New business or core trade? Sony's defining question

Article  by  Thomas BENTLEY  •  Published 02.01.2011  •  Updated 04.01.2011
In the face of the music industry's renaissance, Sony Music has thrown itself into new business under Rolph Schmidt-Holtz. With the under-fire CEO's contract up, the question beckons – will they split further from their core trade, or give the venture capitalists and 360 deals a run for their money?

Summary

It all started to snowball when Madonna upped and left the traditional music circles to sign a $120m, 10-year deal with tour gurus Live Nation. Nickelback, Shakira and JayZ soon followed suit, whilst the Eagles penned an exclusive deal with US retail giant WalMart, and Sir Paul McCartney brewed up a campaign with Starbucks to market his then-new release "Memory Almost Full". Then there was Radiohead's pay-what-you-fancy "In Rainbows" album, an opus that sent shockwaves through the entire industry for the groundbreaking way in which it was sold – or not – depending on how you see it.

These were all moves that left the likes of Sony Music Entertainment floundering as the big draw artists began to wander off of the traditional music label path. Three years on, with the CD market burning its last embers, and the core trade traditionally executed by the labels being questioned, the majors, in turn, are thinking outside the box.

New opportunities and the split with tradition

This September, Vevo CEO Rio Caraeff proudly announced that his company's premium online music video channel is currently raking in tens of millions in revenue, highlighting both the value of music to advertisers and its continued global appeal, with over 49 million unique viewers every month.  This was undoubtedly sweet news to both Sony and Universal Music Group, music's current revenue toppers, whose partnership with a lesser-known entity, the Abu Dhabi Media Group, is capitalising on increasingly small income streams for recorded music.

Sony and Universal's escapades into the relative unknown have taken similar turns in recent times, notably investing in the abundant rise of prime-time musical talent shows such as "The X Factor" and "American Idol".  Recently, Universal Music has forged a new relationship with Simon Fuller  – the man behind the "Idol" series (American, Australian, etc.) – to market, promote and distribute albums from the show's finalists through its tributary, Geffen-Interscope-A&M Records.  Jimmy Lovine, the producer extraordinaire who founded and now chairs the tributary, will also step in as a consulting mentor for the contestants.

This may be a case of nine years too late for Universal, however, as their deal comes off the back of Sony relinquishing its own long-standing accord with Fuller and his company, 19 Entertainment, in order to remain exclusively with Simon Cowell, whose multitude of shows, spin-offs and talent-spotting reportedly accounts for over 30% of the label's profits, according to the New York Times.  Sony's venture into television is by far the company's most lucrative non-traditional business, and one that has been fed by the group's steps to radicalise the meaning and purpose of the record label.

Back in July, the group brought "The Three Investigators" children's mystery book series to the stage across Germany, selling out many of the country's biggest arenas, as nostalgic Generation X-ers jumped at the chance to be taken back to childhood. Earlier on in the year, the organisation penned a consultancy deal to help the Argentine province of San Luis develop a multitude of cultural activities. Both have proven an astute and welcome source of revenue for the label, whose moves above and beyond the call of scouting, recording and producing sellable music products are due in no small part to personnel.

"Three years ago I said, look, we are dying, we have to go into new businesses." It was 2007 then, and Rolf Schmidt-Holtz, who spoke those words in a recent NYT interview, had been chief executive of Sony Music for a year. His appointment turned a few heads within the company, as seasoned industry moguls were overlooked in favour of the ex-magazine editor and television executive. Some of those heads were to roll not long after, as he set about eradicating the "stretch-limo culture" that was rife within his ranks.

Urging his executives to follow their noses whenever they got a whiff of opportunity from then on, Schmidt-Holtz has created new businesses that, according to unofficial figures obtained by the NYT from within Sony Corp., will generate more than $40 million in profit for Sony Music this fiscal year alone.  The figures are conclusive. The new business sought out during the Schmidt-Holtz era has become a primary earner for the label, but what of its core domain? Sony's rivals have been quick to suggest that this new model simply masks the organisation's failings in its traditional area of expertise.

It has actually been a successful period for Sony, with the fallout from Michael Jackson's death (whose rights are owned by Sony's Epic label) propelling three of his creations into the top ten albums sold worldwide last year. Joined at the top by the infamous Susan Boyle, another of Cowell's progenies, chart success saw Sony garner a further 2% of the global music industry's market share since 2008, raising its total figure to 23%. Still behind, but gaining ground on Universal at 28%, the group is now well ahead of Warner (15%) and EMI (10%) according to Music & Copyright, a US trade publication.

The problem therein lies with the rarity of these events, the likes of which are unlikely to be repeated in the near future. Despite budding Sony acts like Kesha (whose debut album recently topped the US charts), sceptics, some seemingly close to the company, have gone as far as to allude to a "terrible" situation with regards to Sony's core trade, had these events not occurred.
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Venture capitalists and creative control: the bands become CEOs

Like the other big three, Sony is pitting its wits against fresher music models where the artists, more than ever, retain their creative control and contribute to the running of their business. Singular, income-generating occurrences aside, the majors are currently fighting a fire of musical independence and enterprise, onto which "In Rainbows", arguably, poured the fuel.

