I’m gonna start with a question: When is the last time you bought a music CD like this
one?
For the millennials watching this video, a Compact Disk was a thing with songs recorded
on it.
Yes, before the Internet era, if you wanted to listen to music, you had to buy it!
There was a thing called a ‘Record shop’ and a CD like this one, or a cassette tape
could cost up to 30 dollars!
I know, I know, it sounds pretty weird.
In less than 20 years, record sales have almost disappeared.
In the year 2000, more than 900 million CDs were sold… just in America!
18 years later, this number has dropped to just 90 million.
That’s less than a tenth of what it used to be.
The reason, of course, is internet downloads.
Platforms like NAPSTER, EMULE and TORRENT have completely changed the industry.
And of course, you might think that, in this situation, record labels must be going bankrupt,
right?
Well, the opposite is true.
Just check this out.
Universal Music Group turned over an average of $17.5m per day in 2017 – as the company’s
annual sales hit record highs by topping $6bn.
And this is just an example!
Other companies like SONY MUSIC or WARNER are in the same situation: record profits.
And… in case you were wondering, the answer is NO: streaming platforms such as PANDORA,
DEEZER and SPOTIFY are not enough to explain this phenomenon.
For example, TAYLOR SWIFT is one of the World’s most famous artists and she makes hardly 400,000
dollars a year from her Spotify listens.
It might look like a lot but, believe me, this is pennies if we compare it with the
mega money Michael Jackson made in sales from Thriller.
So why are record labels making so much money?
How can they even survive all of the illegal internet downloads and file sharing platforms
like NAPSTER and EMULE?
Today we will answer these questions but, before we do, let’s take a look back at
history.
CREATIVE DESTRUCTION
In the year 1935, the Union of American Musicians published this statement.
“Records are multiplied and duplicated by the thousands and then sold to and used in
places where otherwise musicians would be employed.”
According to this union, more than 8000 professional musicians had lost their jobs because of the
so-called JUKEBOXES.
A jukebox was a big record player that was placed in bars and restaurants.
You could insert a coin and choose a song you wanted played.
By the year 1935, more than 135 000 machines like this one were sold throughout the states.
But at the same time that those 8000 traditional musicians were taken out of business, Benny
Goodman was signing a million dollar contract with a label called RCA-VICTOR.
The business model of the music industry had already changed… forever.
Prior to this, musicians lived off of the money they made from concerts.
In fact, the first music records were used as advertising for the live performances.
But now, 90% of their income was coming from record sales.
This process is what we call…
But this was more than an economic shift.
The way we listen to music changed forever as well.
All of a sudden, some local music genres started being enjoyed nation wide.
For example, jazz music was a typical genre in New Orleans but it ended up expanding all
across America.
And not only that!
This also changed the way we understand music.
Think about it.
Before we could record music, musicians could only do live performances.
Their maximum audience was… hundreds of people.
Suddenly, radios and records allowed them to reach millions of people.
And this meant way more money.
This is how a new genre was created.
A music style made by and for radio: ROCK AND ROLL.
A style that originated in America and ended up expanding to all parts of the West: from
L.A. to Berlin.
Rockstars were not simple artists anymore but small engines inside of a complex machinery.
The record label paid for marketing campaigns, organized massive concerts and even negotiated
advertising deals for them.
Meanwhile, the rockstar gave the whole industry a young, fresh face.
This is why, while artists like Elvis and the Beatles became millionaires, the big companies
became bigger and bigger.
Since their music was not just listened to all across the developed world, a record like
Michael Jackson’s Thriller could sell more than 66 million copies in a brand new market
that stretched from L.A. to Tokyo.
By the year 1999, the music industry reached its ceiling.
More than 1200 million records sold.
The music business was bigger than the GDP of a country like the Dominican Republic.
And… what happens when an industry generates so much money?
Well… the big guys start eating the small ones.
For a better understanding, in that moment, 78% of the industry was concentrated in just
5 big multinationals.
And then… when the music industry was the ultimate money making machine… something
surprising happened.
Do you remember that thing I said about creative destruction?
Well… if there’s one good example of a positive destructor, it’s NAPSTER.
NAPSTER was the first software that allowed users to download songs in MP3 format in a
fast, free and, of course, illegal way.
