This is Celia Hirschman with On the Beat for KCRW.
In the last week, two major stories have broken in the music business. EMI Records, the multi-national conglomerate became the first major label to finalize a non traditional mega million dollar deal with the rock band Korn. What makes this deal so unique is the scope of engagement. Unlike traditional record deals where the band assigned to the label for recording, and perhaps even publishing, the Korn deal creates a new standard of involvement, including outside sponsorship deals, concert ticket sales, merchandising, film and television licensing, advertising, video games and other opportunities. The deal is rumored to involve an advance of $15 million to the band, against a 25% cut of the band's revenue.
EMI claims that upon hearing the latest forthcoming album, they felt completely confident in presenting such a plan, though critics suggest they may have made a serious error in judgment. Korn has sold almost 15 million CDs in America since 1994, but their most recent two records have yielded only 1.5 million in sales each, according to Nielsen Soundscan.
This particular deal need not make money -- being the first of its kind, it will announce to other artists the possibilities of a new way of doing business. In our declining sales market, labels choose to invest in established brands with greater financial participation to stay on track.
Someone who is also investing in his brand is Steve Jobs. The Leader of the Apple empire went on the offensive this week. Citing pressure from record labels to raise the price of the download, Jobs countered that profits were already fine for labels. Jobs believes higher prices will drive piracy, and will destabilize legitimate downloading. He suggests that if labels want to raise prices, it means they're getting a little greedy.
I disagree simply on the basis of economics. Let's hope Mr. Jobs was choosing to make a political statement rather than a statement of fact.
Digital downloading is quickly replacing the time honored tradition of buying CDs. It's is an excellent way to distribute music from established artists who have already spent the time and money developing their audience. But new artists require a huge infusion of marketing, and that means demand greater financial investment. Currently, labels earn 70 cents or so per download on iTunes, and subtracting artist and publishing royalties, labels are left with about 48 cents. The 48 cents has to pay for the recording, mastering, artwork, radio promotion, online marketing, consumer advertising, and tour support, not to mention the artist's advance. It also has to contribute to the labels' business structure, which includes salaries, rent, telephones, etc, etc.
Though the record business is terrible at communicating with its audience, it knows what a failing business plan looks like. You gotta sell a hell of a lot of downloads at that profit margin to keep the music machine sustainable.
But Mr. Jobs doesn't have to sell very much at all.
His iPods, in six different configurations, offer a far great profit margin for Apple, retailing at up to $400 a unit. With over 22 million iPods sold, I can't help but wonder what his profit margin looks like.
No question that to the victor goes the spoils, but people in glass houses should never throw stones.
This is Celia Hirschman with On the Beat on KCRW.