We've seen it for years. Disruptive technology disrupts business models. Disruptive applications of technology force innovative change. Some companies react and transition well when faced with innovation that threatens their businesses. Others (most) don't.
The music industry record labels were slow in reacting to the fundamental shift from CD to online distribution. Think about it. Artists used to dream of signing with a label. The label could be very selective in picking artists and controlling support for, and distribution of, the artist's work. And rightfully so, since their revenue was generally based on a percentage of CD sales. So, what happens when CD sales are replaced by online distribution? Merely changing the method of distribution shouldn't make much difference, you would think. Well, how would you feel if you owned a professional baseball team, and you only controlled the ticket prices? The parking, the concessions, the TV and radio rights, and all of the other related revenue streams were controlled, and revenue realized, by third parties? For a change, you, as the owner, would be calling for renegotiation of the player contracts. And, so, we find the same thing happening today.
Labels want to renegotiate their deals. They want a percentage of ALL revenue from CD sales, online sales, appearances, tours, product sales...they want to own a cut of the entire revenue stream. Quite smart. Too bad they didn't figure this out years ago and start transitioning to this new model in a more manageable way by educating the industry as to the coming challenges. Are labels going the way of stock brokers? Has the music industry finally succumbed to "disintermediation", another fancy term for taking out the middle guy? We'll have to wait and see. One thing is for sure, though. If the labels can't figure out how to add value commensurate with their compensation, they are in for a rough road ahead.
And here's the hard part. The online revenue streams today are complex, and negotiation on a case by case basis with artists will likewise by complex. Both sides need to understand all of the sources of revenue that exist today and are likely to exist in years to come. Relationships are less employer/employee-like, and more partner-like. For instance, if you are a label, and you agree to a revenue split for online record sales, I can easily imagine a business model that generates signficant non-sales revenue you don't get a cut of. And how about sharing online advertising revenue from streaming free video? There the parties need to decide who will take the lead on cutting deals. Are artists going to understand the online music world, and related revenue streams today and in the future, to make good decisions? How, as an artist, do you make sure revenue is accounted for fairly when your song is packaged with other artist's songs on a membership site? Your revenue share might be a percentage of membership dues, but is the percentage of dues fair, and what formulas can be put into play that will adjust compensation fairly? How do you make sure you are being paid fairly?
It is going to be an interesting process to be involved in over the coming months and years. Today, the artists are in a commanding position. They can opt to go it alone and distribute product directly online. Labels have to come to the table with a great value proposition. They don't seem to have any real options. My guess is that labels will try to treat the online music sites the same way they treated the brick and mortar music stores. We'll see if they can pull it off and control the distribution point. If they can, they'll be in control once again. It will take some remarkable strategic and tactical thought leaders working outside of the box to pull this off. Is it possible? I think so. Is it likely? Doubtful.