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Tomorrow, Digital Races. Where Are We Going?

This is Celia Hirschman with On the Beat for KCRW.

The digital medium performs its own kind of marketing magic in today's portable, streamlined environment. So it's not at all surprising that record labels are concerned about what their future might hold online.

When you consider the high cost of manufacturing, marketing and distributing new artist CD's, you really see the benefits online. It's far easier to release a few songs on the web, through outlets like iTunes, Rhapsody and eMusic, and wait to see what might happen. No salesmen visit your home. No expensive promotion campaigns are engaged. No excessive videos are created. No, the online digital world of the music business seems to be the most economical and cost efficient way to introduce new artists.

So labels are flocking to the online medium with gusto. Two of the four multinationals have already announced the launch of new internet only labels, just in the last few months.

Many digital believers are convinced the online world will save the record business from the declining shape it finds itself now in.

But I'm not one of them. I love the download medium, and I love my iPod. But I can't see how a business built on a $16.98 business model can switch gears successfully to operate on a 99-cents model. Slice and dice it anyway you want, but the economics of the music business have just been gutted, simply gutted.

So it's not really all that surprising that two of the biggest record labels, Sony BMG and Warner Music Group have refused to license their biggest artists' music to the new iTunes store in Japan. The multinationals are trying to force I tunes to raise the price of the single download from 99 cents to $1.49.

Why would these two huge labels risk losing the support of their most valued online distributor? The only reason can be money.

One look at the balance sheets of the major labels tells you that continuing on the course they are currently on, their future does not look bright.

It's true that the traditional record label business model is out of date and it's time for labels to downshift to meet that economic reality. But where to downshift is the real question. Right now, online sales still only generate a limited amount of revenue. Sell 10,000 single downloads, and the gross revenue is almost $10,000; but sell 10,000 full CD's, and the revenue is more like $170,000. Since no one knows which artists will sell, labels have to bank on the ones they believe have the best chance to succeed. They need to maintain a financial float to record, market and promote new artists, regardless of whether the last six artists actually made it.

Until the online world generates an economic model that is sustainable for a band to grow and tour, for a publisher to pay songwriting royalties, and for a label to survive, downloading will remain an important but limited growth area for the labels.

The record business can cheer on the sidelines, but they better not quit their day job.

This is Celia Hirschman with On the Beat on KCRW.

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