How it works: the music industry

A record label owner and a festival organiser explain the ins and outs of the business

Despite the flamboyance of international superstars such as Lady Gaga in her bejewelled Gallianno clobber, and Katy Perry in her sickly sweet candy land videos, it is clear that the music industry has taken a beating in recent years. Hard-hit by the recession, and blighted by a relentless surge of illegal downloads, it's little wonder that players at all levels are being forced to make cutbacks. And it's not just the small labels, artists and venues that have suffered. In February this year, the EMI Group reported pre-tax losses of £1.75 billion, and was issued with a going concern warning by KPMG, indicating a significant probability that the group will go under. World-famous London superclub Fabric went into administration this June - which was handled by PwC, though it was able to stay open for the duration of the period, and is still putting on all its regular nights. These cases show that no ship is too big to be at risk of sinking in these tough times.

On a brighter note, however, according to Will Page of PRS Music, the British music industry turned over £3.9 billion in 2009, which represents a 5 per cent increase on the previous year, and the second consecutive year of growth.

However, many record labels will have missed out on a vast portion of this money. Selling tickets for performances is how artists make the majority of their money these days. There has been a meteoric rise in festivals, with over 100 listed in the UK alone this year. Live shows and tours are also increasingly popular - fans are willing to fork out a lot to see their favourite DJs and bands in the flesh. Which is great news for artists, venues and festival organisers, but many record labels don't receive royalties for their artists' appearances despite investing heavily in their music.

The Gateway sat down with two insiders from different parts of this industry to talk about their views on where things are at the moment, and how they function as business people in the music world.

The record label manager

Andy Whittaker is the label manager for two UK-based techno/indie record labels - R&S and 2020 Vision. He tells The Gateway about the business side of making music.

What are the different roles at a record label?

The first stage of the process, and in many ways the most exciting, is talent scouting. This part is known in the industry as "artists and repertoire", or "A&R" and basically involves finding artists that we'd like to sign. We do this by reading blogs, via social media such as Facebook and MySpace, through our contacts, and sometimes artists come to us! That's something that I take care of for both the labels that I currently manage, although larger ones will often have people who only handle A&R. Then there's the recording and mastering of the records we produce. At R&S we have our own studio, where artists can work on their tracks with our engineer. All our manufacturing and distribution is outsourced - and all record labels do this, regardless of their size and location. The final stage in the process is marketing and PR. I do a lot of this work myself, purely because I've been in the music industry for eight years now and have established contacts at all the main magazines and websites, so I don't need to pay someone to make those connections for me. It's typical to have in-house publicity teams at major record labels though, and it's also common for labels to outsource their PR.

When you sign an artist, how do you weigh up whether they're going to be a good investment?

Much of it is down to pure instinct, but you also have to make a rational decision as to whether they will work on your label. A good fit is essential. Different types of artists also entail different costs. Producers such as James Blake and Pariah make songs at home on their PCs, and then they might come into the studio to have the tracks mastered. Working this way doesn't rack up as many production costs at our end. At the other end of the scale, bands take a lot more work - and we've just taken on a new indie band. The amount of time and money that goes into making their tracks will be far greater. We'll need mixing engineers, producers, extra musicians, and we might have to take them to several studios. So bands are a much heavier investment - but we're always excited about having them on board.

Live events are the major source of income for artists these days, but do you get any royalties from your artists' gigs?

The answer to that is no. We spend all our money making their music and getting them out there in magazines, but we get nothing when they play out. Revenue from live shows is the only money in music worth fighting about, which is why the industry is changing. Historically, record labels have made nothing from live shows, but this is becoming a thing of the past. Major labels have started doing what they call "360 deals", which mean that they take a cut of everything from merchandise and publishing through to performances. Indie labels have always been "the nice guys", but it's a model that we're slowly moving towards, even though it could deter more experienced artists from working with us - and that's a big shame.

Where does most of your profit come from?

Music downloads - particularly and increasingly albums, but singles are still holding their own. We also make money from the vinyl that we sell, and licensing our music to compilations, advertising and film. When we produce a track, we own the copyright for it for 50 years, which means that if someone wants to use our track, they have to pay for it. Last month we licensed one of our old back catalogue tracks when an Italian film producer wanted to use Joy Beltram's 1990 hit "Energy Flash" for a club scene in his film. Sales of our music for these kinds of commercial purposes are often where we draw in the most revenue.

Where does the money that you make from selling music go?

The first distinction we make is between overheads and profit. If we sell 10,000 records at £2 each, we've made £20,000. If the overheads cost £10,000, that's £5,000 profit for us, and £5,000 for the artist - although we don't include legal fees in our overheads. We try to keep our costs at less than our revenue - otherwise we're "in the red", so to speak. Our biggest overhead is manufacturing. This includes things like mastering, initial test products and the commercial product itself. It can also entail video and remix fees, which can raise costs considerably. Then there's PR and marketing fees if we decide to outsource, as well as artwork and designer fees.

