the development of risk management within the music industry
TRANSCRIPT
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Independent research project
The Development of Risk Management within the Music Industry:
A Multiple Case Study
Author: Jesse Irwin
Email: [email protected]
Personal number: 19950107-T014
Examiner: Henric Lindstrom
Date: 26th
June, 2016
Course Name: Music & Event management
Course number: 16VT-1MM721
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Table of Contents 1. Introduction ............................................................................................................................................................ 3
1.1 Background ........................................................................................................................................... 3
1.2 Problem Discussion .............................................................................................................................. 4
1.3 Research Question ................................................................................................................................ 4
1.4 Sub Research Questions ....................................................................................................................... 4
1.5 Aim of Research/Purpose ..................................................................................................................... 5
1.6 Geographical Limitations ..................................................................................................................... 5
1.7 Chronological Limitations .................................................................................................................... 5
2. Methodology ........................................................................................................................................................... 6
2.1 Data Collection Method ........................................................................................................................ 6
2.2 Research Design ................................................................................................................................... 7
2.3 Source Criticism ................................................................................................................................... 7
2.4 Theoretical Framework ......................................................................................................................... 9
3. Research Results & Findings .................................................................................................................................. 9
3.1 Risk Management in the Music Industry .............................................................................................. 9
3.2 Risk Management in the Pre-Digital Era ............................................................................................ 12
3.3 Risk Management in the Digital Era .................................................................................................. 14
4. Conclusion ............................................................................................................................................................ 18
References ................................................................................................................................................................. 20
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1. Introduction
1.1 Background
The “digital revolution” that began with the emergence of the World Wide Web in 1993
(Campbell-Kelly and Garcia-Swartz, 2013) was widespread and has affected nearly every
industry within western society. The music industry was no exception. When the music sharing
platform Napster hit the web in the year 2000 (Åstedt, 2016), it became increasingly clear how
influential the revolution would be on the music market. Throughout its history, the popular
music of the day as well as the market that nurtured it has always been tied in some way to the
technological advances of the time. In advertising, there was the increase in advertising that
resulted from the popularization of music on the radio. This allowed for a greater and more
diverse audience to be reached than ever before. In instrument design, there was the fateful day
in 1941 when Lester William Polsfuss, better known as Les Paul, unveiled his solid body guitar
“The Log” (Waksman, 2010) which featured an iconic new sound that has developed into an
essential part of most music in the western world today. A long line of innovations like these
have come to shape the music industry and the music it produces today. One of the most recent
and most powerful of these innovations, is that of the digital revolution; the acceptance of the
internet and its capabilities into the lives of the public and the resulting unparalleled access and
diversification of the music market.
An important player in both the pre and post digital revolution music markets are record labels.
These are considered to be, according to Cambridge Dictionaries Online, “a company that
records and sells music” (Record Label, 2016).
Record companies got their first major push in the United States during the late 1940’s when the
popularity of the phonograph was gaining popularity. By 1948, Columbia Records had issued
twelve different vinyl records to the public, which gave the world its first real taste of a record
company (Beilas, 2013). Many other record companies in the United States as well as Europe
followed suit and the music industry that we know today began to form. It saw a peak in the
1990’s when it was making a staggering $40 billion a year (Beilas, 2013). This massive amount
of revenue is largely believed to be the result of the cheap production costs and popularity of
CD’s which were coming into the music scene at the time. Since then, the consumption of music
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worldwide has been increasing, but the amount that the public has been paying to listen to it has
continued to decrease (Beilas, 2013).
1.2 Problem Discussion
The digital revolution competed with the notion that these record labels should have the center
stage in the music industry. The revolution swept through the music industry like a wave and
affected the way music is produced, advertised, sold, listened to, and shared. One of those most
affected by this change has been the record labels within the industry (Åstedt, 2016). Over the
years, the internet has brought competition in the form of peer-to-peer networks like Napster,
online radio services like Pandora, and streaming services like Spotify and Deezer. Also
introduced along with these services were a multitude of different social media platforms
including Myspace, Facebook, Instagram, Twitter, and Tumblr.
