How to Open & Operate a Financially Successful Independent Record Label

How to Open & Operate a Financially Successful

Independent Record Label

By Martha Maeda

How to Open & Operate a Financially Successful Independent Record Label

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Library of Congress Cataloging-in-Publication Data

Maeda, Martha, 1953-

How to open & operate a financially successful independent record label : with companion CD-ROM / by Martha Maeda.

p. cm.

Includes bibliographical references and index.

ISBN-13: 978-1-60138-142-2 (alk. paper)

ISBN-10: 1-60138-142-5 (alk. paper)

1. New business enterprises. 2. Record labels. 3. Marketing. I. Title. II. Title: How to open and operate a financially successful independent record label.

HD62.5.M324 2011

384--dc23

2011026356

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DEDICATION

This book is dedicated to all the artists, producers, and technicians who enrich our lives with wonderful music, year after year.

Table of Contents

TABLE OF CONTENTS

Introduction

CHAPTER 1: What is an Independent Record Label?

CHAPTER 2 : Setting Up Your Record Label

CHAPTER 3 : Writing a Winning Business Plan

CHAPTER 4: Financing Your Record Label

CHAPTER 5: Finding and Working with Artists

CHAPTER 6: Contracts and Agreements

CHAPTER 7: Music Publishing

CHAPTER 8: Copyrights and Trademarks

CHAPTER 9: Setting Up a Website

CHAPTER 10: Recording and Production

CHAPTER 11: Distribution

CHAPTER 12: Promotion and Marketing

CONCLUSION: What Does the Future Hold?

APPENDIX A: Further Reading

APPENDIX B: Glossary

Bibliography

Author Biography

INTRODUCTION

A record label is an entity that produces and markets music. A label can be a single person working from a home office with a laptop, or it can be a corporation with a large advertising budget and a full-time staff of producers, talent agents, sound engineers, graphic artists, marketing professionals, and distributors. You may want to start a record label to produce and sell your own music or because you feel that you have a talent for recognizing good musicians and helping them to develop their careers. Perhaps you have years of experience in the entertainment industry and are ready to strike out on your own. Managing your own label will give you artistic freedom and the power to make important decisions without having to answer to a committee of corporate executives. You may want to apply your knowledge of marketing and promotion to selling an exciting and rewarding product. Or you may simply have a passion for a particular genre of music and confidence that you can succeed.

Whatever your motivation, this book will help you with every aspect of setting up and running an independent record label. Learn how to set up your record label as a legal entity, how to prepare a business plan, how to keep accounts and prepare taxes, and how to protect your intellectual property. Read about the history of the music industry, current trends, and the anticipated directions the industry will take in the near future. Review helpful suggestions for discovering and working with talented musicians and artists, and producing and recording music. Craft legal contracts that protect the best interests of your label and your artists. Learn how to record and market music and the roles of producers, engineers, and artists. Explore multiple opportunities for publicizing and promoting your music, including social media and viral marketing. Learn how to work with distributors, music stores, and media outlets to make your products widely available. The more you know about the music business, the greater your chances of success.

The word record in this book refers to any form in which music is recorded and sold — a vinyl record, CD, DVD, tape cassette, MP3 file, audio download, and any new technology that has not yet appeared in the market. The world of music is evolving so rapidly that it is difficult to anticipate the next direction it will take. Trends in the music industry are driven not only by new technologies, such as cell phones with universal wireless access, but also by new forms of social networking and sharing music, such as Facebook, YouTube, Pandora®, and Internet radio.

It takes years of dedication and effort to develop a successful record label. The entertainment industry is volatile; an artist or a genre that is extremely popular today may be almost forgotten next year. Be prepared for a roller coaster ride. You will learn to make the most of the peaks and to strategize your way through the valleys. Each independent record label is as unique as its founder(s) and the artists it promotes. Some thrive in a local scene; others sell to a global audience; still others have the support of a small but intensely loyal, genre market. For young people in particular, music is more than entertainment; it represents a brand and a lifestyle with which they thoroughly identify. Genres such as punk, indie, metal, and emo are associated with specific styles of clothing and fashion, behavior, attitude, and ideology. Music has become inextricably entwined with advertising and commercial entertainment products — some of today’s successful artists first attracted attention when one of their songs was used in a popular TV show or commercial or when they participated in a televised talent quest. These trends present unique opportunities to break into mainstream music markets.

Since their inception, independent labels have been responsible for introducing some of the world’s most beloved artists and genres to mainstream music audiences. However, the development of digital recording technology and the explosive growth of the Internet, digital downloads, and social networks has dramatically altered the arena in which independent labels operate. Today, a good recording can be made with a relatively small investment and marketed through the Internet. Hundreds of thousands of independent labels and artists compete for the attention of a global audience. Independents use social networking and innovative marketing to engage their fans and develop a loyal following.

