss Edgar Bronfman, speaking to the mobile phone trade organization, GSMA, at the Mobile Asia Congress in Macau last month. "By standing still or moving at a glacial pace, we inadvertently went to war with consumers by denying them what they wanted and could otherwise find, and as a result, of course, consumers won."

Major labels' size and muscle, which once afforded them so much power, hasn't left them nimble enough to adjust to the changing environment. The Internet has been a great leveler, neutralizing advantages in distribution and promotion as well as retail and radio access. Money the labels spend on videos, advertising, and retail end caps just doesn't buy what it used to in terms of sales, exposing the inefficiency of this business model.

"Everybody feels the pain," says Vagrant Records owner Rich Egan. "What the indies have over the majors is that we can't and don't spend stupid money. If you keep your costs relatively in check, this is still a fairly healthy business model. Is it what it was even two years ago? No, and certainly not what it was five years ago."

Egan points to the long-term, front-loaded contracts majors typically use to lock in established artists. As Radiohead proved so poignantly, many musicians capable of selling millions of discs don't need labels. In Vagrant's case, its willingness to do one-off deals and offer artist-friendly terms allows it to sign major-label escapees such as Eels, Paul Westerberg, and Thrice.

If the majors are to retain their profitable artists, they need to keep them happy. No longer can they operate on the old studio system of indentured servitude — if for no other reason than that there simply isn't enough money in music anymore. Realizing this, the labels have made initial efforts to address the problem, homing in on artists' merchandising and tour monies. This is the idea behind the so-called 360-degree deals signed by Madonna and Korn with Live Nation and EMI, respectively. These give the label a cut of all the artists' revenue, from concerts and endorsements to T-shirts and publishing. But for artists to assent, the labels will have to erase a long history of self-interest and artist exploitation.

"We will need to give artists at all levels a deal that is fair to both sides, perhaps one that moves away from the large-advances model of old and provides a true alignment of interests and transparency," wrote Guy Hands, the head of EMI's new owner, Terra Firma Capital, in a memo leaked in October.

Beyond whether major labels can act as agents rather than employers is the question of whether they're even equipped to deliver what they promise. While they've proven reasonably competent at creating stars, there's a lot more to the business these days than selling music.

"The major labels aren't staffed with people who know about touring, merchandise, or a whole lot about publishing," says Egan, who managed punkers Face to Face before starting Vagrant in 1996. "Just because you fly on planes a lot doesn't mean you know how to fly them. ... Until they completely restaff these labels with people who have experience and are experts in those particular fields, [if I'm with an artist] I'm thinking, 'Your business is messed up, so I'm going to cut you in on our business?'"

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