The Mechanics of the Recording Industry
Originally published at soundcharts.com.
In the early 20th century, sheet music publishers ran the music industry. House concerts were a centerpiece of middle-class entertainment — the number of pianos manufactured in the US alone averaged at around 300,000 each year (vs. 31,000 in 2017). However, by the 1920s phonographs (and gramophones or graphophones, depending on the brand) became widely available and in 1921 gross sales on the US phonogram market reached $106 million (around $1,5 billion in today’s money) with over 140 million records sold. The first record labels, departments of major phonograph producers (Columbia, Victor and Edison) found their place in the industry as record-makers, financing costly record production, manufacturing and distribution of records.
Just a decade later, at the height of the Great Depression, the revenue shrunk down to $6 million (or $117 million in today’s money). The birth of radio, a new music medium which was not only free but also sounded better, lessened the appeal of phonograms. By the 1930s, all of the big recording players in the U.S. were acquired by the radio corporations: RCA bought Victor in 1929 to create RCA Records, and CBS bought Columbia Records in 1939. In 1931, the European affiliates of Victor and Columbia merged to form EMI.
Fast forward through vinyl, cassette tapes, CDs, Napster and digital piracy, download-to-own services and, finally, streaming. Throughout the years, technological advancements caused shifts in the landscape of the industry, as manufacturers of new mediums and hardware took a stake in the recording business. Recordings, audio mediums and record-players are what economic theory would call complementary goods. Victor was making records to sell phonographs, and the more phonographs there were, the more was the demand for compatible recordings. Later on, RCA bought Victor to make records that would populate radio waves and therefore boost sales of radio receivers, which, in its turn, grew the radio’s audience and increased demand for new hits.
The same principle carried over to the modern age. Would Apple ever launch iTunes if the iPod wasn’t such a huge success? The synergy between hardware (or, in 21st-century terms, software) manufacturers, distribution channels and the recording side always led to the vertical integration of the recorded music chain. We can see the signs of this tradition in relationships between the labels and streaming services today. Remember how Frank Ocean released Blond? Back it 2016, he delivered his visual album, Endless to fulfill contractual obligations to Def Jam and Universal — and release the “proper album” on the next day via his own label as an exclusive for Apple Music. Shortly after, Universal announced that it would no longer do streaming exclusives, and although it’s still not clear if these two stories are related, the tensions within the recording chain are apparent.
The recording industry is guided by technology, more so than any other part of the music business. Getting a record from the studio to the final customer used to be a lengthy and costly process. Now, an album can be produced on a laptop, and digital distribution via streaming has a zero marginal cost — the structure of the recording chain itself has radically changed.
In the age of physical distribution, it was reasonably straightforward. Labels were recording and marketing, manufacturers were producing physical media, distributors were taking care of the logistics, and record stores were facing the final consumer. The digital environment has turned that system upside down. Now, customers get music via digital service providers of all shapes and sizes, from ad-driven video platforms such as YouTube to customizable digital radio of Pandora and subscription-based streaming services. Artists sign with labels and labels work with distributors, who collect recording royalties from DSPs. However, almost every step of this chain can be bypassed altogether.
Artists can release their music directly on platforms like Soundcloud, Bandcamp and, as of late, even Spotify or sign a “distribution only” deal to put their music on all digital platforms — and keep most of the revenue for themselves. Nevertheless, labels are still at the heart of the industry, and they were able to keep that position by continuously adapting to the evolving realities of the market.
The recording business has three primary objectives:
First two objectives are the focus of all record labels, although throughout the years the priorities between the two have shifted — don’t worry, we will get into it a bit later. The third function, manufacturing and selling the record, is a job of distributors. However, some labels (mainly the majors) can internalize that process and distribute themselves — which is in fact one of the main qualitative distinctions between the major and independent from recording standpoint.
Production of the master record is an intricate process. The creative process is unique for each artist: some don’t need anything but their laptop to record, and others require a symphonic orchestra, a choir, hundreds of mixes and several studios. The costs of making an album can fall anywhere between 0 and infinity: Nirvana’s Bleach was notoriously recorded in 3 days on a $600 budget, while Guns N’ Roses’ Chinese Democracy cost around $13 million and took over 13 years to make.
However, if we take the outliers out of the equation, an average recording investment has unquestionably diminished over the years. From the invention of the 8-track machine in the 1950s, that allowed mixing several sound sources to create a final recording, to the modern-day Digital Audio Workstations that pack functionality of a fully-fledged recording studio into a single laptop, technology optimized the recording process, making it both cheaper and more accessible.