Recording a great album is only the first step. The real challenge is getting that album out into the marketplace, building an image and a following for your label, and making a living for yourself and your artists. You will need a wide range of skills to run a successful record label, including an intuition for good music, the ability to work effectively with artists and professionals, and an aptitude for marketing and distribution. Your label also needs a solid business foundation, or it will founder even in the face of runaway popularity. You will need money to invest in recording and advertising. If you are deficient in any of these areas, you must find partners or hire employees who have the skills and resources to complement your own.

Your record label is a reflection of who you are — your instincts, talent, musical tastes, creativity, business ability, and vision. Your personality will determine the character of your label, and your passion for music will be the driving force behind its development. The information in this book will help you to direct that passion into a lucrative and successful business. The music industry is vast; some topics can only be touched on briefly in this book. Appendix A: Further Reading contains a list of suggested reading and resources where you can find more information on many of these subjects.

Table of Contents

CHAPTER 1: What is an Independent Record Label?

An independent record label, or indie, is just that — it is funded and operated independently from the major record labels that dominate mainstream music markets. During the rise of punk music, which emphasized independence and a do-it-yourself ethic, a record label was defined as an indie only if it studiously avoided having anything to do with major record labels. Today, some independent labels collaborate with major record labels in distribution or production deals. Over the years, major record labels seeking to expand into new markets have purchased many independent labels. In some cases, these labels have retained artistic control and maintained their unique images while receiving support from the parent label.

Independent record labels are as old as the recording industry; the earliest were founded at the end of the 19th century and beginning of the 20th century by gramophone companies to manufacture the wax cylinders and discs played on their machines. Many independent labels were established to promote the music of a single band or artist or a particular genre or niche in the music market. Historically, independent record labels heralded the emergence of new styles of popular music, such as rhythm and blues (R&B), jazz, rock ‘n’ roll, punk, pop rock, heavy metal, and new age or world music.

As you can see from the stories of the Big Four record labels below, they all began with the merger of two or more smaller labels and grew by acquiring the brands and music catalogs of other labels until they became mega-corporations with the resources to catapult a new and relatively unknown artist to global stardom in a few short weeks.

The histories of the four major record labels are filled with successes and failures, colorful personalities, tales of beloved artists and musical groups, acquisitions and mergers, and ultimately, influxes of cash from international investment companies. Their executives had to be agile: jumping into new genres, finding ways to exploit overseas markets, keeping up with trends, quickly retiring outdated music, and always looking for the next big thing. Their fortunes became entangled with the parent companies that funded them, fluctuations in the stock market, and dips in the economy. The biggest challenge of all has been the explosion of digital and file-sharing technologies over the last decade. No longer able to pull in huge profits from the sales of hard copies such as CDs and vinyl albums, record labels have had to find ways to make money from downloads and sales of single hit songs rather than compilations. They also had to deal with rampant piracy and illegal file sharing, which is almost impossible to control. Several companies experienced setbacks due to negative publicity when they sued their own customers for sharing files on their computers and others when the DRM (digital rights management) software they embedded in their music files to discourage illegal sharing inadvertently made computers vulnerable to viruses.

Independent record labels experience their own set of challenges, primarily the high cost of promoting artists and records. They must decide where to invest their limited resources to achieve the greatest results. Another challenge is finding production facilities and establishing distribution networks for their CDs and records. Even success can be a challenge: an independent label may not be prepared to supply its products in large quantities or deal with the sudden rise of one of its artists to international prominence. Successful independent labels usually operate within a specialized field or genre.

New technologies have made it much easier for you to start a record label of your own. Digital recording equipment and software make it possible to produce music with a relatively small financial outlay. On-demand printing and distribution companies allow you to order copies of CDs or DVDs as you need them instead of having to buy hundreds at a time. Digital music can be distributed through downloads without the need for hard copies. The Internet and social media such as Facebook, YouTube, and Twitter™ provide unprecedented avenues for promotion and publicity. Using the Internet, you can quickly do research, locate professional services, and compare prices without leaving your desk. Computers also enable you to do your bookkeeping, keep track of contracts, and produce your own high-quality photos, publicity materials, posters, and press releases. Later chapters will cover these topics in detail.

The Big Four

Four major record labels, known as the Big Four, represent as much as 75 percent of the annual music market. They are Sony Music Holdings, Universal Music Group, EMI Group, and Warner Music. Many familiar record labels, such as Columbia Records, which Sony Music Holdings owns, are subsidiaries of one of these major labels. An artist may be contracted directly to the major label or to one of its subsidiaries. Subsidiary labels may work somewhat independently, but the major label that owns them typically makes important financial decisions. In some cases, major labels offer distribution services to indie labels that coincide with their own markets.

Major labels pour massive resources into promoting and marketing their artists. The decision to sign a particular band or artist is made by a corporate hierarchy and is based on whether company executives believe the artist can achieve an acceptable level of sales. Once a contract is signed, hundreds of the label’s employees work on producing, recording, releasing, and publicizing the artist’s music. The label arranges radio play, publicity, concert tours, and distribution through its own well-established channels. In return, the artist must relinquish control over some aspects of his or her career and, in many cases, his or her artistic freedom.

