( 5. ) Faced With Shrinking Profits

Faced with shrinking profits, record labels are touting a new approach
It has become a familiar refrain. For years record labels, citing tumbling CD sales blamed on internet piracy, have decried the decline of the music industry. The reality is rather more subtle, as Edgar Bronfman, the chairman of Warner Music, a big record company, pointed out last month. "The music industry is growing," he told an investor conference in New York. "The record industry is not growing."

Indeed. Seven years ago musicians derived two-thirds of their income, via record labels, from pre-recorded music, with the other one-third coming from concert tours, merchandise and endorsements, according to the Music Managers Forum, a trade group in London. But today those proportions have been reversed—cutting the labels off from the industry's biggest and fastest-growing sources of revenue. Concert-ticket sales in North America alone increased from $1.7 billion in 2000 to over $3.1 billion last year, according to Pollstar, a trade magazine.

Frustrated record companies have responded by trying to get their artists to spend more time promoting records and less time touring and endorsing products, says Jeanne Meyer of EMI, another big record label. "Sometimes you've got a tug of war going on," she says. Yet the more labels spend on marketing pre-recorded music, the more they raise their artists' profiles and boost their other, more lucrative, sources of income. Pre-recorded music, no longer the main cash cow, increasingly serves merely as a marketing tool for T-shirts and concert tickets. The best seats for The Police's world tour this summer cost over $900; the group's entire catalogue on CD costs less than $100.

Record labels have come up with a remedy: the "360° contract". Instead of settling for a cut of CD sales, they increasingly offer artists broader contracts that encompass live music, merchandise and endorsement deals. Such deals, also known as multiple-rights or all-rights contracts, are particularly important in regions with rampant CD piracy, such as Africa, Asia and Latin America. "The market has made it necessary—we've got to look for something else," says Manuel Cuevas, an industry executive in Mexico City. His company, the Mexican subsidiary of a major label, decided earlier this year to adopt the 360° model. "It's a discussion you have with every new artist now," says EMI's Ms Meyer.

Although record labels like the idea, artists are unsurprisingly less keen. Few established artists have accepted 360° deals, though the labels trumpet the exceptions, including Robbie Williams, the Pussycat Dolls and Korn. It is more profitable, the artists say, to stick with artist-management agencies, which have traditionally handled the job of cultivating careers beyond the realm of recordings.

Management agencies are also considered to have more respect for their artists' interests. Record labels, for example, have been criticised for obtaining rights to the names of artists and bands for use in internet addresses. Some clauses stipulate that name ownership applies even after contracts expire or artists die. This can prevent musicians from launching websites to promote tours, sell merchandise, and communicate with fans as they see fit. "Record companies don't exactly give many artists the warm, fuzzy feeling," says Gary Bongiovanni, the editor of Pollstar.

Musicians with small fan bases and little business experience are much more receptive to the idea of 360° deals. There is no shortage of aspiring artists, and some will become big names. Juha Ruusunen, the founder of TWU, a small management agency for heavy-metal bands based in Jyväskylä, Finland, says European labels have begun to sign up new talent with 360° contracts. As record labels move more aggressively into the artist-management field, Mr Ruusunen worries that his agency might struggle to compete.

Building a roster of 360° talent, one deal at a time, is slow going. It is quicker for labels to buy artist-management agencies. Last month Universal Music made a £104m ($205m) offer for Sanctuary, a struggling British label with a management arm that represents musicians including Elton John and Robert Plant. Sanctuary also owns two other artist-management companies and runs Bravado, a merchandising operation. Sanctuary's shareholders will decide whether to accept Universal's offer, which is considered generous, this month.

For its part Warner Music has expressed interest in Front Line Management, one of America's biggest agencies. And last month Warner announced the formation of Brand Asset Group, an artist-management joint venture with Violator Management, a firm that negotiates roles for rappers in films, advertisements, video games and TV programmes, and licenses their names and images to promote drinks, books and clothes. (Its clients include 50 Cent, Diddy and Busta Rhymes.)

The shift away from recorded music is due in part to the recognition that touring and merchandise are more lucrative. But it may also be a consequence of internet piracy, as free downloads give music fans more money to spend on other things. Jwana Godinho, the director of Música no Coração, a concert promoter in Lisbon, thinks many music lovers have a "mental budget" that they are prepared to spend on music, and have switched their spending from CDs to tickets and merchandise.

The logical conclusion is for artists to give away their music as a promotional tool. Some are doing just that. This week Prince announced that his new album, "Planet Earth", will be given away in Britain for free with the Mail on Sunday, a national newspaper, on July 15th. (For years Prince has made far more money from live performances than from album sales; he was the industry's top earner in 2004.) Outraged British music retailers were quick to condemn the idea. As far as the record industry is concerned, it is madness. But for the music industry, it could well be the shape of things to come.