The combination of these new competitors and new social platforms has transformed the music
industry that record companies operate and promote in. In this new area, record companies have
seen some risks decrease and others grow beyond their control. In this way, risk management in
the digital era has had to evolve to match a market that grew with its own perspectives on the
uses of copyright, sharing, and the consumption of music. As this market continues to grow, it is
essential that research is conducted to look into the new forms of risk management that are
necessary for a modern-day label to survive.
1.3 Research Question
In this paper the researcher will be focusing on the primary research question: What factors of
the “digital revolution” have affected risk management within record labels?
1.4 Sub Research Questions
In order to gain a more thorough understanding, the researcher will also be looking into the sub
research questions:
What are the risks that are being managed within record labels?
What factors existed in the pre “digital revolution” that affected risk management within
record labels?
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1.5 Aim of Research/Purpose
The aim of this research is to examine the internal and external factors in the music industry
throughout its history that have allowed record labels to take manageable financial risks.
1.6 Geographical Limitations
To main a high level of detail and comparative analysis the researcher will be only focusing on
the western music industry, in particular the following music hubs will be the primary focus of
the research:
The United States
Sweden
As a whole the western music industry operates with similar standards and has reacted in similar
ways to these music hubs, so the researcher will be choosing them as a reference to represent the
majority of the western music market.
1.7 Chronological Limitations
To keep the effects of the digital revolution in focus and devote more time to the period just
before and after that transition, the researcher will be focusing primarily on the time period
spanning from the 1970’s to the current day. This will give approximately 20 years of time on
either side of western society’s widespread acceptance of the digital revolution, as marked by the
birth of the World Wide Web in 1993. The years before the revolution will be included to show
the development of the pre-digital music industry and will contain the origins of the modern risk
management and operating structure of record labels. The years after the revolution will be
included to show the developing structure and modern practices of record labels and the music
industry as a whole in terms of risk management.
1.8 Definitions
To aid the reader in understanding this research, the following terms have been defined in
context to how they will be used:
Risk Management- “understood to be “policy”—that is, a decision about what to do to
avoid or reduce identified risks, which is necessarily values based since it involves trade-
offs between multiple objectives.” (Hardy & Maguire, 2016)
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Music Industry- As David Thorsby (2002, pp. 2-3) describes it in his paper about the
music industry in the new millennium, the music industry can be looked at as
composition of the multiple stakeholders that exist within the industry such as:
o creative artists such as composers, songwriters and musical performers;
o agents, managers, promoters etc. who act on behalf of artists;
o music publishers who publish original works in various forms;
o record companies which make and distribute records (LPs, cassettes, CDs, music
videos, DVDs);
o copyright collecting societies which administer the rights of artists, publishers and
record companies;
o a variety of other service providers including studio owners, manufacturers,
distributors, retailers,
o broadcasters, venue operators, ticket agents, etc.;
o users of music such as film-makers, multi-media producers, advertisers, etc.; and
o individual consumers, who purchase a musical good or service (buying a record,
attending a live performance, subscribing to a “pay” diffusion service) or
consume it for free (listening to broadcasts, background music, etc.)
Digital Revolution- “[T]he capacity to store musical sounds as computer files, to copy
and reproduce them on personal computers, and to transmit them over the internet
(Thorsby, 2002, p.7)”.
2. Methodology
2.1 Data Collection Method
In this paper the researcher will be exploring the research question using primarily a qualitative
research method. Qualitative research usually “emphasizes words rather than quantification in
the collection and analysis of data” (Bryman & Bell, 2011). In exploring the factors of the
“digital revolution” and their effects on the risk management practices used by record labels, it
will not be possible to use a quantitative research method. This is due to the vagueness of several
elements of the research question and the sub questions. Due to this vagueness the research
question is not a quantifiable one, but it is however a qualifiable one. This means that the
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primary research must be conducted using qualitative research methods to uncover the answers
to the questions. This is not to say that the research will be conducted entirely through qualitative
research, instead the researcher hopes to be able to answer the proposed question and sub
questions through a limited use of a mixed research method. A mixed method research design
that incorporates both qualitative and quantitative research can have a practical advantage on
single method research designs when looking into multi-faceted questions (McCusker, 2014). A
qualitative method can be used for the majority of the research and embellished with aspects of
the quantitative method to further strengthen the detail and clarity of the paper.
