Music Money Shifts From CDs To Concerts

Seven years ago musicians derived two-thirds of their income, via record labels, from pre-recorded music, with the other one-third coming from concert tours, merchandise and endorsements, according to the Music Managers Forum, a trade group in London. But today those proportions have been reversed—cutting the labels off from the industry's biggest and fastest-growing sources of revenue. Concert-ticket sales in North America alone increased from $1.7 billion in 2000 to over $3.1 billion last year, according to Pollstar, a trade magazine.

The shift away from recorded music is due in part to the recognition that touring and merchandise are more lucrative. But it may also be a consequence of internet piracy, as free downloads give music fans more money to spend on other things. Jwana Godinho, the director of Música no Coração, a concert promoter in Lisbon, thinks many music lovers have a “mental budget” that they are prepared to spend on music, and have switched their spending from CDs to tickets and merchandise.

How do musicians get compensated when their tracks can be downloaded for free? One answer is concerts. Just as musicians allow their music to be played for free on radio in order to drive more sales of their CDs, now free digital downloads work as advertising for their concerts.

Case in point: Prince.

Neither the Mail on Sunday or Prince's camp would divulge how much the newspaper paid Prince for the right to give his album away, but it's clear Prince was paid upfront, and that nearly 3 million Mail on Sunday readers -- plus everyone who bought tickets to one of his shows -- received the CD for free. The giveaway almost certainly contributed to Prince selling out 15 of his 21 shows at London's O2 Arena within the first hour of ticket sales. The venue (formerly the Millennium Dome) holds around 20,000 people. If the remaining six shows sell out, the series will gross over $26 million.

Prince's latest gambit also succeeded by acknowledging that copies, not songs, are just about worthless in the digital age. The longer an album is on sale, the more likely it is that people can find somewhere to make a copy from a friend's CD or a stranger's shared-files folder. When copies approach worthlessness, only the original has value, and that's what Prince sold to the Mail on Sunday: the right to be Patient Zero in the copying game.

As with blogging and so many other things digital, music distribution could become a competition to see who posts things first. In a sense, music distribution would no longer be about space -- it would be about time.

Prince is allowing his music to be given away for free so he can then make money from them on concerts.

Prince also takes it a step further by selling the rights to distribute the CD to a newspaper. The newspaper uses the free CDs as a way to increase readership.

The record labels are taking a different tact and attempting to get compensated when music is played on internet radio.

Almost all of America's 14,000 or so webcast stations, which have 34m regular listeners and income from advertising, do pay royalties. For one thing, America's traditional radio stations pay relatively little in royalties, thanks to a 1909 law that mandates fees for composers but not for performers. (Low royalties, radio stations have argued, are justified because playing songs provides performers with free publicity.)

In March the record labels persuaded America's Copyright Royalty Board (CRB) to triple royalties for webcasters, to roughly a fifth of a cent per-song per-listener, with retroactive effect from the beginning of 2006. This will almost certainly put most webcasters out of business. They will also have to pay SoundExchange $500 for each channel they stream when the ruling takes effect on July 15th. This fee is likely to eliminate one of the most cherished features of online radio: the customised channels that listeners can concoct using software that produces playlists based on the names of favourite bands or songs. One popular webcaster, Pandora, creates customised channels for some 7m users. It cannot possibly afford to pay $500 for each one.

The quest for higher royalties may actually be doing record labels more harm than good. People generally do not buy music unless they have already heard it. Internet radio makes it easy to zero in on a preferred genre, so listeners are more likely to discover music they would want to buy. Many online stations even provide links to online music stores—free of charge.

As with all digital media, since it has no cost to distribute, you have to decide what you want to charge for and what you want to use as advertising to sell something else. As illustrated above, it might make more sense to allow music to be played on radio and internet radio for free as advertising for concerts. Overall I find the music royalty system to be bizarre in how it determines who gets compensated and when.

via The Economist and Wired and The Economist