Remake, Remodel: The Evolution Of The Record Label

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This pre-draft version is strictly for review purposes only and is not for general dissemination or sharing. Firstly, the sales and distribution function has been simplified over the years, with centralised buying and telesales negating the need for a huge on-the-road sales force taking individual orders and pre sales from hundreds of stores. But the increase in importance of chains of stores has also made it more difficult to grow an artist’s career unless they have an impressive promotional and marketing story to tell. This has made the HMV chain and Amazon business models – which involve carrying a wide range of line items including new and unproven artists – all the more important at the early stage of an artist’s career. As this report goes to press, the financial pages are full of the struggles of HMV as it tries to retain the confidence of the investment community amid sale rumours and a falling share price. Several senior label executives expressed the opinion that if HMV collapsed, ’it would be a disaster, as we still have a relatively healthy physical business.’ A further consequence of the rise of the supermarket is downward price pressure and the related demand for increased discounts from retail. The average net realised price of a single CD album unit has declined by almost 19% per cent over the decade 28 . Labels are clearly wrestling with tighter margins from their retail business compared with 10 years ago. This is not even adjusted for ‘real terms’, so labels are clearly wrestling with tighter margins from their retail business compared with 10 years ago. Back then, labels would negotiate terms with major retail chains for a two–three-year contract period. That renegotiation is now more likely to be annual as the physical retail landscape changes so rapidly. Recently, the Tesco retail chain has lifted the bar higher than ever by proposing labels supply product on consignment where the price of the CD (minus a nominal 50p manufacture fee which would be paid on delivery into the store) is only invoiced when the retailer actually sells it. As this report goes to press, the reaction of labels to this proposal isn’t clear. Labels are aware of the danger in the reduction of points of sale at retail, and Derek Allen, VP Commercial and Sales, EMI, expressed the importance of finding new routes to market via non-traditional outlets. The challenge of dealing with these retailers who are used to significantly higher margins for their products can be dealt with via bundling ideas – e.g. packaging the music with a book or a T-shirt. As retail sales shift to digital, they bring with them new dynamics in the label/retail relationship. 28 BPI 2000-2010 - average net realised single cd price declined by 18.8% 36
This pre-draft version is strictly for review purposes only and is not for general dissemination or sharing. Says Derek Allen, ‘We don’t have to ship units in the digital space, but the battle is about getting space on the home page to drive sales and pre-orders. The lines between sales and marketing in digital are really blurred now.’ At least one major label is looking to put the digital sales team into its marketing team in the near future. This underlines the importance in the marketing mix of positioning and profile in digital retail. Traditionally, the sales team would own the retail relationship, but switching that to marketing reminds us that the old model of the label ‘selling’ product to retail is outmoded. The emphasis now has to be optimising the profile to the consumer. Non-retail income As well as digital increases, there is growth in non-retail income. This is a variety of income streams derived from recorded music, but which tends to gear more towards usage and B2B (business-to-business) rather than transactional retail sale. Part of this is performance income – the income earned every time a recording is played. With the expansion of media outlets, the opportunity to derive income in this way has grown accordingly. PPL is the organisation that collects and distributes this money from the use of recorded music on behalf of labels and performers in the UK. In the 10-year period to 2009, PPL income to record companies has grown by 40 per cent 29 and has become a key component for bolstering the margins of companies. For a small label, with relatively low sales, this income stream can sometimes be the difference between break-even and loss. In a genre driven by hits, such as pop, performance income is a significant part of the overall income mix. Likewise the usage of music in other areas, such as computer games has bolstered income lines for labels in the short term. Meanwhile, some releases have seen minimal retail sales, but attracted significant income from their usage in a computer game. In turn, this can also lead to a knock-on effect at retail. So labels are organising themselves in such a way as to maximise these high-margin income streams. This can be seen by the increasing size of ‘secondary’ or ‘strategic’ marketing departments, especially in major companies, even in the context of an overall reduction in headcount. Links with brands, TV and movies through synchronisation and licensing deals are important to the business – both for the income that it generates as well as for the added exposure that can result. Often this exposure can be as important as a TV appearance by the act or radio rotation in launching a project. In the growth years, these income streams were seen as icing on the cake. Now they are increasingly proactive and professional, bearing the burden of responsibility for the company’s bottom line more than ever. 29 PPL 37
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