2.2 Research Design
“Research design provides a framework for the collection and analysis of data” (Bryman and
Bell, 2011, pg. 40). For this paper, a type of case study will be used to research the subject. Case
studies are a useful research tool that can be utilized to discover why a decision or set of
decisions was made, how these decisions were made, how they were applied, and with what sort
of outcome (Schramm, 1971). The case study research method encompasses a wide scope of
information. As Yin explains it (2014, pg. 15),
“A case study is an empirical inquiry that
Investigates a contemporary phenomenon (the “case”) in depth and within its real-world
context, especially when
the boundaries between phenomenon and context may not be clearly evident.”
In this study, the researcher plans to discover what factors in the music industry allowed record
companies to take manageable financial risks in both the pre-digital age and the post-digital age
to see how the digital revolution has affected risk management in record companies. To obtain
relevant information for this the researcher will be utilizing a multiple case study method. This
has been chosen in order to effectively observe both the pre-digital and post-digital ages of the
music industry, and note on their similarities and differences within their approach to risk
management.
2.3 Source Criticism
To get the most complete data on the subject, the researcher is including both primary and
secondary sources within this research. The primary sources used in this paper are defined by
Appanniah in the book Business Research Methods as any sources that are “…collected from
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interview, observation and survey (Appannaiah et al., 2010)”. In this paper, the primary source
consists of an interview conducted through Skype with Peter Åstedt, who is the CEO of s
Swedish publishing company Musichelp, CEO for DistroSong, as well as an A&R rep for Dead
Frog Records and a board member of SOM (Swedish independent music producers), A2IM, and
Mbin (Music business independent network).
The rest of the research in this paper will be based on secondary sources, which are defined as
such:
A secondary source analyzes, interprets, assigns values to, provides conjecture on, summarizes,
reorganizes, or draws conclusions about events reported in primary sources. Secondary sources are
one or more steps removed from the events under study. They may contain pictures, quotations, or
graphics from primary sources (AJN, 2009).
In this paper, the secondary sources will be consisting of articles, journal entries, books, news
articles, and website information.
There are distinct advantages and disadvantages that come with each type of source method.
While primary sources come with the advantage of direct and controlled access to contemporary
data, they also run the risk of being incomprehensive and/or laden with the researcher’s own
bias. In this particular case, the interviewee’s first language is Swedish. This may present some
problems when trying to translate his marketing experience through his secondary language.
Similarly, his accounts of the music industry may be biased towards a Swedish market which is
in some distinctly different from the American market in which the majority of the secondary
data originates.
Likewise, while secondary sources are easier to access and provide a greater variety of data they
also run the risk of being laden with the authors bias and/or could be based on an inaccurate or
misinformed sources. To limit the effects of these disadvantages, the researcher will be
employing Bryan & Bell’s (2015) standardized four point criteria to evaluate the quality and the
objectivity of the secondary sources found in the research:
Authenticity - Is the evidence genuine and of unquestionable origin?
Credibility - Is the evidence free from error and distortion?
Representativeness - Is the evidence typical of its kind, and, if not, is the extent of
its untypicality known?
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Meaning - Is the evidence clear and comprehensible?
2.4 Theoretical Framework
In order to analyze the field of risk management within the music industry the use of theories
will be utilized. One of these theories is the Modern Portfolio Theory. According to researcher
Anna Dempster, Modern Portfolio Theory is,
“…concerned with the diversification of risks to investors, makes the distinction between
unsystematic (e.g. company specific) risk which are random factors that cancel each other out as the
size of the portfolio increases, and systematic (e.g. such as macro-economic) factors that affect all
firms in a particular market in the same way and therefore would not cancel each other out even if the
size of the portfolio of investments was increased. Therefore, while unsystematic risk can be
managed, systematic (or market) risk remains in all portfolios (Dempster, 2006, pg. 211).”