This is a massive shift in the recording business. The label’s endorsement used to be a must for an artist to record music, and now, funding the recording process is just another bullet point in a long list of label’s services. Some artists still need to rent a studio, pay for technicians, gear and session musicians, and label finances that process — but it’s not an integral part of the business anymore. Owning a full-scale recording studio is extremely rare amongst the labels of today, while throughout the 20th century all majors labels kept dozens of engineers on the payroll. The recording industry is no longer here to record, but rather to find upcoming artists and help them develop careers and build audiences.
Almost every label has some sort of Artist & Repertoire department, or simply A&R. It can be limited to talent hunting or work hands-on with artists on everything from image to creative team composition. A&Rs come in all shapes and sizes — but their primary goal is to find promising artists and sign them to a label.
Scouting for talent has changed a lot as the digital space took over the music industry and recording technologies made the production process affordable. Back in the day, labels were talent hunters that had to bet on an inexperienced, unproven artist coming out with a successful debut. That meant significant recording investments without any real guarantee of returns — but massive sales of the hit records made up for that risk.
Nowadays, upcoming artists record their debuts without the label’s involvement. First tracks or even albums are recorded in bedrooms and garages. Initial fan-bases are built on social media, which have become the hunting grounds of most A&Rs. If labels used to make records, now they find them — and the first label deals are signed when artists have recorded and released music by themselves.
In contractual terms, this is the shift from the artist deals to the licensing ones. Under an artist deal, the label pays the artist in advance and finances the entire release cycle to own lifetime copyrights of a final recording. Licensing deals, on the other hand, are signed when the artist licenses an existing record, contracting copyrights to the label for a specified period (and, sometimes, a specified geographical market). Such deals are less risk / more costs scenario for the recording industry: on the one hand, the label has to invest into “buying” an existing (and somewhat successful) record, but in exchange, the risks of the creative stage are avoided altogether.
However, finding talent is just the first part of the A&R’s job. Once the deal is done, A&R representatives continue working with the artists. On the production side, they offer input on overall creative direction and help build the creative team: finding songwriters and songs for artists who don’t write their own material, putting rappers in touch with “hot” producers and beatmakers, and so on.
On the artist development side, A&R becomes something like a brand manager for the talent. What kind of photoshoots should the artist do, how the album cover should look like and what will be the music video aesthetic? A&R can help find answers to such questions, defining the artist’s image and positioning and laying the ground for the future marketing strategy, carried out by the label’s promotion team.
As we’ve already mentioned in the Mechanics of Management, usually the manager is also heavily involved in the artist development process. That means that artists, A&Rs and managers have to be aligned for the chemistry to work. This is not always the case, however — so there’s often a bit of a power struggle between the management and A&R, which can go either way. When it comes to the artistic direction, the A&R can be limited to the administration of the recording process or end up running the artist’s career — the extent of A&R’s involvement is unique to each artist.
So, as the costs of production were cut down a lot, labels had to adapt, shifting their focus from making records to promoting them. The principal part of the label’s service is now promotion, marketing, and distribution of the release, and the licensing deals are an implication of that shift.
Promotion and marketing are pretty much the same in their core as they share an end-goal. The main difference is that marketing involves directly paying for the reach and the audiences, while promotion strategy is all about getting media and fans to talk about the artist “for free”. At large, promotion and marketing strategies are mostly business as usual: put out singles and pitch them to playlist owners and radio programmers to get initial play, try to persuade music journalists to cover the release, and once the record is out — buy ads, and book TV and radio appearances.
Labels have connections with both traditional and digital media, from radio, TV and press to blogs and online outlets, and in that sense not a lot has changed since the 60s. Although the media-space has become more diverse and leveled across the board, networking still plays a crucial role in the industry. Just like in real life, a recommendation from a friend can go a long way — there is a difference from a journalist’s standpoint between getting a press release from an unsigned artist and a PR-manager they know and trust.
Those communication strategies, of course, depend on the scope of the artist, but the basic principle remains the same. The media have evolved and hundreds of new channels and formats became available to the marketing team. However, the end goal of the label is still to make more people talk about, listen to and buy the record.
Before the digital age, distribution meant getting audio from the studio and into the ears of the listeners — setting up and optimizing the physical production and logistics and developing a network of subcontractors and partners. Streaming has made that whole process much, much cheaper. You can now simply upload music on digital platforms and make it available to fans from all over the globe. However, distribution still plays a huge role in the recording business — and here’s why.
