The Big Record Labels' Not-So-Big Future

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Professional Strength

Despite the challenges, record labels still perform some tasks extremely well. The Big Four turn out recordings that are technically pristine, meeting the exacting standards of radio, television, and film that are out of reach for most kids with computers. The labels also can transport these CDs worldwide, stock them at retailers, market them reasonably effectively, organize concert tours, and manage various business functions for artists under contract. "They're very good at selling a Bruce Springsteen album and getting it everywhere at once," says Dale Anderson, a Buffalo (N.Y.) journalist who produced independent folk singer Ani DiFranco's first two records.

Record labels are experimenting with new approaches, too. Part of Bronfman's new strategy will be to expand revenue sources with musicians so that record sales are but one part of a pie incorporating more frequent releases, touring, licensing, merchandising, endorsements, and sponsorships. Others envision a time when music—a market still showing respectable growth—becomes more of a product, like mobile-phone service or cable television, that flows into your home or telephone at various rate plans. Others argue that music will become free, with record companies and musicians making money from concerts, merchandise, and licensing.

What's hard to see, though, is how the Big Four can boost their sales and income much in this new era. Manufacturing and distribution costs stand to fall in the digital transition, and record companies will handle numerous business and administrative functions for artists. But the profit bonanza of an $18 CD? Those days are gone forever. Record companies are likely to become geared more toward the commercial aspects of the business and away from the creative side. "They'll still play an important role. The question is whether they'll get paid for it," says Kessler. "They'll either go out of business or wake up."

There's talk of further industry consolidation—EMI was acquired this summer by private equity firm Terra Firma Capital Partners for $4.8 billion. Some analysts have said the industry's conversion from CD to digital music may be a job best overseen by private owners.

Mix and Match

Not that CDs will become rare anytime soon. For all its online experimentation, Radiohead is expected to put the new record out on CD next year, shortly after the band ships an $82 "discbox" of album art, vinyl LPs, and eight bonus tracks. Another group, the Charlatans UK, will give fans its new record for free in 2008, with the first single coming Oct. 22 as a digital download.

British music journal Record of the Day collected some 3,000 responses in its online poll of what consumers paid for Radiohead's In Rainbows, finding that about half offering the band nothing. The rest said they'd given £5 or £10, or $10.20 to $20.40. Others said they'd paid what they assume an artist receives from a typical CD—10% to 20% of the retail price—Record of the Day Managing Director Paul Scaife said in an e-mail. "First time I've paid for an album in years," posted a purchaser from Britain, who said he'd paid £5. "I'm paying in part because I love this kind of original thinking—though I don't see it as a solution to the music industry's woes."

In his speech, Bronfman detailed the company's 2006 experience with South Korean pop star Baek Ji Young as a possible template for future releases. In the traditional model a pop act had the record and several singles to sell. For Baek's record, the company had 416 distinct digital products, including song tracks, ringtones, videos, and album art. "And all without the need for physical inventory," said Bronfman. Just the sort of revenue scheme that could comfort a record executive lamenting the loss of his CD collection.

Check out BusinessWeek's slide show to read about 10 acts that shook the music industry.

Bachman is deputy news director for BusinessWeek.com.