The pioneers of the music industry couldn’t have seen this coming in their wildest dreams. When publishers were selling sheet music in the late 1800s, the idea of people privately sharing their product, independent of location and physical constraints, would have seemed ridiculous. But now record labels have been decimated by the digital shift, and are rethinking their entire business model to survive.

Even as recently as the 1970s, the thought that consumers would be able to bring the industry to its knees by circumventing the existing structure and barriers seemed ludicrous. Large companies solidified vertical and/or horizontal integration across almost all elements in the supply chain; this practically ensured a stranglehold on consumers.

i-19034150245e14d37917939b5f797ffc-home_taping_is_killing_music.gif

Then, as the infamous “home taping is killing music” warning inside record sleeves indicated, the music business (record labels and trade groups in particular) became concerned that blank cassettes were eroding profits. The ability to record songs from radio, a record, or via another cassette meant that people could acquire music cheaply or even for free.

It’s worth noting that not all people saw this as the beginning of the end. In 1981 the Dead Kennedys endeared themselves to a legion of anti-corporate youth by printing this message on one side of a cassette EP:

“Home taping is killing big business profits. We left this side blank so you can help.”

As anti-establishment as the Dead Kennedys and their label Alternative Tentacles were, I don’t think even they could have dreamed up the situation most record labels would find themselves in during the following decades.

The Decline Begins

Since 2000, most formats of physical music products have seen a rapid decline in sales. Debate flares about the causes, but most people accept that digital file sharing, an audience oversaturated with content, an ever-growing number of avenues for entertainment, the splintering of audiences into niches, the widespread shuttering of brick-and-mortar record stores, and the questionable quality of mainstream music have resulted in severe problems for record labels.

Each of these individual factors is bad enough, but a coming threat to labels is that the contracts of many career artists are coming to an end. For the major labels, these superstars have always been the profit center. If an artist has built a sizable fan base (usually thanks to the label), the infrastructure now exists to operate fully outside the traditional model. Labels should be prepared to see some level of attrition moving forward.

The traditional label model that worked for almost seven decades is in its death throes.

What’s Next?

Much of the current debate in the music industry is on the role record labels will play moving forward. The majority of label income has traditionally come from selling physical product, which is the area now seeing the sharpest decline. As a result, record companies have experienced a rocky decade, seeing wave after wave of layoffs and massive decline in revenues. In addition, technology and innovative distribution and marketing solutions now give many artists the ability to work outside the traditional music business model. This further reduces the value a label can offer to many artists, especially those in the mid and lower tiers.

Nobody is quite sure what the future looks like for record labels, but in discussions with a wide variety of music industry professionals, a few common themes seem to emerge.

Marketing Services

First, regardless of what is being sold or where the fans are, every artist needs promotion and marketing. Record labels are experts at this, and will be able to provide value here for the foreseeable future.

“Marketing expertise will always be needed whether it is provided by a traditional label or by the artists themselves,” said Kevin M. Richards, an independent music marketer who has held marketing positions at multiple labels. “With millions of new songs being released as digital downloads yearly, there is no way a listener can sort through all of it and find anything new without some promotion. Some bands will be able to promote themselves and go right to the top of the charts. Others may choose to have an experienced record label assist.”

i-5f144cbc4d1d0df96d995d6f089d7823-NMT logo.jpg

Scott Perry, owner of New Music Tipsheet and Sperry Media, agrees.

“The core roles of record labels will never change — facilitating the marketing and distribution of an artist’s work is essential,” he said. “However, the rights and revenues split will be vastly different, and that will affect the role the label plays in distribution and marketing.”

Ultimately, labels will need to find new ways to generate revenue from their artist relationships, as the continuing decline in physical product sales will not sustain profitability.

Missing Profitability

Sean Adams, editor of U.K. music webzine Drowned in Sound, sees another possible avenue for labels.

“It’d be interesting if any of the promoters buy any of the labels, and start to invest in touring acts, but I’m not sure the oil tanker that is the music biz can turn quite that quick,” he said.

i-c3efd4ec2ac52ba60dc4abc717b5b1dd-drowned in sound logo.jpg

This addresses the core problem. Labels’ traditional revenue streams are drying up and no business can flourish without sustainable income. A remapping of revenue sources is inevitable and has already been put into practice by many labels via so-called “360 deals.” Pulling from tour revenues seems to be a logical progression, especially since the new paradigm for many labels is that records exist to promote the tour, rather than the opposite which was true for decades.

To this point, Scott Perry adds, “The bank is broken, and until investing in an artist’s career is proven to be a profitable endeavor, it will be difficult for any artist to find a benefactor to fund the labor necessary to push an artist beyond their sphere of friends and into a larger network.”

Brenda Walker of Rebel Content is a marketing consultant and content producer. She feels smaller labels will continue to quickly adapt to new revenue sources.

“Smaller labels, often owned by managers and artists in partnership, will increase their focus and expertise in direct consumer marketing and distribution, both online and mobile, packaging music in a variety of ways,” she said. “Because they are nimble and will control comprehensive rights for licensing, they will grow revenue from multiple channels — recordings, licensing, merchandise and live performance.”

Alternate Models

Although labels expanding their reach into additional streams of existing revenue should allow for their continued existence, many people are discussing the notion of completely rewriting the core music business model.

Walker feels a scaled-down shell of the current model is in store.

“The major labels will look more like music publishing and even stock photography companies, focused on maximizing income from exploiting licensing opportunities. Their operations will scale down, but they will not go out of business,” she said.

Adams offers up a much different model.

“I think corporate patronage is the only viable model,” he said. “Something that mashes up Levi’s ads in the ’90s and the Starbucks’ label…I really don’t see anyone else who values music in such a way and sees an upside to being associated with the emotional relationship people have with music.”

Regardless of one’s opinion as to the future of record labels, the consensus is that the traditional model no longer works. Certain functions will always be required, but where the funding comes from and how revenue is generated will be significantly different. No one solution is guaranteed to work, but forward-thinking artists and labels are already starting to change their businesses to once again find sustainability and profit.

Jason Feinberg is the president and founder of On Target Media Group, a music industry online marketing and promotion company. He is responsible for business development, formulation and management of online marketing campaigns, and media relations with over 1,000 websites and media outlets. The company has served clients including Warner Bros. Records, Universal Music Enterprises, EMI, Concord Music Group, Roadrunner Records, and others with an artist roster that includes The Rentals, Flipper, Thin Lizzy, Sammy Hagar, Primus, Poncho Sanchez, Ringo Starr, Chick Corea, and many more. You can follow Jason on Twitter @otmg