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Posted by Mark Mulligan on March 16, 2010
News reports today suggest that Warner Music may be planning for buying some or all of EMI in a post-bankruptcy fire sale. As a Brit I’d be particularly sad to see EMI meet such a disappointing end, but there is an unnerving sense of inevitability with current events. I’m not a financial analyst and I’m not going to attempt to comment on the likelihood of Terra Firma meeting its debt obligations. But what I do think is interesting and relevant from a strategic perspective are the questions EMI’s predicament raises about the role of record labels in the digital age.
In fact there are three key questions record labels need to ask themselves:
- Are they relevant and necessary anymore?
- Are they innovating enough?
- What role should they play?
Here's my take on what the answers should look like...
- Refine and redefine relevancy. For the record (no pun intended) I do not buy into the ‘internet disintermediates the record labels’ myth. Somebody needs to play the role of investor in talent (labels invest $5bn a year according to the IFPI). As much as brands are emerging as a new revenue source for artists (see my post here) brands and other 3rd parties have little interest in gambling on unproven talent that has just a 1 in 10 chance of making a return on the investment. Brands are most likely to go with a proven artist, which carries the unfortunate risk of them becoming retirement plans for artists seeking out one last pay day.
But the reason many of those artists that can chose alternatives to labels do so, is because they see benefits their label agreements don’t deliver. Whether that be creative freedom, promotional support, higher profit share, new routes to market, the simple fact is record labels need to offer what the competition offers, and more. They need to be the undisputed best option for artists.
- Innovate and incubate innovation. Some labels (especially Universal and many of the indies) have seized the innovation bull by the horns. All labels need to do so, but they also need to do more. Music product innovation is the labels’ ticket out of the Music Industry Meltdown (see these two posts for more: Music Product Manifesto and Music Industry Meltdown).
Crucially labels also need to fully empower the marketplace to innovate for them. They should take a leaf out of Apple’s book: with their app store Apple is letting the marketplace shoulder the R&D costs of innovation and in doing so is achieving far more innovation than Apple could ever have achieved by itself.
- Stick to core skills. The core value record labels deliver are: a) investing in talent b) nurturing talent c) promoting talent. Nobody performs those duties better than a record label.
But the changing dynamics of the recorded music market and the dynamic growth of the digital space dictate a major revision of practice. Labels need to have much greater diversity of artist relationships. In the post-album age (we’re nearly there) the concept of the ‘album deal’ loses relevancy. Instead labels need to have deep portfolios of different deals, ranging right from ‘iPhone app only’ through to uber 360 degree. This gives the labels greater chance of generating ROI and also therefore greater chance of delivering revenue back to the artists.
And the focus on delivering value to artists is key. Many artists are feeling disenfranchised. Labels need to bring greater balance to their relationships with artists (50/50 net receipts as standard among majors would be a great start).
So record labels are not about to disappear with the CD, but they certainly need to innovate hard in order to better deliver on their core skills if they are to retain relevancy in the digital age.