Saturday, July 12, 2008

Music Row faces new realities

By all standards, 18-year-old country star Taylor Swift has made it in the music industry.

When her debut single, "Tim McGraw," hit in 2006, it simultaneously landed on Billboard's top country, pop and digital charts, while also securing a spot on Apple iTunes' weekly top 10 downloads list.

Since then, Swift has won several major music awards, even receiving a Grammy nomination for best new artist. Her debut album has sold more than 3 million copies, and in a genre-bending feat earlier this month she took a spin as co-host of MTV's popular Total Request Live show.

But to the nearly 20,000 mostly unseen people working in Nashville's music industry, Swift represents far more than the latest young artist to hit it big on the country music scene.

She illustrates the industry's new benchmarks of success in an era dominated by the easy availability of digital music, an explosion of new media platforms and a decline in album sales, in a business that has seen a third of its $14.6 billion retail market evaporate since 2000.

Call it the music industry's new normal. Or call it the result of a business thrown into chaos by 10 years of corporate consolidation and rampant piracy brought on by the rise of Internet technology.

In either case, life has changed — and is changing — for just about everyone on Music Row, from the songwriters and musicians to the publishers and record labels that make up the heart and soul of this city's most famous product.

What does this new era mean to a person like Liz Rose, the co-writer on Swift's "Tim McGraw," when a high percentage of sales comes through digital singles at the expense of pricey full albums? What does it mean to someone like Scott Borchetta, who signed Swift to Big Machine Records, the label he started in partnership with Toby Keith in 2005 after serving as an executive at the now-shuttered DreamWorks Nashville?

The short answer is that it means fewer people in the industry are probably making as much money as they would have in the go-go 1990s, when a closed network of record labels, radio stations and retailers could have propelled Swift's album to sell as much as 10 million copies. By the same token, more music fans, spanning genres and geography, probably know who Taylor Swift is and what her music sounds like.

Consumers aren't the only ones to benefit from changes in the music industry. New media companies that couldn't have existed 10 years ago are finding lucrative markets developing a range of products. And musicians who were once beholden to layers of industry gatekeepers can now deliver their work directly to fans through services like MySpace and iTunes, which in the past several years have played roles in catapulting to prominence fresh new acts like Gnarls Barkley and Feist.

For their part, music executives in Nashville and across the country have begun to shore up the future of the music business instead of fighting to protect its past.

As Jay Frank, who oversees music strategy for Country Music Television, put it, "The groups that have the potential to lose have already lost. Now, everybody just wants to win and is ready to try new things."

Sales fall, but airplay rises

That the music business is finally headed for a new business model serves as cold comfort to Rick Carnes, president of the Songwriters Guild of America, who, in speeches and presentations, is quick to lay out the same doom-and-gloom scenario he painted for a congressional subcommittee three years ago.

It goes like this: By law, a songwriter is entitled to 9.1 cents for every song sold, giving him a starting point of $91,000 if an album sells a million copies. A publishing contract eats up half of that, reducing the figure to $45,500. That sum is typically split in half again because many artists won't cut a track on their album unless they receive a co-writing credit. That money is often used to pay back the initial investment made by a record company. That now leaves the songwriter with $22,750. But included in most standard record deals is a clause that pays co-writers only 75 percent of their congressionally mandated royalties, leaving a grand total of about $17,000 in a songwriter's pocket.

That model may have been sustainable when publishing companies would bankroll a songwriter's career in the early years and when CDs sold in bigger volumes, Carnes said. But now, "professional songwriters have no future."

For her part, Rose said that, with the success of "Tim McGraw" fueled in large part online, she has no right to complain about digital technology.

But she points out that where it was once a thrilling financial prospect to get a songwriting credit on a hit album — even if your particular song wasn't a hit — the Internet has blown that opportunity away as songs are increasingly sold individually as singles.

"Having said that, it's also cool that we have iTunes because you can get sales there that you might not get from an album or at radio," Rose said. "There are both sides of the coin."

Songwriters and music publishers typically earn royalty payments from two sources: sales of music and through licensing fees paid by broadcasters, such as radio, television and, increasingly, the Internet.

While the sales side of the royalty equation may be sagging, publishing houses and the three U.S. organizations that collect payments on broadcast performances — ASCAP, BMI and SESAC, all of which maintain significant operations in Nashville — have seen revenues steadily rise in recent years.

In its last fiscal year, ASCAP reported annual royalty collections of $863 million, a 10 percent increase over the previous year, while BMI reported
$839 million, a 7 percent increase.

