A Big Change At WMG....Maybe

Today it was announced that Warner Music Group chairman Edgar Bronfman Jr. will step down as of the end of January. Bronfman has been pretty good at destroying companies, from Seagrams (the liquor dynasty that his family built) to Universal Music to taking Warners to the brink as their stock price took a big hit, so it's hard to tell for sure whether the decision to leave was his decision or new WMG owner Len Blavatnik's.

Bronfman's leadership had little to do with music; it was always about the money. More market share, higher stock price, and more acquisitions all had more precedent than developing talent for the long term. In this case, you reap what you sow, as WMG is just another major on a slow decline.

While it might seem like a good move that one of the old guard executives is leaving, don't be so sure that it will make a difference. Remember that the company is still owned by a Russian oligarch. not by a music person. Big money and music have never mixed, since the product is turned into a commodity rather than the art that it is. Since buying Warners earlier this year, Blavatnik hasn't shown that his purchase was anything more than some wealthy bargain hunting.

When the music business was at its peak in the 70s, the Berry Gordy's, Ahmet Artegan's, Jac Holzman's and Mo Ostin's of the world were running it. These were real music people that lived at breathed what their artists did and were willing to stand behind them until they broke through in a big way. Unfortunately we live in a much different world today; one that relies on immediate success and spurns artist development and technical innovation. It's no wonder that a tech company (Apple) basically took over the business by supplying the distribution chain that the labels could not.

So how will anything change? We need a new crop of music entrepreneurs, ones who are their audience and love music for the music, not the money. Until that happens, music will remain in the doldrums and the 3 remaining major labels will continue down their long, slow death spiral.

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Sell A Million, Make Zilch - Part 3

I've been giving examples of how recording contracts are stacked against you in recent weeks (other articles here and here), and here's yet another good example that comes from none other than Courtney Love. Like her or her music or not, in this Salon rant she is extremely cogent and describes what happened after her very brief flash of music stardom. Oh, and by the way, it's from 2000, but the basic premise still holds today.
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"Today I want to talk about piracy and music. What is piracy? Piracy is the act of stealing an artist's work without any intention of paying for it. I'm not talking about Napster-type software.
I'm talking about major label recording contracts.

I want to start with a story about rock bands and record companies, and do some recording-contract math:
This story is about a bidding-war band that gets a huge deal with a 20 percent royalty rate and a million-dollar advance. (No bidding-war band ever got a 20 percent royalty, but whatever.) This is my "funny" math based on some reality and I just want to qualify it by saying I'm positive it's better math than what Edgar Bronfman Jr. [the president and CEO of Seagram, which owns Polygram] would provide.

What happens to that million dollars?

They spend half a million to record their album. That leaves the band with $500,000. They pay $100,000 to their manager for 20 percent commission. They pay $25,000 each to their lawyer and business manager.

That leaves $350,000 for the four band members to split. After $170,000 in taxes, there's $180,000 left. That comes out to $45,000 per person.

That's $45,000 to live on for a year until the record gets released.

The record is a big hit and sells a million copies. (How a bidding-war band sells a million copies of its debut record is another rant entirely, but it's based on any basic civics-class knowledge that any of us have about cartels. Put simply, the antitrust laws in this country are basically a joke, protecting us just enough to not have to re-name our park service the Phillip Morris National Park Service.)

So, this band releases two singles and makes two videos. The two videos cost a million dollars to make and 50 percent of the video production costs are recouped out of the band's royalties.

The band gets $200,000 in tour support, which is 100 percent recoupable.

The record company spends $300,000 on independent radio promotion. You have to pay independent promotion to get your song on the radio; independent promotion is a system where the record companies use middlemen so they can pretend not to know that radio stations -- the unified broadcast system -- are getting paid to play their records.

All of those independent promotion costs are charged to the band.

Since the original million-dollar advance is also recoupable, the band owes $2 million to the record company.

If all of the million records are sold at full price with no discounts or record clubs, the band earns $2 million in royalties, since their 20 percent royalty works out to $2 a record.

Two million dollars in royalties minus $2 million in recoupable expenses equals ... zero!

How much does the record company make?
They grossed $11 million.

It costs $500,000 to manufacture the CDs and they advanced the band $1 million. Plus there were $1 million in video costs, $300,000 in radio promotion and $200,000 in tour support.
The company also paid $750,000 in music publishing royalties.

They spent $2.2 million on marketing. That's mostly retail advertising, but marketing also pays for those huge posters of Marilyn Manson in Times Square and the street scouts who drive around in vans handing out black Korn T-shirts and backwards baseball caps. Not to mention trips to Scores and cash for tips for all and sundry.

Add it up and the record company has spent about $4.4 million.
So their profit is $6.6 million; the band may as well be working at a 7-Eleven.

Of course, they had fun. Hearing yourself on the radio, selling records, getting new fans and being on TV is great, but now the band doesn't have enough money to pay the rent and nobody has any credit.

Worst of all, after all this, the band owns none of its work ... they can pay the mortgage forever but they'll never own the house. Like I said: Sharecropping. Our media says, "Boo hoo, poor pop stars, they had a nice ride. Fuck them for speaking up"; but I say this dialogue is imperative. And cynical media people, who are more fascinated with celebrity than most celebrities, need to reacquaint themselves with their value systems.

