Music Industry

I had a very interesting meeting with Dwight Wardlaw, a friend of mine in the Sloan program, who started his own record label. He invited me and a few other MBAs to talk about his experiences in creating the record label and working with the associated companies in the music ecosystem. His major artist is Gary Kyle (checkout video at youtube: http://www.youtube.com/watch?v=oKlCDaF7_nE).

First we discussed the ecosystem. Normally there are three major players: Record Label, Publishing, and Management.

Record Labels are run very inefficiently (no surprise!); an example is how they recoup their initial investment in a band. Typically they will pay for all recording costs upfront, as well as give the band an advance. Recording costs are approximately $250,000 for a major record label, with an additional $50,000 for the advance. The band doesn't receive a penny until the record label has recouped these investments. From here it is easy to see how to game the system--allocate as much cost as you can to the recording expense. This is exactly what the record labels do. They charge as much overhead as they can to the "recording costs", and the bands get practically nothing. For example, Dwight was able to professionally record his artist for a fourth of what a major record label would have charged.

Next is publishing, and basically the big mistake a band can make is lose their publishing rights--a friend of Dwight's is unable to release her album (it has been ready for over a year!) because of making this mistake.

Management covers a lot of different aspects of the band--personal manager, publicist, and distribution. Obviously, distribution used to be much more difficult than it is now, with digital music download sites like itunes, but it is still essential to sell albums (through commercial sites and at concert venues). All album sales are reported to sound scan, which is used by Billboard to rank the top albums and singles. This is the most common way for a band to build the credibility needed to "be discovered."

The rest of the meeting we discussed the innovations we see occuring in the music industry. For example, the website www.pandora.com is leading the way in music discovery for consumers. Another site, www.platinumblueinc.com, analyzes songs to determine the probability of them becoming a mainstream success. For $10, you can analyze a single song and receive a report within 5 days. Another interesting site is www.sellaband.com; from here you can purchase equity in a band in $10 increments. Once the band has raised $50,000 they can record an album with professional equipment, and every one who invested in the band receives a CD. From there the songs are downloaded from the site for free, with ad revenues from site traffic shared between the band and shareholders. It's a nice little Web 2.0 version of the record label industry.

MySpace has obviously changed the way bands build fan bases, but a very interesting development is occuring on a more radical social networking platform: Second Life. Real bands such as Duran, Duran and Talib Kweli have played to virtual audiences in the online world (http://www.wired.com/news/technology/internet/0,71593-0.html). For those unfamiliar with Second Life, you should check out a podcast created by one of my classmates: http://iinnovate.blogspot.com/. Search for the interview with Philip Rosedale, Founder of Second Life. Don't believe that an online virtual game has monetization possibilities? Check this article out: http://www.businessweek.com/the_thread/techbeat/archives/2006/11/second_lifes_fi.html?chan=search

I know Stanford will be hosting a panel of music industry experts in January--it will be interesting to see what they think lies ahead for the future of music.