SESAC, which has its headquarters in Nashville, does not disclose its financial results, though President and Chief Operating Officer Pat Collins said his organization has seen similar growth.

Driving the increases has been a surge of new companies that are licensing music, from cable television using songs in hit shows such as The Sopranos to satellite radio and Internet music services like Those new opportunities, Collins said, have more than offset any flatness in a radio industry that has seen its playlists shrink.

Those gains have flowed to publishers as well. "We have multiple ways to sell music," said Gary Overton, executive vice president and general manager of EMI Music Publishing in Nashville. "TV, movies, radio and restaurants — anytime you hear music, we get paid. That's why we've been so healthy."

As BMI explained to its members last fall, changes in the music industry have "recast the traditional revenue structure" from one dominated by conventional broadcasters to a new age in which digital media services increasingly hold sway.

Collins said he doesn't know where future royalty streams may come from, but he can make at least one prediction: "Technology does not go backwards."

Labels seek new revenue

Record companies know that their 50-year-old business model, centered on selling physical products such as CDs, tapes and records, won't survive for the long haul.

But that doesn't mean record companies — or physical CDs, for that matter — are destined to fade away like typewriters or the horse and buggy, observers from outside and within the industry say. Physical copies of albums still account for as much as 85 percent of the $10 billion retail market for music in the U.S.

"No matter where this thing goes, there's always going to have to be people on the front end exposing new music and artists to people," said Luke Lewis, chairman and CEO of Universal Music Group Nashville. "Whether that looks like a traditional record company or not, I don't know."

The key question boils down to how and where record companies will make the bulk of their money in the future.

Today's top-selling acts are simply selling fewer CDs than artists did in previous years, undermining the industry math that has long held that 10 percent of a label's artists pay for the other 90 percent of the acts on the roster.

Where a decade ago the Backstreet Boys and 'N Sync were moving between 9 million and 10 million units a year, only one album in 2007, Josh Groban's Noel, scanned as many as
3 million copies.

To make up for that loss, the industry has begun experimenting with several new deal structures with artists.

Swift opted for a smaller independent label with the promise of more personal attention and early revenue than she might have received elsewhere.

What really made the deal work, however, were new opportunities to deliver music and video to specifically targeted audiences online, rather than having to rely on the traditional system of radio and retail, a route that has been dominated by major labels for a half-century or more.

Swift's gamble seems to have paid off. Her promotion team's push online not only helped her break through to a critical mass of fans, but also placed her among a younger, more vibrant audience than she would have found solely through country radio.

One new deal that's attracting plenty of attention these days is known as a "360," in which labels take not just a portion of record sales, but also a cut of an artist's publishing royalties, endorsement deals, and ticket and T-shirt sales.

The most prominent 360 deal maker has been concert promoter Live Nation. It struck a $120 million comprehensive revenue-sharing agreement with Madonna last year, and a similar arrangement with rapper Jay-Z for $150 million. That strategy led to a rift at Live Nation last week, with Chairman Michael Cohl, who wanted to sign as many as 15 such mega-deals, resigning over the decision by CEO Michael Rapino to take a wait-and-see approach.

Greg McCarn, vice president of marketing at Disney's Nashville-based record label, Lyric Street, said record companies should have been asking for a bigger share of revenue all along.

"We can pump hundreds of thousands — even millions — of dollars into acts that never sell enough records to enable us to recoup our investments," McCarn said.

Critics say deals like the 360 amount to land grabs by labels struggling to create new sources of revenue.

"It's certainly up to labels to add value where they're taking more," said Virginia Davis, who until recently was general manager of Warner Nashville's Raybaw imprint. She now manages pop-star-turned-country-hopeful Jewel for L.A.-based Azoff Music Management.

Davis said that with an artist like Jewel, whose 1995 pop debut, Pieces of You, sold more than 12 million copies, a label deal makes sense as she tries to re-brand herself as a country artist.

"She wanted to break into country radio," Davis said. "A label was the right choice for her."

Greg Hill, an artist manager with the Nashville office of Red Light Management, a Charlottesville, Va.-based music company started by Dave Matthews Band manager Coran Capshaw, said he thinks talking about whether 360 deals are the new model misses a larger point.

"It's not just about modifying an existing agreement and giving someone extra pieces," said Hill, whose clients include country singers Phil Vassar and Rodney Atkins. "It's about ripping up any owner's manual we've ever had on how to do business and changing it."

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