Back in time (IV)

For most of the twentieth century, the basic structure of the music industry remained the same. A group of businesses that had arisen specifically to produce and sell a single invention – the phonograph – somehow managed, over the course of several tumultuous decades, to dominate an industry that expanded to include all sorts of competing inventions and technological innovations: records of different sizes and qualities; high-quality radio, which made music widely available to consumers for the first time, and changed the nature of promotions; eight-track tapes, which made recorded music and playback machines much more portable; cassette tapes, which not only improved portability but also made unlicensed copying easy; MTV which introduced a new channel of promotion and encouraged a different kind of consumption of music; and CDs, which replaced records and tapes with stunning rapidity.

Through it all, with the exception of that one hiccup during the era of rock ‘n’ roll, the majors ruled. That’s a remarkable feat. How did they pull it off? They used their scale to do two things very effectively: manage the cost and risk of bringing new content to market, and retain tight control over both the upstream and downstream ends of the supply chain.

Let’s unpack this a little, starting with the management of risk. It is notoriously difficult to predict which people and which products will succeed in the creative industries. In a memoir, William Goldman summed up the problem when reflecting on the movie business: “Not one person in the entire motion picture field knows for a certainty what’s going to work. Every time out it’s a guess and, if you’re lucky, an educated one.” His conclusion? “Nobody knows anything.”

In practical terms, this meant, for much of twentieth century, that in the hunt for talent, the creative industries relied on “gut feel.” With little access to hard data about how well a new artist or a new album would do in the market, record companies, for example, could only make the most unscientific of predictions. They could put together focus groups, or study attendance figures at early concerts, but these were exceedingly rough measures based on tiny samples that were of questionable value when applied to the broader population. For the most part, the companies therefore had to rely on their A&R (artist repertoire) departments, which were made up of people hired, optimistically, for their superior “instincts.”

The big companies did agree on one element of success: the ability to pay big money to sign and promote new artists. In the 1990s, the majors spent roughly $300,000 to promote and market a typical new album – money that couldn’t be recouped if the album flopped. And those costs increased in the next two decades. According to a 2014 report from the International Federation of the Phonographic Industry, major labels were then spending between $500,000 to $2,000,000 to “break” newly signed artists. Only 10-20 percent of such artists cover the costs – and, of course, only a few attain stardom. But those few stars make everything else possible.

As the IFPI report put it, “it is the revenue generated by the comparatively few successful projects that enable record labels to continue to carry the risk on the investment across their rosters.” In this respect, the majors in all the creative industries operated like venture capitalists. They made a series of risky investments, fully aware that most would fail but confident that some would result in big payoffs that would more than cover the companies’ losses on less successful artists. And because of their size, they could ride out periods of bad luck that might put a smaller label out of business.

Scale also helped labels attract talent upstream. Major labels could reach into their deep pockets to poach talent from smaller ones. If artists working with independent labels began to attract attention, the majors would lure them away with fat contracts. All of this, in turn, set the majors up for more dominance. Having stars and rising talent on their rosters gave the major labels the cachet to attract new artists, and the revenue from established stars helped fund the big bets necessary to promote new talent. For record companies, identifying and signing potentially successful artists was only beginning of the job.

Just as important were the downstream tasks of promotion and distribution. Once a company had invested in signing an artist and developing that artist as a star, it almost had to invest seriously in getting the artist’s songs heard on the radio, making the artist’s albums available in stores, and getting the artists booked as a warm-up act at big-name concerts. Record companies had to do e everything they could to make people notice their artists, and their willingness to do that became an important way of attracting artists to their label.

The majors didn’t merely find artists; they used all the methods at their disposal to try to make those artists stars. Their decisions about promotion and distribution were gambles, of course, and the risks were big – which meant that, as on the upstream side of things, the “little guys” couldn’t compete.