3. Research Results & Findings
3.1 Risk Management in the Music Industry
Risk management has long been an important tool used within the music industry to create
investment plans and marketing strategies. Every song that is produced within the industry
carries with it a risk once money or other resources are invested in it. Risk management within
the music industry is focused on minimalizing this risk and creating the highest possible return,
in terms of notoriety, image, and financial gain, for the amount of resources invested in it.
According to an interview with Peter Åstedt (2016), CEO of Swedish publishing company
Musichelp and A&R rep for Dead Frog Records, record labels are the most common carriers of
risk within the industry and are the area in which risk management is employed most frequently.
When an artist signs with a record label there are several barriers they must face. The strength of
both the artist’s and record label’s risk management ability and knowledge is critical in being
able to surpass these hurdles and break into the music industry. These barriers are summarized
by Gerard Lewis, Gary Graham, and Glenn Hardaker in their 2005 article “Evaluating the impact
of the internet on barriers to entry in the music industry" (p.351) as:
The complex, capital-intensive logistics of an international distribution network that must
cope with sudden changes in demand (independents often trade their international
intellectual property rights against international distribution.
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The huge marketing costs involved in “pressing music into the market” in which six
figure dollar sums are spent on chart-bound albums in the major national markets, such as
the UK or Germany.
While these barriers do apply to all record labels and artists it is important to note that not all of
them handle an equal amount of risk when it comes to production costs. Major record labels and
star artists handle these barriers in quite a bit of a different way because of their financial support
and industry experience. The “capital-intensive logistics” mentioned by Lewis et al. (2005) are a
possible reason why the current four major labels (EMI, Sony BMG, Universal Music Group and
Warner Music Group) “account for around three quarters of all recorded music that is sold
worldwide (Marshall, 2013, p.6)”. Recent technological innovations have reduced this power,
allowing smaller labels to afford the production of professional-level recordings, though the
major labels still hold their competitive advantage when it comes to the large scale production,
distribution, and promotion of the new music on the market today (Marshall, 2013).
The relationship between the major labels and the independent labels is at least partially due to
the way popular demand shapes in the music industry. Creating a new music star requires a
major investment and, by comparison, taking the already-successful stars and hits of the past and
repackaging them would seem to be a much more reliable and predictable investment. However,
this sort of repackaged investment is often hindered by the cost of repackaging content that has
already proven successful. This leads major labels to take the risk first on promising acts while
leaving the option of repurposing old hits as a backup plan. This option is often not fiscally
available to independent labels which often are forced to take the riskier artists that they can
afford. Major labels devolve risk to these independent labels in an attempt to lighten their risk
which in turn allows for the independent labels to gain access to some of the major labels’
resources and access to a fresh market that is full of potential (Bilton, 1999).
Record labels often utilize a theory commonly referred to as Modern Portfolio Theory to manage
the risk that is spread out amongst their signed artists. As previously stated in the theoretical
framework section, Modern Portfolio Theory is defined by researcher Anna Dempster as being,”
concerned with the diversification of risks to investors”. The theory,
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“…makes the distinction between unsystematic (e.g. company specific) risk which are random factors
that cancel each other out as the size of the portfolio increases, and systematic (e.g. such as macro-
economic) factors that affect all firms in a particular market in the same way and therefore would not
cancel each other out even if the size of the portfolio of investments was increased (Dempster, 2006,
p. 211).”
While the majority of the risks that are being actively mitigated by record labels fit within the
systemic type of factors, much can be achieved by expanding their portfolios to spread out their
risk amongst a greater number of smaller investments in the hopes that one of them may
reimburse the others and eventually bring profit to the label.
The risk management for evaluating the viability of potential artists begins before even signing a
band to a label. Labels are now looking to see how much time an artist has put into their own
marketing before the label’s investment (Åstedt, 2016). The risk is then calculated based on
many different factors. An example of some of the factors that Åstedt (2016) mentioned is the
importance of an artist’s story and network. It is in this way that star artists also present less risk
for a record company when signing a new contract; the artist already has a good story to pull
listeners in and an established network in which they are able to reach out to the listeners. Åstedt
also mentioned that something as simple as the bands connection to their booking agency could
yield record selling potential. If the band has a booking agency then often the band is granted a
certain number of gigs and “those gigs can sell records”. Put simply, record labels put time into
their initial research to determine whether or not an artist is viable and how much they could
draw for the company (Åstedt, 2016).
