Greed catches up with the major labels

Gerd Leonhard and David Kusek, authors of The Future of Music: Manifesto for the Digital Music Revolution, suggest a "utility model" whereby labels work out a deal with ISPs to recover sales lost to file-sharing by charging users, similar to the surcharge on blank tapes and recording equipment.

Leonhard also suggests licensing music to huge social networks like MySpace and Facebook. "What [the major labels] really have to sell [consumers] is access to the music and to the artist, to the brand, and to the experience that goes with the music," he says. "Companies like Sony and Matsushita, which owned MCA, they got into music because the profits were obscene right after CDs. ... They got in because it was easy. Now if you want to sell CDs, you have to be a lot smarter — because you can't control the system, because there are so many people involved now. It's no longer about just music."

Aaron Farmer

Related Content

• Record Peddler: Speculators Make a Mockery of Record Store Day
  April 23, 2013
• Shannon & the Clams: Show Preview
  February 20, 2013
• Local Musicians Re-Imagine Radiohead's Kid A with Stunning Success, 2/24/13
  February 25, 2013
• Vinyl Copies of Daft Punk's Random Access Memories Are Nearly Sold Out in S.F.
  May 21, 2013
• Sizzle & Fizzle: Highs and Lows from the Last Week in S.F. Music
  February 27, 2013

More About

• Rich Egan
• Sound Recording Industries
• Gerd Leonhard
• Private Equity Firms
• Music Sales

The thinner margins and a more difficult environment could also mean more private equity deals like Terra Firma's, which would benefit the labels. Entertainment is a volatile business which rewards a risk-taking attitude that's a lot tougher with stockholders breathing down your neck. Private investors are better able to ride out industry turmoil until labels recover more of their value, just as Providence Equity Partners hopes to do with its pending purchase of Clear Channel.

"It's not enough [for a public company] to just make money," Leonhard says. "You have to keep making more money, and I think a lot of media businesses are not suited to that because they could be having a huge profit one quarter and none the next."

The majors have already borne the cost of inaction, but Beggars Banquet CEO Lesley Bleakley cautions against overreaction, noting that Beggars' success has come through recognizing its core competencies. "If you don't do what you're good at, you dilute everything that you're doing that's good while you're investing in other areas," she says. "It's going to take some very aggressive CEOs and some unpopular CEOs to actually change things enough to be able to get back to those economies of scale."

Capitalism is based on cycles of destruction catalyzed by new technologies. While the Internet poses an imminent threat to the recording business, music remains vital. (Concert revenues have gone from $1.7 to $3.1 billion in the last seven years, according to Pollstar.) The labels may be shedding ground faster than the Arctic shelf, but if they can retool their thinking, there's plenty of new territory opening up.