From one day to the next, those records that cost 30 USD could be found for free online.
And, as you can see on the chart, this was the beginning of the end.
Even though Napster lost a case in the courts, it was already too late.
The music business had already changed forever.
At the end of the day… why would you buy something if you can get It for free?
But…
OK, wait a minute, just look at the chart again.
If you pay attention, you will see that, despite a dramatic decline in record sales… the
profit for companies like Universal Music Group haven’t changed that much.
Why?
We’ll explain right now!
SIZE MATTERS
Do you remember those 8000 musicians that lost their jobs in 1935?
Well in the year 2000, something similar happened.
Universal Music Group fired 4000 people practically overnight.
This was 34% of their staff.
At this point, record sales were almost 90% of their income.
And those sales were falling by 20% year after year.
And this moment is when the executives of the big record labels started playing the
same old tune we’ve been talking about once again… yes, I’m talking about…
CREATIVE DESTRUCTION!!!!
If they wanted to survive, they had to make a 180 degree shift to the company.
They had to stop being a record label and start becoming a MUSIC label.
OK, OK… but what does this mean?
Well, let’s take the example of Universal Music Group.
The first step for creative destruction is, of course, destruction.
In the first decade of the 21st century, Universal got rid of everything that was not making
money.
What was that?
That would be the record manufacturing factories.
They sold most of them as soon as possible.
What’s the next step of creative destruction?
Of course, the creativity.
With all the money they got from selling the factories, Universal bought all the music
labels they possibly could.
The main goal was to expand their music catalogue as much as possible.
Which explains news like this.
Universal Music Group Purchases EMI Music Label group will acquire catalogs of the Beatles,
Pink Floyd, Radiohead and more
So what happens after a creative destruction process like this one?
Well… tastes and music genres change again.
For example, we have K-POP, with songs like GANGNAM STYLE.
This was a popular genre in South Korea that ended up expanding to the rest of the world.
Yes, my dear viewers, in the 30s, the music industry was limited to the United States.
Then, in the 80s, it had expanded throughout the West.
Now, in the 2000s, music is a 100% global industry.
And companies like Universal have bought labels in any market you can imagine.
Universal Music signs Tencent deal for China expansion
Universal Music Group to relaunch EMI Records in India
Universal buys majority stake in Kenyan label AI records
And now you might wonder…
OK, but no matter how many labels you buy, if people don’t buy music anymore, your
income will fall inevitably, right?
Well… yes, you are right.
In fact, the music industry today is nothing but a shadow of what it used to be.
So what is the difference then?
Well… now, despite the cake being smaller, there are way less people eating.
As you can see on the chart, 72% of the industry is covered by 3 big multinationals: Universal,
Sony Music and Warner.
And yes, now is when we can start talking about Spotify.
As we said before, Spotify gives very little money to the artists.
1 million listens only means about 7000 dollars.
But when you have the rights of 25% of the music produced in the world, even if you make
0.006 dollars per listen, you still become a millionaire.
Today, record sales have gone from being 90% of the industry’s profit to just 25%.
And streaming music represents 6 out of 10 dollars entering the music industry.
Of course, this is great news for the multinational corporations, which make more and more money.
But, as you can imagine, this is not so good news for the musicians.
It’s harder and harder to make money with music and this is why you need to be extremely
popular to make any money out of this.
On the other hand, those 3 big labels aren’t willing to risk what they have by experimenting
with new formulas.
But wait just a minute because this isn’t so bad!
If you’ve been following the news of the music industry lately you will see that there
is still some room for a spoonful of…
CREATIVE DESTRUCTION!!!
Spotify Now Lets Artists Bypass Labels and Upload Their Own Music
Yes, my dear viewers.
If you have a band, now you can upload your songs to Spotify and get your royalties without
a middle man.
And, of course, if you make good music and you want some free advertising, you can send
us your demos at info@visualpolitik.net so we can play it in the background of some of
our videos… of course, remember to add a link to your youtube channel.
Meanwhile, the big question now is… will we witness the advent of a new creative destruction
process in the music industry?
Please, leave your answer in the comment section below.
Also, visit RECONSIDER MEDIA.COM, the podcast that provided the vocals in this episode that
were not mine.
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