Established music stars that have since gotten over these original barriers can be an extremely
profitable investment if chosen wisely, with the potential influence from the sales of a single
successful album able to make a significant impact on a label’s annual figures (Marshall, 2013).
Labels often can take advantage of these star’s intellectual property rights “…to exploit scale
effects and reach the largest possible market size (Bach et al., 2010, p.64)” By focusing their
efforts on their top sellers the label is able to “…spread risk over a variety of artists and music
genres, and to maximize the combined ways of diffusion (Bach et al., 2010, p.64)”. For these
reasons star artists can exhibit much less of a risk to record companies than an artist that is new
to the industry. At the same time, stardom comes with its own risks when producing records. The
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popularity of musicians can be extremely inconsistent and if the popularity of an artist declines
suddenly after a major investment is made, the extra financial commitment to promote the star’s
album coupled with the lack of return on album sales can just as easily translate to a fierce
setback in the annual figures of a record label (Marshall, 2013).
Both established music stars and new artists alike are subject to the risk of failure. Ten percent of
all records released are accounting for 90 percent of the income for labels, or to put it another
way: “90 percent of records released make a loss (Marshall, 2013, p.7)”. However, terms like
“failure” and “loss” run the risk of being misinterpreted in this context. As researcher Lee
Marshall puts it, “…a record can be categorized as a loss-making record if it “does not recoup”
(i.e., if the artist’s royalties do not cover the costs of producing the recording…) (Marshall, 2013,
p.7)”, yet contracts are often structured so that a record company can still make a profit off of an
album while the artist is losing money on royalties (Marshall, 2013)”. This creates a predicament
for the record labels which often face accusations of exploiting artists with unfair contracts
while, on the other hand, still having to endure the financial risks for the 90 percent of the artists
who are not successful (Lewis et al., 2005).
3.2 Risk Management in the Pre-Digital Era
One clear way to see the effects of the digital revolution and their magnitude is to observe the
supply chain as it existed before the digital revolution so it can be contrasted with the digital one.
In the pre-digital era supply chain, “The artists are the content providers, contracted by record
companies to record material that is either their own or provided for them by writers (Lewis et
al., 2005, p.351)”. As the record company had ownership of the exclusive rights of their artist’s
music they had the majority of the power and control of this supply chain. The record company
also usually controlled the distribution and supplier sections. In return, the artists under the label
are provided with “promotion, merchandising and the distribution of their content in a
commodity format (e.g. CD) (Lewis et al., 2005, p.351)”.
Along this supply chain there are several risks that the music industry must moderate to be
successful. One of the oldest risks in the industry is touring. Every live performance is an
investment and every investment carries with it a risk. The time artists take with touring is a
thought out risk that always has to be evaluated pre-tour to be successful (Åstedt, 2016). A risk
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more specific to the time period was studio time. This effected labels and production companies
alike and was especially important in the digital era due to the dependency of high quality
studios and the relatively high price of technology. If a label or production company owned a
studio they were able to reduce the amount of risk they undertook by eliminating the need to pay
for studio time. At the same time there was also the risk that the studio which the label or
production company employed may not be of the highest quality which could translate to a loss
in sales. The alternative of recording with an independent studio carries the risk of an artist not
getting the time they need to do their best recordings (Åstedt, 2016).
Risks could also be lessened by an effective marketing campaign of a label’s signed artists so
naturally the marketing campaigns were an important part of a label’s risk management strategy.
Most major record labels had an extensive marketing and distribution network to connect their
music with its fans and build a stronger fanbase. A major label’s marketing campaign usually
included focused branding, information distribution, and sample distribution (Parikh, 1999).