While at first glance uploading content on a digital platform seems easy, you still need digital infrastructure to make sure that the record will be available (1) on multiple platforms, (2) on the day of the release and (3) with proper meta-data. Distributors have a well-oiled pipeline that covers that tech side of the release. But even more importantly, distributors are in charge of what is called trade marketing — making sure that the music is well-represented within DSP’s digital store-front.
Flashback to the physical age. A customer walks into the record store and, if they don’t have a particular record in mind, they are presented with hundreds of options. The departments are organized by genre to help them get around, the “stuff selections” section offers an eclectic mix of new releases, the Point of Sale stand promotes the latest blockbuster release and, finally, there is a premium shelf at the entrance of the store. Every single customer will see the records on that shelf. Working with the record shops to get that beneficial placement in the store was a big part of the distribution strategy back in the day.
Back to reality, we don’t have record stores anymore, but the same principle of favorable placement still applies. The person pulls up Spotify, navigates to the browse section, clicks on “New Music Friday” and presses play. The track that plays is the #1 song of the week and this it is the “record that every customer will see” — the 21st-century analog of the premium record store placement. This spot is the end goal of any distribution strategy in the 21st Century.
When it comes to distribution, labels can be generally divided into two categories: the majors who distribute themselves globally and independents that outsource the distribution to external partners. The latter either work with white-label distributors like Believe, Consolidated Independent, Fuga and so on or — you’ve guessed it — outsource distribution to the majors. That makes the distribution even more major-centric than the recording industry as a whole — currently, on the U.S. market, 85% of distribution revenues are shared between the companies under the umbrella of Universal, Sony or Warner. The fact is that, when it comes to trade marketing, the structure of the distribution channels requires equally influential partners to represent the interests of an artist.
Streaming has made the fragmented customer-facing music market of record stores much more centralized. The digital market (accounting for 86% of all recording revenues in the U.S.) is made up of a few large DSPs — and even as most of the streaming giants are putting their algorithms forward as mediators of music discovery, most popular playlists are still curated by humans. Much like in the old days, there is a handful of people who are singling out the “hottest record of the moment” and have the power to push it to the millions of customers.
In that sense, streaming is both a distribution channel and a promotion space. The promise of DSPs is not only to help artists monetize their music, but also build an audience on the platform. As a consequence, distribution strategy became an integral part of career development for most artists. However, if streaming giants are a unified record store and a massive promotion channel, who is fit to represent the artist on the other side of the distribution deal?
Negotiating with DSPs to ensure beneficial placement on the platform has been challenging even for the biggest independent labels — merely because they lack the scope of the catalog. Distribution and playlist strategies revolve around the editorial teams of streaming platforms, and editors at Spotify or Apple can’t speak to hundreds of managers every week — the size of their business in a way forces them to talk to “bulk” representatives at the majors and distribution companies. In that sense, the old industry is coming back in a way: the major labels used to rule the game as they held the keys to the media; now, their catalog gives them leverage to negotiate with DSPs.
In order to counteract that, both digital platforms and independents are trying to find a way out of this state and level out the playing field. On the label side, digital rights network Merlin has been instrumental at mediating relationships between independent labels and streaming giants. At the same time, DSPs themselves are making steps towards a system of equal representation. For example, Spotify has recently introduced a unified tool for playlist submission to standardize the way to pitch music to the editorial team across labels and artists of all scope.
That said, the distribution system is still quite far from perfection. We have to acknowledge the fact that independent labels don’t have the same 1:1 access to the editorial team that the Majors have. On average, it’s still easier for artists to be visible on streaming platforms if they are signed to (or distributed by) the major.
There is one last part of the recording business that we’ve decided to keep out of scope for now: integration of recordings into other creative products, like movies, video games and so on. Much like distribution via streaming platforms, content synch can become not only a healthy revenue source but also a vast promotion channel. There are dozens of artists who have broken the charts after a single successful integration.
Licensing the recording (the master) is tied with the publishing industry — which is why we’ve decided to make a separate mechanics article to explore the world of content licensing and relationships between brands and artists in more details.
It’s still in the works, but, as usual, you can set up notifications to get an email once this article is out by completing this form. It will also help us prioritize the future articles, so let us know what you’re interested in, and stay tuned to our Mechanics series — we’ve only scratched the surface so far.
The Mechanics of the Recording Industry
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