Independent Labels Eye New Business Models in the Digital Era

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Cutting deals in the music industry used to be a straightforward affair. Like a cookie cutter, one deal usually looked just like the next and all of the key players — artists, managers, record labels, agents and distributors – knew their places.  And for an independent label, that meant negotiating an agreement, often with one of the 5 or 6 companies with national reach, for the manufacturing and distribution of the label’s music to ALL outlets considered to be “normal retail channels.”

Welcome to Digital Age, which feels like the Wild West, where file sharing has been surmounted by downloading, which has been surpassed by streaming, where subscription competes with freemium, and where the rules are being rewritten on the spot and news breaks almost daily about newfangled ways of doing business.

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For some, this is an exciting and potentially very lucrative time. Independent record labels are taking more control of their own fates. And the recent tumultuous nature of the music industry is creating market forces that will only enhance this trend.

IT STARTED AT THE TOP AND IT’S TRICKLING DOWN.

Some marquis artists like Drake, Beyonce, Kanye and Taylor Swift have made headlines in recent months with announcements of marketing and distribution deals that are breaking the molds. By negotiating exclusivity rights — often for just the first few days or weeks while the music is still brand new — in deals cut directly with Apple, Tidal, Spotify or another major DSP (digital service provider), these artists are charting new courses for taking control of the revenue from digital streaming.

For artists, it’s a matter of supply and demand:  When you limit access to something, you’ve made it rarer and the market responds by treating the exclusive product as “hotter” than ordinary products.  And the DSP’s are eager to have the “leg up” of the initial release of the latest hot album.

There’s also a built-in synergy whenever a major DSP, such as Spotify or Pandora, cuts an exclusive deal with an artist. The DSP can boast that it has exclusive content that may prompt some consumers to adopt that DSP for the first time and most likely remain a user into the future. The artist, too, can see exponential fan base growth by enjoying the status of bringing exclusive content to all of the DSPs users.

WHAT DOES THIS MEAN FOR INDIES?

Individual artists with less clout probably cannot follow in these big footsteps — at least not yet.

But some independent record labels are now beginning to take advantage of the myriad opportunities that digital distribution has created.

Prior to digital, cutting out the middleman was simply not an option for independents labels. When music was on vinyl, cassettes and later CDs, the only viable route for getting to market was to tap into the manufacturing and retail sales capabilities of one of the major distributors.

Still today, the distribution of music remains dominated by three major players due to the eroding but continuing power of terrestrial radio, now consolidated into a handful of huge players controlling the playlists of scores of stations throughout the country, and the clout that the major labels continue to hold in terms of their ability to spend huge amounts to promote their artists at the mainstream radio formats.

But digital streaming is shaking the Etch-A-Sketch by reducing the significance of radio and the focus on singles in the minds of listeners, and as such, drastically lowering the costs associated with getting the product in the consumer’s hands — or ears — since there is no physical product involved in streaming, an ever-growing wedge of the music industry’s pie chart.

However, not every independent label is ready to wander into the Wild West and demand a better deal.

To do so, a label must be prepared to tackle some of the digitizing tasks in-house, such as adding metadata — the “hidden” data in computer files that “tags” a file with certain identifying information. For digital music, the metadata identifies the song title, performers, composers, title of the album, year released, track number, genre, the album art, lyrics and producer.

THE FINANCIAL ASPECT OF DEALING WITH A DSP

For labels that have reached a certain critical mass, the option of selling music directly through DSPs, often through independent label digital trade associations like Merlin, rather than through a distributor, can be very profitable.

For independent labels and their artists and for the DSPs, such deals can have an alchemical effect. The theory is fundamental economics: For the independent labels, not only must they share the sales revenue from streaming with their distributor, but they also get to micro-manage their relationship, i.e., the promotion of their important releases, with the DSP, ostensibly ensuring greater numbers of streams and hence, income.

In my practice, the phenomenon of independent labels taking the reins and striking short-term exclusive deals directly with DSPs, or other creative approaches to configuring more favorable distribution contracts, appears to be a nascent trend.

The reality, of course, is that for the next few years, most of these deals will stray only so far from the standard, boilerplate contracts we are all accustomed to. But the market forces are driving an inevitable and unavoidable sea change in how business is done and the benefits — and profits — to be gleaned from these new ways of doing deals could be truly significant.

Independent record labels should be studying this issue and working with counsel to develop a strategy for capitalizing on this trend when the time is right.

Remember this: In the Wild West, the rules are being rewritten every day, but only the good rules will be followed. That’s why they call it wild.

ABOUT THE AUTHOR

Tim Mandelbaum is an entertainment lawyer and a partner in the New York office of Fox Rothschild, with a practice centered on providing business guidance to talent and corporate clients in music, film, television, new media, literature and sports.

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