These campaigns would be pushed through a variety of channels to reach the public including
“professional promoters, disk jockeys, dance clubs, television and radio stations (Parikh, 1999,
p.2)”. In addition, the main wholesalers who generally handled the big music releases of the
record labels would also offer a service referred to as “rack jobbing” in which non-traditional
retail outlets like petrol stations and supermarkets would be supplied with records and display
material to further sell the artist to the public (Lewis et al., 2005). These efforts also served the
purpose of creating a valuable community of music fans with similar tastes who could be
depended on in the future to help with album sales. In this way these marketing campaigns were
a long term investment as well when it came to risk management.
Without the public’s access to information that we know today with the innovation of the
internet, record labels were often able to manipulate the music market through clever booking
strategies and sales practices to make their artists bigger than they actually were. According to
Peter Åstedt (2016), “Labels had the housewives that actually went out and bought records.
They’d send them money to buy the latest single every week”. Artists could also be given a spot
at a big festival or put on a big stage to give the audience the impression of the artist being larger
than they were and increase the likelihood of sales or a stronger fanbase (Åstedt, 2016). During
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this period the public could do little to verify if a band was really as big as the stage they were
standing on implied or if they were as popular as their record sales indicated; these just had to be
taken for granted as there was usually no way to fact check them. These practices were, however,
a two way street when it came to risk management for record labels. While building an artist up
through these practices helped to reduce the risk of that artist, record labels also were subject to
the same practices enacted by the artists themselves in their initial attempts to get signed. An
artist could present themselves as bigger than they actually were and labels would have little in
their power to confirm this or not, so it would be a risk to the labels when they would decide
whether to trust the hype around an artist and sign them or not (Åstedt, 2016).
The end of the pre-digital era saw the beginnings of one of the most discussed risks of the
digital era, which would be the risk of illegal distribution of music. In the digital era this came in
the form of peer to peer sharing, downloading and torrenting, but in the pre-digital era this was in
the form of illegal copies of CD’s and cassettes. Even though the US had already developed
powerful copyright laws, the non-legitimate sales from these copies during the 90’s totaled
around 27 million units annually, worth 280 million dollars (Thorsby, 2002).
3.3 Risk Management in the Digital Era
As the western world moved into the digital era, so did the music industry. Risk management
remains important in the modern digital era, but the focus of it has shifted and the types of risks
that are being encountered have changed with the technology. This technology has allowed for
more of these risks to be tracked and in result, “The risk taking today is more calculated than
ever (Åstedt, 2016)”.
Some risks of the previous era were reflected into this era, but through the access of the internet
and modern technology new risks have come to replace them. According to Åstedt, when
comparing the risks of the past to the risks of today, the risk of an artist not getting their record
out to the public due to distribution restraints has been replaced with getting forgotten in an open
market. “Today the distribution system is open. So that means before I had maybe 10,000 bands
to choose from, today I have over 100 million… It’s overwhelming (Åstedt, 2016)”. In other
areas risks were lessened by the advances in the production technology. On the publishing side,
the digital revolution paved the way for a technical/manufacturing revolution that had made
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recording technology increasingly cheaper and simpler. Before 2001, artists and labels were
heavily dependent on their studios and had to accept the risks previously mentioned that were
attached to that dependency. With cheaper technology and easier access to computer artists and
labels are now much less dependent on the studios. This mitigated dependency on the studios can
mean a lessened risk for the various industry figures that regularly use them (Åstedt, 2016).
The supply chain has seen many modifications in the digital era. The internet has developed into
a key distribution, promotion, and marketing platform for the music industry. Some of the
important new areas within the supply chain are the online or computer based music services like
Spotify, iTunes, and Pandora along with computer or mobile based social media platforms like
Facebook, Instagram, Twitter, and Snapchat. Each outlet comes with its own potential and risks.
Artists who are innovative and can use the social media outlet that resonates the most with their
target market have a higher chance of reaching a greater number of fans.
The first online music services began to be seen online around 1995, but it wasn’t until Apple
Computers had introduced their iTunes service in 2003 that the online music service model
seemed to show real potential (Vaccaro and Cohn, 2004). Within the first 6 months, the service
saw 14 million songs being purchased for download. Apple saw the service reach 100 million
downloads just 15 months after being introduced (Vaccaro and Cohn, 2004). Spotify and
Pandora have seen similar results; Spotify currently amassing an impressive 75 million users
with 20 million of them as paying premium members (Spotify for Artists, 2016) and Pandora
reporting over 80 million monthly users (Pandora Media, Inc., 2016).
