Where has the money gone? Part 1 – The Recording Industry

Sharing is caring!


Over the past 15 years, the recording industry has fundamentally shifted their business model. After years of fighting change, the industry has slowly latched on to new technologies, and for the first time since 1999, music sales actually increased, albeit only 0.3 percent.  Still, it’s a sign that perhaps the future will be a brighter one for the music labels and musicians alike. In this post, we’ll take a look at where the industry went wrong, where it is today, and where it’s headed.

In the 90’s, the entire music business was really coming into its peak. Where once there had been dozens of big labels and hundreds of different radio stations, there were now only 6 major labels competing with each other. When Congress passed the Telecommunications Act of 1996, Clear Channel went on a buying spree, growing from 43 stations in 1995, to 830 in 1999. The process for creating and marketing a superstar became as streamlined as ever, and the profits were at an all time high. The profits were boosted even more as consumers traded in their tape decks for CD players, and in the process began to repurchase their old catalogues in the new format.

The Decline

When the bubble began to burst, it was easy to look at Napster and lay the blame solely on the file sharing service. But by blaming Napster and its spawns, the music labels were overlooking the larger point; consumers were tired of paying $15-20 for the few songs on a CD that they enjoyed, and downloading music was their way of saying so.

Instead of embracing the new technology and trying to treat the real problem, the major labels rose together to try to crush it, which in the end sealed their own demise. Lawsuit after lawsuit was filed, but new technologies were popping up everyday to replace the old ones. In a few short years, file-sharing services became ubiquitous on every computer in the country, and stealing music was mainstream.

When Steve Jobs and Apple announced iTunes in 2003, the music industry finally had a competitive answer to the free services. It was an intuitive platform, where customers could find and easily download music, without the threats of viruses that came on other networks. It also came with a price tag that was much more consumer friendly: 99 cents per song and $9.99 for an album.

It was the answer music fans had been looking for, but it had taken four years too long; and during that time an entire generation had grown used to downloading music for free. This lag time had allowed the perceived value of music to shift in a monumental way.

The Culprit

In the past ten years, iTunes has surpassed Wal-Mart to become the world’s leading music retailer. Digital downloads have grown every year since its inception. But even with all the success of digital music, the recording industry’s revenues are half of what they were in 1999. Why? The record industry most often blames music piracy. Many artists and fans blame the music labels for not developing their artists or simply pushing too much corporate pop music.

So who’s really to blame? Unfortunately the answer, for the most part, is no one.  Sure, there are still people who download music illegally, but multiple studies suggest that those people spend more on music than those who purchase all their music legally. The real culprit here is simply progress.

With or without Napster, when the Internet came around, it meant that the music industry was never going to be the same. When new technologies arise, some industries grow, and some industries die. But the music industry as a whole isn’t dying; in fact, it’s growing. It’s only the recording industry that continues to shrink.

Part of it comes from the fact that year after year, it has become cheaper to produce, cheaper to record, and cheaper to distribute music. What once took a million dollar studio can now often be done on a laptop. The price of albums has come down as a whole with the advent of iTunes, and lower prices mean lower revenue. But profit margins are down as well, and this isn’t the only problem.

One major profit killer is the fact that during the golden years, the labels became complacent by creating albums that had a few good songs and a whole lot of filler. Because they controlled distribution, if you wanted those songs, you had to pay for the whole CD. When music sales peaked in 2000, Americans alone purchased 843 million CDs. At an average price of around $15 dollars, there was a whole lot of money being made.

But with the advent of digital downloads, consumers can pay individually to get the songs they want and leave the rest out. By 2007 digital singles surpassed CD sales, and in the past year over 1.4 billion singles were purchased, compared to only 200 million CDs.  Labels are missing out on ten or more dollars per album. This dearth of CD sales may lead to a dramatic shift in how music is distributed; already some artists and labels are saying that the time of the album has passed, and that more concise EP releases should be the new norm.

The Future

Another huge shift that has been unfolding more recently is the diminishing importance of ownership. For the generation that has been growing up with iPods and computers, the idea of owning a physical copy of music is not necessarily engrained, and often times rather foreign. And in this post-physical world, when many young consumers face the choice between paying a dollar to “own” a song, or simply listening to the song on YouTube, they simply don’t see the point of spending money.

The point of owning the music is to listen to it; if you can listen to it, why own it? This attitudinal shift has allowed services like Spotify and Pandora to flourish. Streaming services have grown rapidly in the past three years or so, and though neither labels nor artists seem satisfied with the current payout, it looks to be the next logical direction for the recording industry.

In less than 15 years, an industry that was at its peak has gone all the way to its breaking point. It’s heading towards its 2nd transformation, the first from physical to digital, and now from owned media to subscribed media. Where it will ultimately end up remains to be seen. The outlook is certainly not all bad though, as there are parts of the music industry that are currently flourishing. My next installment will discuss how the decline of record sales has led to a huge increase in the touring industry.

About the Author