When the Bough Breaks, the Cradle Will Fall

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This is Celia Hirschman with On the Beat for KCRW.

The evidence is mounting that major record labels will be forced to change far more quickly than most had expected. Large labels are not only beginning to feel the effects of declining sales from the CD format, but they are also confronting difficult questions from some of their biggest recording artists. The main concern is "what tangible value is my label offering"? Bands who consistently generate significant touring and sales income would be very foolish not to consider these questions before signing another long deal. Major record deals used to last seven album cycles, which could easily run 20 years in length. With technology shifting every day, and companies changing monthly, many artists want the freedom to determine how and with whom they affiliate when. That's not possible in the current major-label system.

Some musicians have made dramatic shifts in response. Artists like Garth Brooks and The Eagles have organized marketing and distribution deals on their own selling music exclusively through a big-box retailer. Given that their audience appeal is mainstream, big-box retailers like Walmart and Target are willing to pay huge advances to insure the exclusive rights to the music.

Meanwhile, others want a variety of national-distribution outlets, but don't want the marketing machine that traditionally goes with a label deal. They opt for a distribution deal, and finance the marketing and promotion themselves. Examples of this are rap icon Ice Cube, Jimmy Buffet and Aimee Mann. By doing this, the artist controls the marketing costs and reaps a far bigger piece of the income stream. Artists like the Rolling Stones and Elvis Costello have created their own version of controlling their deals. Both are doing short-term deals, one or two albums deep, to keep their options open and their exit pass handy.

All of this has a huge net effect on the economic health and well-being of the major-label system. The real money has never been in the superstar's next album, but rather in his or her deep-catalog sales. And those catalog sales have always financed the new stars of tomorrow. That is how the major label system was built, but in a digital age, where financial specifics are readily accessible, most major artists aren't too keen on supporting record labels' newest wunderkind, especially at the expense of their own pockets.

This is not a small problem. Whenever a major catalog leaves a label, the effect is negative, and cumulatively, this can be very significant.

Labels are starting make their own demands. This week, Universal Music took on Microsoft's new portable music device, Zune. Arguing that the devices contain tons of stolen music, developed and sponsored by record labels without compensation, Microsoft agreed to give them a percentage of each Zune device sale. Following their new deal with Universal, Microsoft subsequently announced deals with all the major labels.

So record labels will receive a licensing fee from the sale of each Zune device, as well as standard royalty rates for the sale of music on the Zune Marketplace site.

This cannot come as music to the ears of Apple executives, who have never been interested in sharing the wealth. When their licensing deals come up with record labels in the coming years, it will be interesting to see if that story changes.

This is Celia Hirschman with On the Beat on KCRW.