How has music sharing on the internet affected your business?

The internet has allowed people who want our music to get it very easily. If they want it, they're going to get it, and that can work both in our favour and against us. There's the very obvious problem of piracy, and we do hire a company to remove links from sites where we don't want our music publicised, and if it's been leaked before or around the release date. There's a whole army of people who just want to have our music first, and use the fact that they've got it to promote themselves. They're not being creative with it, or giving it the right kind of publicity - and we really don't appreciate this kind of behaviour.

In terms of downloads affecting sales of records, it's not necessarily a bad thing as it lowers manufacturing costs for us. I also think that true fans of our music will still go out and buy the vinyl - as it's something physical, and beautiful to hold in your hand. I mean we still have people buying packages for £200 - they'll get fancy wrapping and a set of tickets to a live show. Others will opt for the free download version - different people are looking for different things.

What's in store for the future of music downloads?

Thinking back to when I first started in this industry eight years ago - it's a totally different world now. Having said that, I think that some people are always going to want something in their hands rather than just downloads, but I think that it's only a matter of time before the mp3 is dead. I'd say that streaming is more likely to take precedence in years to come, as people will have access to such powerful computers that they won't need to store music on their hard drives any more. At the moment though, we can expect to get anything from 30,0000 - 50,000 streams for a song in a given month, but that will relate to around £20 in revenue, which is totally ridiculous.

Record labels have been too complacent for years selling CDs at silly prices - like £13.99. They really were taking the piss for a while. It's no wonder that people turned to buying and downloading online. HMV didn't see it coming, and they got stung particularly badly. They missed the boat with selling music on their website and now they don't sell much music at all. Making money from this industry depends very much on staying on top of new technologies and utilising them to their full potential. All I can say, is that the person who can work out how to really start making big money from online downloads and streaming, will make themselves very, very rich.

The festival organiser

Rise began in 1996 as an anti-racism event, and has since grown into a music festival known as UpRise. Founder Mike Barnard gets down to the nitty gritty of running it.

There's two things you need to know about running a small festival. The first is that no matter how organised you are, and how far in advance you plan - there's always going to be a strong element of unpredictability. Initially, we were aiming to raise £125,000 to fund a 30,000 capacity festival. We ended up raising a more modest £25,000, but we were still able to put on a good event - just on a smaller scale, with a 3,000 capacity. The venue also fell through at the last minute. We'd planned for it to be held at the outdoor Vortex in Dalston, which was a great location because it didn't require much infrastructure work. That plan was scuppered in June, leaving us only three months to rethink our plans. At that point, we decided to meet with Haringey Council to bring the festival back to Finsbury Park (which had been the festival's location for the past three years that we'd held it). Another major unpredictable factor is the weather. Rain can put a huge damper on an outdoor event!

Secondly, as a business person, you should expect a very different festival experience to your guests. The actual event itself is a very small part of the whole experience, compared to all the prior organising, setting-up and clearing-up afterwards. During the festival, you won't be looking at a hot dog stand thinking: "Mmm, that food looks good." You'll be looking at how many people are queuing up to buy food, and what they're buying. You won't be thinking: "This music is amazing", you'll be judging how busy the stage looks. Your concern for how well the festival is going never leaves you, and while this doesn't mean you can't enjoy it, it's a very different viewpoint - it's a business perspective.

In terms of the major expenditures, most of the money we spent went on the production side. Things like toilets, staging and marquees come at a fixed cost - whereas the artists were willing to either play for free, or just with expenses paid, meaning that they weren't really a significant overhead. On the other hand, forking out for security is a huge dent in your wallet when it comes to festivals, and not everyone realises that this costs significantly more than hiring the artists. The festival received a fair amount of TV and radio coverage, but most of our publicity was done via our website, and through social media - which is the cheapest and most effective way of reaching people. We have around 3,500 fans on our Facebook page which is quite impressive.

The ultimate business model for a music festival is undoubtedly Glastonbury. It's particularly impressive just because of its sheer size, combined with its year-on-year success. But even with a festival of the scope and with the reputation of Glastonbury, the risk of flooding or other large scale disasters is always a real threat. We are looking to expand UpRise, but it would be silly to try to do it too quickly. Next year, we could aim for a capacity of 5,000 or 6,000, but there are several aspects of our business model with problems that we need to iron out first. Being ambitious is always a good thing - and if you persevere with your dreams, you can still achieve them, even if you have to scale them back a little bit.

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