The Big Record Labels' Not-So-Big Future

With the Web decimating CD sales, the major labels are looking for new revenue streams, including ringtones, merchandise, tours—everything but music

by Justin Bachman

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It has been a rough month of breakups for the Big Four record companies. First, British rock group Radiohead decided to release its new record as a pay-what-you-wish digital download on Oct. 10, making it clear the quintet intends to avoid any new major record deal. A week later, industrial band Nine Inch Nails declared its emancipation from its former label, Interscope Records. NIN's announcement came less than a month after front man Trent Reznor exhorted fans at a Sydney show to "steal" music to protest high CD prices.

"I have been under recording contracts for 18 years and have watched the business radically mutate from one thing to something inherently very different, and it gives me great pleasure to be able to finally have a direct relationship with the audience as I see fit and appropriate," Reznor wrote on the band's Web site on Oct. 8. "Exciting times, indeed."

Not if you're a record company executive watching sales plummet. Last year, CD sales dropped 13%, to $9.2 billion, according to figures from the Recording Industry Association of America. The slump mirrors overall revenues for the Big Four—Sony/BMG, Universal, Warner (WMG), and EMI Group—which have been flat or declining for more than two years.

"A New World"

The Internet has wreaked all sorts of havoc on the traditional recorded-music model. For decades labels have been signing bands, paying for their first record and video, moving the music to radio and retailers, organizing concert tours, and helping to peddle merchandise. But for many fans and artists, that model has become grossly anachronistic. If the music is flowing digitally, why allow a corporation to get between an artist and the audience? "It's a new world now, and people are thinking of new ways to reach the people, and that's always been my aim," said Paul McCartney in March, 2007, when he joined Starbucks' (SBUX) new music label, HearMusic, ditching his longtime home at EMI.

It doesn't help that the same companies have been antagonizing music consumers for years with pricey CDs, rights-management restrictions, and file-sharing lawsuits. "They can't even make a product you can open," says Brandon Kessler, founder of Messenger Records, a small New York City label. "Can you imagine going to the store and buying a carton of milk you can't get open? It's infuriating. There's such a lack of knowledge of their customer."

Record executives finally recognize the shift and are no longer betting on a revival of CD sales. "Almost every core operating principle in the recorded-music business has been shaken or challenged," said Warner Music Chairman and Chief Executive Edgar Bronfman Jr. in a Sept. 17 speech at a technology conference.

One of the casualties is the industry's fundamental economics. A record label used to play an important financial role because it fronted the money to record an album, which could cost tens of thousands or even hundreds of thousands of dollars. Now any 14-year-old can pick up a copy of Apple's (AAPL) Logic Studio for $499 and make respectable recordings. All that's needed are generous parents or a babysitting gig.

Digital is the new paradigm. Who needs a record label to handle marketing and public relations anymore? Musicians can just set up a MySpace page and talk directly with their fans. Record labels used to help court radio stations, too, to get music on the air. Now you can zip MP3 copies of your first single via e-mail to anyone in the world.