Radiohead is now managed by ATC, a trio of music stalwarts who, according to Financial Times pop critic Ludovic Hunter-Tilney, could hold the key to the final unravelling of the music industry's long-established model of "paying for recordings in exchange for copyright ownership".  Adepts of the 360 deal, by which all income is split between the artist and its backers, ATC are essentially venture capitalists investing in budding artists for a return. While the majors rely on the driving of hits, a short-term strategy that allegedly claims the scalps of nine out of ten newly-signed acts, ATC strive to find a niche for their bands, focusing on the areas such as tours and commercial agreements, which have become progressively more lucrative.  In an industry where album sales are edging ever closer to the precipice (US album sales saw an 11% decrease between the first halves of 2009 and this year), the change of focus makes sense, especially when you consider the relative success with which the ACT acts have hit the scene.

A £40,000 investment in Mumford and Sons, a rising London quartet, resulted in their hit 2009 album "Sigh No More". It was the culmination of continuous touring, repeated soundtrack appearances on hit shows like "Grey’s Anatomy", and the astute targeting of markets, notably Australia, where the band's hit single "Little Lion Man" topped Triple J Radio's Hottest 100 of 2009, the world’s largest public music poll. The album, released through their own record label, was licensed to a variety of labels worldwide.  This rise to fame took flight along what ATC's Brian Message likes to call the "hard road", a path "for those who want to take control" and "believe in themselves as a business".  This idea of creative control and the do-it-yourself ethos with which it can be obtained has proven undeniably infectious, both among newcomers such as the Mumfords, and what may be referred to as the old guard.

Dance legends Faithless recently joined ATC's ballooning roster after a substantial 14-year stint under Sony. With success waning, however, and inspired by Radiohead's "In Rainbows" coup, the trio decided to adopt the DIY style of musical management. The result? Their best-selling album for years, hitting the UK charts at No2, an exclusive deal to sell through UK supermarkets Tesco, and a Fiat car model sporting the name of their new single, "The Dance".
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The middle men

In that fateful year of 2007, Bloomberg's Jon Fine said that "sliding sales and revenues mean labels can't develop slow-building artists, nor can they patiently tolerate stars' occasional slumps. So veteran acts are apt to be labelless for portions of their careers." Three years on, the labelless Rollo Armstrong from Faithless echoed , "there is only a certain time span for your record to do really well and if it doesn't happen in that time then they've got a lot of other records on their schedule".

It follows then that the labels are becoming the middle men. Startup bands now have the option of going at it alone, and with companies like ATC emerging, they have support to do so. The established acts, who have the fan base, the reputation and the guarantee to turn a profit, are also jumping ship.  As seen for Kate Nash (another ATC product) and Mumford and Sons – who are now with Island Records after requiring further investments, which ATC refused to cushion – the labels are increasingly picking up artists who have already been blooded, and are sticking with them until they have the pull to become independent.  In accordance with Jon Fine's words , this may even suit a major's short term, hit-generating strategy, as new signings can now hit the ground running with a pre-established marketability. On the ever crucial flip-side though, this position heaps even more pressure on structures Fine already described as "creaking and jerry-rigged" three years ago.

Labels no longer offer the best option for artists approaching the twilight – often the most lucrative period – of their musical careers. They also no longer offer the best jump start for any band wishing to break into the industry. This results in a substantial cut in the time that labels have to work with such acts. If bands are signing on late and clocking out early, the windows of opportunity mentioned by Armstrong become ever-sparser. Cut the "time span" tally and you cut the number of releases; snip those and revenue is logically trimmed with it.

It is a concept as simple as it potentially devastating for the majors, and coupled with falling record sales, highlights the reasons why the likes of Sony have thrown themselves into new business.  Yes, they remain the only organisations with the ability and willingness to offset the financial risks involved in signing new acts. They have the uncanny capacity to get their products to the right people and places (radio pluggers, chat shows), and with that, a core model that can still turn a profit – think Rihanna, Lady Gaga or Eminem.  But how long can they keep a ship afloat – a ship that Sony's CEO himself admitted was sinking? How long indeed before the venture capitalists and 360 deals they offer shift the balance of power too far over into the artists' corner?

There are still lifelines being thrown, such as Apple's change in stance on musical subscription services – but will they ever prevent Hunter-Tilney's suggested unravelling from taking full effect?  Reports are stating that Sony Corp. has quietly begun its search for a successor to Rolph Schmidt-Holtz, whose contract runs out in March and whose hands-off approach to management has been widely criticised. We may well be seeing a music mogul at the helm again soon, although there is not yet any certainty that a replacement will be made.

Whatever the outcome, it will be a strong indicator as to how the majors propose to play their hand in the face of what can be described as a commercial renaissance. Will they fold to the lure of new business, or raise the musical stakes?

Decision pending.
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