Hyping Numbers: Are 95% of Artists Really Failures?

By Eric de Fontenay (Founder & Publisher) (more articles from this author) 2001-05-03

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I was reassured at the The Harvard Journal of Law & Technology's "All Shook Up: The Music Industry Confronts the Internet and Consolidation" to hear that there was at least one point of consensus between the opposing sides of the music industry. Both Matt Oppenheim and Courtney Love appear to be in agreement that around 95% of the major labels' roster is unprofitable or unsuccessful. The problem is that this consensus is only true under a very specific set of caveats and is therefore, at the least, misleading.

When one says that something is unprofitable, it typically means that the actual total revenues realized from a product did not cover the investment and operating costs. If a company's revenues are not able to cover its liabilities, that company would be considered to be unprofitable. So intrinsic to any discussion on profitable is an examination of costs, especially since this is the only aspect of a business we really have some control over. So if a company's actual total revenues are significantly lower than its expected total revenues, and that company based its investment decisions on expected revenues, the company might be expected to be in a situation of unprofitability. This has been the story of the dot-com crash.

When a label says that 95% of its acts are unprofitable, it is really saying that it overestimated its expected revenue 95% of the time. Considering that these companies are far from bankruptcy, we may also assume that they wildly underestimated expected revenue for 5% of their acts. The first conclusion is that the major labels have a horrible track record on judging consumer taste and demand. To this, one might interject, "But music is not a refrigerator, demand for a specific act is, by nature, unpredictable." But if that were the case, that the demand for new intellectual property is intrinsicly uncertain, this still does not explain a 95% failure rate. Could UPN or CBS or Walt Disney survive with a 95% failure rate for their TV and radio programming? That's like having the XFL on for 22.8 hours of the day!

Perhaps most harmful is the idea that 95% of their roster is unprofitable, thus a failure. The fact is, many of these acts would have at least broken even if prudent investment decisions had been made. Today's technological marvels not only free independents, but also major labels to significantly reduce production, marketing and retail costs. By embracing the web and cheaper, but as effective, production tools, especially in the case of their most 'unprofitable' acts, major labels would be able to significantly reduce their investment per act. This would also provide he labels with invaluable data on real life widescale experiments with new mediums.

The other problem for the major labels is the domino effect. Take the Baby Bells: 10% of its customers (comprising of Fortune 100 companies) account for 90% of its revenues, which subsidizes low-cost access for the remaining 90% of customers. When competition started to emerge, it was this group (Fortune 100 companies) that competitors first targeted. This raised fears of a domino effect where the most profitable layers of the customer base, who were supporting the Baby Bells' low-cost local service, would be peeled away by competitors, at the Baby Bells' peril.

The labels are in a similar position: 5% of their acts are supporting not only themselves, but 95% of the remaining roster. If you peel away 2% from the 'top', either that places that much more pressure on the remaining 3% or reduces the 95% portion. Peel away 5% and you're left with no business. In addition it is this 5% that has brand recognition, not the labels. This 5% can now utilize the web to communicate and transact with a growing global customer base at a fraction of the labels' costs and negotiate better deals with new powerful brands such as Yahoo and MSN. No wonder knees are shaking in the corporate boardroom!

Related MusicDish e-Journal Articles:
» 'All Shook Up' got all shook up! (2001-04-26)
» SDMI Goes to School (2001-04-26)

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