Social media also plays a valuable role in today’s music industry. Social media has become a
powerful networking tool for most artists and due to the popularity of several platforms it can be
an effective and wide reaching tool for artists to discover and communicate with their audiences.
Social media has come to be a “way to calculate risk” (Åstedt, 2016) for labels, when
researching the viability of an artist. It gives the labels places to look to get a better
understanding of an artist’s story and what sort of following they have. According to Åstedt,
“Today one of the biggest risks for artists is time; time to use social media and connect with fans.
Record labels want artists to do more and more of their marketing (at least online) by themselves
to reduce their own risk (Åstedt, 2016)”. This means that modern artists are increasingly being
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needed to be very proactive marketers and understand how to sell their story through social
media. However, it is the type of following that can often be the most important aspect of a social
media network that labels will look at when determining the risk posed by an artist that they are
considering signing.
Before the digital revolution record companies would mostly determine the risk and viability of
an artist by the numbers they had in albums sold, money made, concerts played, etc. In today’s
music market, fans when it comes to evaluating the risk and viability of an artist, the raw
numbers a band has are not as important as the story of the artist, their network, and their
connection to their fanbase. Even when it comes to an artist’s network, simply a number of likes,
followers, or subscribers is not in itself an indicator of a less-risky artist. Based on his A&R
experience with Dead Frog Records, Peter Åstedt (2016) remarked on the subject,
“Nowadays, it’s better to have an artist…that maybe doesn’t have a big fanbase but a fanbase that’s
really passionate about them and actually shares the songs. That’s going to be taking less risk. An
artist with 1000 followers that are actually sharing their music is less risk than an artist with 2 million
followers who aren’t really interacting with them.”
One of the most discussed risks within the modern music industry is that of the illegal torrenting,
sharing, and downloading of music through peer-to-peer networking services. There is a constant
risk that these services could undermine the profitability of the music industry. This fear is
summed up by Des Freedman (2009) in his Managing Pirate Culture: Corporate Responses to
Peer-to-Peer Networking,
The Internet facilitates a much more direct relationship between creative producers and consumers
than was previously possible and threatens the position of the established record companies as key
players in the music value chain. In particular, the existence of peer-to-peer (P2P) networking services
that allow for the illicit swapping of music files online raises the possibility that the current centres of
industry power may be marginalised in the new digital music environment. (p.173)
In his paper Des Freedman (2009) goes on to explain that the origins of the fears about P2P
networking services are too simplified and that the risks implied by the many organizations that
fear them are a bit misguided,
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The characterisation by the IFPI [International Federation of the Phonographic Industry] that demand
for records is fundamentally strong and that Internet piracy is to blame for falling sales is a simplistic
reaction to a complex problem. Demand for and sales of music are shaped by a range of factors
including the impact of the wider economy, levels of creativity, the scale of corporate innovation (or
conservatism), the pace of technological development and the unpredictability of individual consumer
taste. Throughout its history the music industry has been subject to cycles of boom and slump, none of
which have been caused by a single identifiable factor (such as piracy). (p. 174)
In Professor Ulrich Dolata’s (2011) article, The Music Industry and the Internet: A Decade
of Disruptive and Uncontrolled Sectoral Change he further outlined the combination of
factors that some are currently attributing to purely the risk of P2P. These include:
The quickly shrinking market for CDs that came after their success in the 90’s
The variety of competition for music purchases in the form of DVDs, cell phone
use, and gaming.
“A radical technological change that has effectively called into question the long-
successful structuration of the industry that had been controlled by the majors. On
the one hand, music and films are now digital goods, which can be repeatedly
copied without any loss of quality. On the other hand, data compression standards
allow for the unproblematic exchanging and downloading of even data-intensive
digital products. And finally, since the beginning of this century, the Internet has
rapidly established itself as the ideal medium for the global exchange of these sorts
of products (Dolata, 2011, p.8)” which has led people to change their usage
patterns.
