Record companies are counting on their new deal with MySpace Music to help make up for declining CD sales
by Catherine Holahan
In a small Atlantic Records Group studio in New York, rapper Clifford "T.I." Harris Jr. leans into a silver microphone. "It's the T.I.P. man, the king himself," he says. "Dig this." There's no music on this recording, though, no rhyming lyrics. The Atlanta artist simply talks in his Southern drawl, creating an audio clip that will be posted on his Web site and others across the online universe. The clip and more like it are designed to pull in fans—and generate revenues from advertising on the sites.
Meet the record label, version 2.0. After nearly a decade of plunging music sales, the labels are trying to overhaul their traditional business. Instead of just selling recorded music, they want to use music to sell a range of related extras, from online advertising to mobile phones packed with tunes. The new business model puts the Internet at the heart of the industry in an attempt to transform artist Web sites from promotional vehicles into money-making enterprises.
The biggest bet on this new model is MySpace Music. The joint venture between News Corp.'s (NWS) social networking site and the three largest record labels—Universal Music Group, Sony BMG Music Entertainment, and Warner Music—is set to launch in the next few days. The partners are expected to unveil the venture officially and name a chief executive during the week of Sept. 15. On the short list for CEO: Owen Van Natta, the former chief operating officer at Facebook, and Andy Schuon, former CEO of Universal Music's International Music Feed. MySpace declined to comment on the CEO search.
"Skin in the Game"
While the labels already work with a number of online retailers, from Amazon.com (AMZN) to Apple's iTunes, this is their most ambitious push yet to develop online advertising and e-commerce revenues. The labels will have equity stakes in the new venture. They'll also get a cut of the revenue from ads on artists' pages, as well as those from music downloads, ring tones, merchandise sales, and concert tickets. "We wanted the music companies to feel like real partners and to have some skin in the game on the upside," says MySpace.com founder Chris DeWolfe.
How much upside is the key issue. The record industry has been hammered in recent years by online piracy and a dearth of mega-hits, with sales sliding steadily since their peak of $14.6 billion in 1999. As CDs sales have dropped, the labels have tried repeatedly to develop digital strategies to make up the difference, and they've all come up short. Last year was the industry's worst yet in terms of revenue losses. The total value of digital and traditional sales dropped 12% in 2007, to $10.4 billion, compared with a 4.4% slide the year before, according to the Recording Industry Association of America (RIAA).
Record labels have high hopes that this time will be different. Michael Nash, head of digital strategy at Atlantic's parent, Warner Music Group (WMG), predicts MySpace Music and related moves will help reverse the industry's fortunes. "We will be able to return to overall growth," he says.
Cushioning the Decline
That will be a stretch, though. Even if it's successful, MySpace Music will be too small to make up for plummeting CD sales. The labels are "really dwindling," says Paul Verna, a senior analyst at market research firm eMarketer. Still, the new strategy could help the labels cushion the decline in the years ahead and perhaps begin to rebuild revenues a few years out.
The idea behind MySpace Music is that it can help generate revenue for artists every day, not just around an album's release. The venture gives the labels access to MySpace's global audience of 118 million users and its ad sales team of more than 250 people. It also provides the labels with a prominent venue to pull in audiences and advertisers with new types of nonmusic content, including music news, behind-the-scenes videos, and artist interviews such as the one with T.I.
Major advertisers are signing up. Industry sources say MySpace Music has signed multimillion-dollar ad deals with McDonald's (MCD), Toyota Motor (TM), and other major brands for its launch. Toyota and McDonald's confirmed their participation, although they wouldn't specify the ad dollars involved. Kim McCullough, Toyota's manager of marketing communications, calls the MySpace Music launch an "unprecedented opportunity."
MySpace is designed to do more than bring in ad revenue, though. It also gives the industry a new channel through which to sell songs, ringtones, T-shirts, and tickets. With 5 million artists using the site to promote their bands, MySpace has already become a major destination for discovering new music and upcoming concerts.
MySpace Music can't save the industry on its own. The whole site takes in about $743 million in advertising revenue now. Make some reasonably optimistic projections about MySpace's prospects, and the record labels could end up with $1 billion in new revenue from the venture by 2012. That helps, but given the current rate of decline in CD sales, the industry could lose an additional $3 billion in yearly CD sales by that time.
Still, MySpace Music may prove to be a model for future ventures on the Net. If the concept works, it could help the labels turn other online hangouts, like the leading social networking site, Facebook, into forums for music sales and related revenues. It could also help demonstrate that the labels will see tangible benefits from new contracts under which they share in advertising, e-commerce, and merchandise sales. "If they do all that, then maybe they can stem the tide of these rapidly falling CD sales and start to see the pie get a little bigger," says Paul Verna, a senior analyst at eMarketer. "But it is definitely a big if."
The labels are experimenting with a host of new efforts beyond MySpace. One recent deal with Nokia (NOK) will let the Finnish mobile-phone maker, through its Comes With Music program, sell phones preloaded with music subscriptions. A separate deal with imeem, a Web site designed to help people discover new music, provides the labels with licensing fees and a slice of advertising revenues. "There is a larger degree of sophistication at the labels and a willingness to embrace more cool stuff," says Dalton Caldwell, imeem's chief executive.
Lack of Innovation
The labels are intent on reinvigorating music sales on the Net. Digital sales growth slowed from 74% in 2006 to 43% last year. Record executives believe that, as Apple (AAPL) has come to dominate online sales through its iTunes store, sales growth has been hurt by a lack of innovation. "I think everyone has a sober understanding that the next three years will be challenging," says Mitch Bainwol. chief executive of the RIAA. "But the long-term prognosis is outstanding."
Not everyone likes the labels' latest approach. Under new contracts, bands are being asked to give labels a cut of revenues from concert tickets and merchandise sales, instead of just from music sales. Jason Debiak, keyboardist with the band New London Fire, thinks that's a bad deal for musicians, unless the labels are going to pay for singing lessons or other development. "It's an offer that should be thrown in the garbage," he says.
Still, the major labels have made a sharp reversal that may improve their prospects. For years they fought Internet companies for fear that their music would be stolen. Now they're racing to capitalize on the new opportunities on the Web. Warner has created a special digital studio to help artists develop unique online content. And Warner artists T.I. and Grammy Award-winning rapper Missy Elliott have album releases timed to coincide with the MySpace Music launch. "The labels were very reticent to embrace change at a time when it could have actually worked to their advantage," says eMarketer's Verna. "Now there's a sense that they have no choice."
With Tom Lowry in New York. Holahan is a writer for BusinessWeek.com in New York.