Music album economics and industry evolution

This article considers the changing economics of the music industry and reviews some investment implications of these changes

From a personal and investment perspective, the music industry is near and dear to my heart. So when I read an article in New York Magazine this week that explored the changing economics of the industry, I thought it would be interesting to explore it in a little more detail and review some investment ramifications of these changes.

The main story centred around Grizzly Bear, a popular indie band, that has had a great deal of artistic success, which hasn’t translated into the same amount of commercial success (although they did sell out Radio City and their latest album debuted at No. 7 on the Billboard Chart).

“When the band tours, it can afford a bus, an extra keyboard player, and sound and lighting engineers. (That U2 tour had a wardrobe manager.) After covering expenses like recording, publicity, and all the other machinery of a successful act (‘Agents, lawyers, tour managers, the merch girl, the venues take a merch cut; Ticketmaster takes their cut; the manager gets a percentage; publishers get a percentage’), Grizzly Bear’s members bring home… well, they’d rather not get into it. ‘I just think it’s inappropriate,’ says Edward Droste of Grizzly Bear. ‘Obviously we’re surviving. Some of us have health insurance, some of us don’t, we basically all live in the same places, no one’s renting private jets. Come to your own conclusions.’”

Before we hop into the analysis, I also want to acknowledge that musicians getting hosed by records labels et al. isn’t exactly a new phenomenon (read:Motown). It’s just different people taking a cut of the pie this time around.

New album sales

One of the more interesting statistics is regarding new album sales. While I could probably have guessed that record sales were down, the recentness and sharpness of the decline was interesting. As you can see below, since 2008 new record sales have dropped by almost 50%. I am sure that number is even greater if you go back to, say, 1999, when it was cool to have CD books and stacks of albums.

If I had to guess what’s driving this, I would point to two big factors:

1. The increasingly popular notion of “à la carte” music purchasing from services like iTunes
2. The growing ubiquity of smart phones and streaming radio services

So where is all the money going?

Below are two charts that walk through the major sources of income for two different types of bands, a major label act and an indie band like Grizzly Bear.

One of the more interesting data points that stands out is the minuscule amount of money that these bands earn from the streaming services that have become so prevalent in the world today. If Pandora (see IB Research reports) or Spotify are somewhat responsible for taking album dollars out of the pockets of artists, they should at least be making up a decent amount of that lost income. It makes the Internet Radio Fairness Act seem all the more absurd.

The Market Realist Take

With online streaming and Internet radio services becoming more popular than listening to CDs, the music industry and Internet radio companies like Pandora have been embroiled in a continuing battle over royalty payments. Pandora has stated that its profitability has been affected because Internet radio stations have to pay six times the royalty rate of other mediums. Pandora pushed for the passage of the Internet Radio Fairness Act, which would lower royalty rates, but the bill faced stiff opposition from labels, publishers, and music artists. Pandora Media recently won a case against the American Society of Composers, Authors and Publishers (ASCAP) with a federal judge ruling that ASCAP has to provide Pandora access to its entire catalog of music through 2015, when the current licensing terms are up for renewal.

Clear Channel and Warner Music Group struck a mutually beneficial partnership deal in September that will allow WMG to promote its artists through Clear Channel in return for low royalty rates on Clear Channel‘s iHeartRadio. Although this deal was considered groundbreaking, there’s no actual legislation yet that will ensure fair compensation for the artists. The entry of tech giants Apple Inc. (AAPL), with its newly launched iTunes Radio, and Google (GOOG) will create more competition for companies like Pandora (P), Spotify, and Sirius (SIRI). These new radio services are taking market share from legacy AM and FM radio station companies like Cumulus Media (CMLS).

Source: Yahoo.com