None of these reasons debate the belief that P2P can be a risk to the profitability of the
industry, as illegal sharing is a very real and present risk in the music industry, they instead
offer the point that the modern industry has many risks that are leading to drop in
purchases that we see today.
Some artists are taking advantage of the modern opportunities that are being presented
online today. There are several stars who maintain the opinion that the internet is a place
where they see opportunity to be free from the control of record companies and create
18
more direct relationships with their fans. In 2007, Radiohead became the face of this sort
of ideology when they distributed their latest album, In Rainbows, without label support
(Marshall, 2013). They utilized the internet and offered their album on their website to be
downloaded for whatever cost the customer wanted. Both the independent online release
and the flexible pricing strategy that Radiohead employed were massive risks, but they are
ones that paid off. Radiohead generated a massive amount of publicity for their new
release and was reported to have made an income of around $3 million (Marshall, 2013).
Other artists have since been taking on these same risks in the modern industry and
challenging the idea that the power of the industry must lay in the hands of the record
labels.
4. Conclusion
The research conducted in this paper was an attempt to examine the factors of the “digital
revolution” that have affected risk management within record labels. The music industry has
been developing risk management strategies over its lifetime and these continue to evolve. These
strategies attempt to reduce the risks presented by both the internal and external factors that
come with the constant developments within the music industry as well as the more general
changes in the outside world that the music industry operates in. These changes have increased
massively due to the digital revolution; both in size and in magnitude. At the heart of these
developments is the
“…central paradox of 'the culture industry'… the attempt to treat symbolic goods as commodities.
The unpredictable and ephemeral values of symbolic goods are assigned a fixed commodity value.
This in turn allows creative processes to be streamlined and rationalised to conform to a model of
production and industrial organisation imported from manufacturing. This attempt to assign
commodity values to cultural goods does not resolve the problem of risk in the creative and media
industries. Instead risk is simply devolved or deferred (Bilton, 1999, pp.20-21)”.
Internally, the music industry has seen a rise of different ways to market, distribute, and produce
music as a result of the technological innovations that came with the digital revolution. The
weight of the marketing campaign has been transferred more to the artists themselves as an
active presence on web-based social media has become more important. The social media
platform they operate on and the time they spend marketing themselves on it are both modern
19
risks. Also, the distribution of music through physical means is a dying concept. As torrenting,
downloading, and other illegal P2P networking methods still present a risk to the industry, artists
are looking increasingly towards touring and streaming services like Spotify and Pandora to
distribute their music. Some bands may find the risk of self-releasing to be an effective
alternative to releasing through a record label altogether. Lastly, as technology continues to make
music production cheaper and simpler, the risks of ineffective studio time and production value
are becoming less important.
Externally, as technology has continued to progress there has always been new risks that come
out of the transitionary period where the music industry must adapt around the technology. The
great majority of these technological innovations, like the invention of the radio or the
innovation of the internet, are out of the music industry’s direct control and their effects can and
have drastically affected the way that the industry has operated. External risks, such as these, will
always exist but it can be hoped that by experience with them and knowledge of them, they can
possibly be mitigated in modern risk management.
Risk management will continue into the future to play an important role in the music industry.
The domain may change, as it has in the past with the innovation of CD’s or the internet, but
there will always be a degree of risk in this industry. It should be noted that the other side of this
issue is the opportunity that lies within these risks. Whether it is for the producers, the labels, the
artists, or even the consumers; in each risk their lays the opportunity for success. The social
media outlet an artist communicates with can be incredibly effective if used appropriately and
with the correct target market. A diverse collection of artists under a label can aid in spreading
out its risk over a greater number of prospects. Risk management will be the key from turning
the risks of the music industry into these possibilities. This research is just at the beginning
stages of uncovering the success of risk management in the past and how it is used properly
today. With more research invested in the subject, the researcher is confident that the music
industry could potentially learn much more about how it can continue to succeed in a modern
industry as unpredictable and multi-faceted as the music industry.
20
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