The Record Label Solution

It’s been a slow news week. Skins are plodding along slowly. I’m hoping that I can steal the skin changing code from someone (ahem kd), I could write it… but why think for myself if someone else already has for me? Exactly! There’s no point in that.

At any rate, I was riding around with Kecia yesterday and I think I’ve solved one of the world’s problems. You see, I’m absolutely convinced that, in a day and age when the public can make high quality CD’s for less than a buck a piece, the artists and musicians are not getting NEARLY enough money from the sale of their $13, $14, or $15 albums. But in a system where the cost to entry is so high, even for the record labels, how do you fix the viscious cycle? Here’s a hint: the internet is not the answer.

The Problem:
The system inherently lends itself to exploitation of the artist by the record label. I have what I think is a decent understanding of the industry (lending much of that knowledge to my dad working in radio for a million years) and it seems that the current system is just a bit flawed. Think about it: it costs lots of money to record, master, press, and distribute a million CDs. If you find a band that can afford to float that cost on their own, they probably don’t need to be in a band because they’re already pretty loaded.

So a big money-grubbing company finds a band that they think the public will like, they invest money in them, and they become famous. Don’t fool yourself… this isn’t a charity, the record labels keep close track of the money spent on the band. And, of course, they want that money back when the band hits it big. Now, if the only cost was the creation of CDs, this wouldn’t be a big deal, but this also includes various things like promotion, managers, payola (c’mon now… don’t gimme that look, you know it happens), etc, etc, etc. So what’s the result? The record companies spend so much dough that the artists have to sell millions of CDs in order to pay ‘em back and start making any kind of good money. Of course, we haven’t even talked about the obligatory fees that the record labels charge just for doing business with the band.

It just seems strange to me that if a band sells a million copies of a CD that the record label is getting $10 a disc to sell to retailers, there should be AT LEAST a few million laying around for the artist when it’s all said and done. I’ve not seen the actual numbers anywhere, but it’s my understanding that this is certainly not the case. However, even with the Internet, it’s virtually impossible for a band to make it big without the big-money-backing of the record label. Sound a little hopelss? It doesn’t have to be.

The Solution:
The solution, in my opinion, is so painfully simple that I’m shocked that it hasn’t been done. The above situation has many similarities to venture capital workings in the tech industry. Of course, that is beyond the scope of this post, but suffice it to say that when you get funded by a venture capital, many times one of the goals is an IPO (Initial Public Offering) also known as “Going Public.” This is the first opportunity that general investors at large have to pump money into the firm in question. What do they want in return for investing? Dividends or lucritive sales by speculation. What does this IPO do? Well, as I understand it, in a lot of cases it gives the firm a surge of cash and gets them out from under the claws of the Venture Capital firm that gave them their start. For a company with a good, solid revenue model, this is a very good thing.

“Blah blah blah,” you’re saying “What’s your point?” That’s quite simple. The solution to the above problem is to give bands a chance at their own IPO. Granted, I still think that (at least at the beginning — and maybe indefinitely) they’ll need the record labels, but think about the possibilities. The record labels drop some cash to get a song or two on the radio and a record out in stores. Then you open it up, and give investors a chance to put their money on the band. The money goes to pay off the record label for its initial outlay of funding and give the band a bit of an operating budget so that they don’t have to take out record label “loans”. Investors could expect, in return, dividends based on sales, concerts, and the various and sundry other ways that bands and artists bring in cash.

Some of you might be thinking that this merely changes who issues the promissory note, and not the actual situation of the band, but I tend to disagree. If I invest $100, there is no promised timeline in which I receive a return on that investment. There’s no guarantee that I’ll get ANY return on the investment, in fact. I could try to sell the shares and end up losing much of the money I spent to begin with. If the band does well, they push some money back out, in the way of dividends, to the investors. If it does poorly, push less out. You can rest assured that if this were not a fairly solid model (even in the long-term) for generating start-up revenue, there wouldn’t be many publically traded companies.

One interesting side-affect, is that you can expect stockholders to buy CDs, instead of burning them, and you can expect them to want to see a reduction in blatant “I’d rather steal than buy” piracy. This would be a good thing for the record labels, because it’s hard to fight a battle with virtually your entire customer base. This, in effect, puts them on the same team. Of course, one might also argue that once someone bought stock in an artist that they’d be LESS inclined to buy the product and more inclined to steal it. This would be a pretty silly thing for the person to do, because the better the band does (in terms of record sales especially) the more the stock will be worth and, thus, the more money the person is likely to make upon sale of the stock.

This might also be good for the consumer… a record label operating by this practice would be less prone to corporate bloat and waste, and would take a smaller piece of the pie. While this could have a tremendous impact on artists’ income, more likely is that their income would

Draw-backs:
Current accounting praticices (as defined in the Generally Accepted Accoutning Principles, which is set by the Financial Accounting Standards Board) make use of the concept of “going concern“, or (in short) that, in absence of evidence to the contrary, one must assume that a business will continue to function indefinitely. While this concept of accounting isn’t invalidated by the idea, it is silly to assume that a band will continue to function indefinitely or even for a long period of time. Given the life expectancy of most bands, would serious investors really consider this market for anything but speculation? It seems to me that the cost of stock in such a market would reflect the likelihood of being able to regain in excess of one’s initial investment before a band folded. This concern could be remedied, but I don’t have that solution all firmed up just yet.

Another possible pitfall might be shareholder control over the band. Of course, right now most bands are already slaves to the record label and public opinion, unless steps were taken specifically to the contrary, this setup would seal the deal. Unless, of course, the record label always bought controlling interest in the band, or some other work-around was reached. If the record label were allowed to buy stock, however, it probably shouldn’t be allowed to determine the amount of the dividends, or the whole process is screwed.

Realistically, there’s no reason for a current record label to adopt this practice, because it almost certainly would cause a loss in revenue, so it seems to me that it would require a new record labe to start. Of course, I think a lot of artists would be interested in this model, and the new label could get a lot of business.

What do you think?