When you look at the legal line on a CD, it says copyright 1976 Atlantic Records or copyright 1996 RCA Records. When you look at a book, though, it'll say something like copyright 1999 Susan Faludi, or David Foster Wallace. Authors own their books and license them to publishers. When the contract runs out, writers gets their books back. But record companies own our copyrights forever.

The system's set up so almost nobody gets paid."

There's more to the article. Read it in its entirety here.

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60% Of Warners Artists Have 360 Deals

On a recent earnings call Warner Music Group CEO Edgar Bronfman revealed an interesting statistic; 60% of all their artists now have 360 deals with the labels. For those of you who've not been paying attention, a 360 deal is when the record label shares in all of your revenue streams from touring, merchandise, publishing, films, etc., and not just from music sales.

This is sort of like having your uncle who owns a clothing store be your manager. He may be able to get you into some nice stage clothes and even supply you with some dough for recording or tour support, but what does he know enough about the rest of the music business to help you at all? Same goes for signing a 360 deal with a major. They're not even that good with selling music these days, why trust them with everything else?

Bronfman also went on to say that a full 50% of their revenue came from areas of the business that did not exist in 2004, with the previously mentioned 360 deals a part of that.

Despite all the bluster, WMG still lost $46 million dollars last quarter, which they're touting as some sort of victory since they lost $55 million last year at this time. About the only good thing that I could see was that their total digital revenue grew 13% to $203 million, but that doesn't matter much when your bottom line is in the red.

The interesting thing about all of this is that WMG is in the running to buy at least some of the assets of EMI, who's price seems to be actually increasing by the day (supposedly there are at least 10 bidders, which is a total surprise). Warner's still has over $2 billion in debt, and even though new owner Russian billionaire Len Blavatnik has some mighty deep pockets, this isn't the part of the industry that I'd be speculating on, especially with such a high debt ceiling.

Another thing that's interesting is that Bronfman mentioned how "early traction is encouraging" when speaking about streaming service Spotify. That's all well and good, but believe me, no one's going to get rich on streaming music, especially after the first big license fee that a label takes in. It sounds like a good story to the stock analysts though, as major labels keep on dangling that carrot, and people still appear to be trying to catch it.

Bottom line - WMG lost a ton of money last quarter despite a big rise in digital music revenue. That one fact says it all.

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Help support this blog. Any purchases made through our Amazon links help support this website with no cost to you.

You should follow me on Twitter for daily news and updates on production and the music business.

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For Warner Music - Let The Bidding Begin

While everyone is aware that EMI Records is virtually down the tubes thanks to their recent default on their Citibank loan, now it looks like Warner Music Group might go before them. According to a report in Reuters, several parties have already started to put in bids for the once venerable company, including private equity firm KKR (who now owns BMG Rights Management), Russian billionaire Len Blavatnik (who already owns 2% of Warners), as well as Universal Music and Sony Music.

There's a lot of intrigue around the issue in that Warner Music CEO Edgar Bronfman is telling everyone that they may spin off their Warner/Chappel publishing arm so that they (WMG) can buy EMI, but because of the huge debt load of WMG, that looks unlikely to happen.

There are a lot of other strategic plays possible, but whatever happens, it looks like the Big 4 major record labels will soon be down to the Big 3, and maybe even the Big 2, very soon.

As I said before, I see this as a good thing, since we're nearing the end of the old music business and starting the new one based on Music 3.0. By the end of the year, our industry may look very different than what we see today.

Read the entire Reuters article here.

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Help support this blog. Any purchases made through our Amazon links help support this website with no cost to you.

You should follow me on Twitter for daily news and updates on production and the music business.

Check out my Big Picture blog for discussion on common music, engineering and production tips and tricks.

Expensive Music Sells Slowly As Predicted

Last year when the the major labels finally got their way with variable pricing on iTunes, industry pundits were pretty unanimous about the idea being a poor one. Why increase the price of hit songs in the middle of the worst economic times since the Great Depression? Why increase the price for the hits to $1.29 when the $.99 was proven to be a workable model?

But that's not how major record labels work, who seem to have knack for doing the exact opposite of what's best for them, their artists, and their customers.

While the first month after the price increase already showed a decrease in downloads, the labels were quick with their spin, saying that revenue actually increased despite the lower sales figure. This is ultimately only a short-term business model in that revenue is not the end-all in Music 3.0. The idea is to expose the music to as many people as possible. A larger audience means more catalog sales, more concert attendance and more merch sales, so anything that lowers the sales numbers is counter-productive.

Now comes a backhanded admission by Warner Music's CEO Edgar Bronfman that the strategy was misguided, suggesting in his comments on the company's recent earnings call that if nothing else, the timing of the increase was poor. This coming on the news that iTunes digital track sales in December grew only 5%, down from the usual double digit growth even in the midst of the Christmas buying season. Bronfman also confirmed that Warner's digital sales growth had slowed to only 8% over the previous year, which was up 20% over the year before that.

Are digital music sales flattening as the market becomes mature? Yes they are and it was bound to happen. But raising the prices have appeared to accelerate the trend. It's all downhill from here until digital music subscription reaches the tipping point.