Each of the major labels has a music publishing arm that manages the rights to its artists’ music and lyrics. The music publishing branch is an important source of revenue because it earns money every time someone wants to copy, perform, or rerelease a song. Nightclub entertainers, high school glee clubs, orchestras, bands, and choirs must all pay to use the copyrighted music. Another important asset is the record label’s catalog — its past hits and recordings that can be rereleased as compilations, box sets, and commemorative albums. Many catalogs are acquired when a label is purchased by another label. In 2010, Warner Music Group reported that its catalog had been responsible for 40 percent of its revenue and its publishing arm for 18 percent of its revenue for the previous year.

Activities of a Major Record Label

In its 2010 Form 10-K, the annual report every publicly traded company must file with the SEC, Warner Music Group describes its business activities:

"We play an integral role in virtually all aspects of the music value chain from discovering and developing talent to producing albums and promoting artists and their products. After an artist has entered into a contract with one

of our record labels, a master recording of the artist’s music is created. The recording is then replicated for sale to consumers primarily in the CD and digital formats. In the U.S., WEA Corp., ADA, and Word market sell and deliver product, either directly or through subdistributors and wholesalers, to record stores, mass merchants, and other retailers. Our recorded music products are also sold in physical form to online physical retailers, such as Amazon.com, barnesandnoble.com, and bestbuy.com, and in digital form to online digital retailers like Apple’s iTunes® and mobile full-track download stores, such as those operated by Verizon or Sprint™. In the case of expanded-rights deals where we acquire broader rights in a recording artist’s career, we may provide more comprehensive career support and actively develop new opportunities for an artist through touring, fan clubs, merchandising, and sponsorships, among other areas. We believe expanded-rights deals create a better partnership with our artists, which allows us to work together more closely with them to create and sustain artistic and commercial success.

"We have a decades-long history of identifying and contracting with recording artists who become commercially successful. Our ability to select artists who are likely to be successful is a key element of our Recorded Music business strategy and spans all music genres, all major geographies, and includes artists who achieve national, regional, and international success. We believe that this success is directly attributable to our experienced global team of A&R (artists and repertoire) executives, to the longstanding reputation and relationships that we have developed in the artistic community, and to our effective management of this vital business function.

"In the U.S., our major record labels identify potentially successful recording artists, sign them to recording agreements, collaborate with them to develop recordings of their work, and market and sell these finished recordings to retail stores and legitimate digital channels. Increasingly, we are also expanding our participation in image and brand rights associated with artists, including merchandising, sponsorships, touring, and artist management. Our labels scout and sign talent across all major music genres, including pop, rock, jazz, country, R&B, hip-hop, rap, reggae, Latin, alternative, folk, blues, gospel, and other Christian music. WMI markets and sells U.S. and local repertoire from its own network of affiliates and numerous licensees in more than 50

countries. With a roster of local artists performing in various local languages throughout the world, WMI has an ongoing commitment to developing local talent aimed at achieving national, regional, or international success."

Warner Music Group

Warner Bros. movie studio started Warner Bros. Records in 1958 to release its movie soundtracks after one of its actors, Tab Hunter, scored a hit with Young Love for Dot Records, a subsidiary of rival Paramount Pictures. At that time, the popularity of rock ‘n’ roll and pop music was just taking off, and the label was soon a major entity in its own right. In 1963, Warner Bros. Records purchased Frank Sinatra’s label, Reprise Records. In 1968, Seven Arts Productions bought Warner Bros. and acquired Atlantic Records, a dominant jazz and R&B label. In 1969, Kinney National Services purchased Warner-Seven Arts for $400 million. In 1970, Kinney paid $10 million for Elektra and its sister company, Nonesuch Records.

In 1971, the company changed its name to Warner Communications, but became known in the music industry as WEA (Warner Elektra Atlantic). Through its purchases, the company acquired rights to many of Atlantic’s rock artists, including Led Zeppelin, Cream, Crosby Stills & Nash, Yes, Average White Band, Dr. John, King Crimson, Bette Midler, and Foreigner, as well as to its earlier catalog of soul and blues recordings. Elektra brought in The Doors, Judy Collins, The Stooges, and a rich variety of folk, classical, and world music. When its distributor was unable to keep up with the demand for newly emerging Grateful Dead albums, the company established an in-house distribution arm. The acquisition of Asylum Records in 1972 brought in Linda Ronstadt, The Eagles, Jackson Browne, and Joni Mitchell. WEA was instrumental in the U.S. success of Fleetwood Mac and the pioneer heavy metal bands Led Zeppelin, Black Sabbath, and Deep Purple. Alice Cooper, Montrose, and Van Halen were among the first U.S. metal bands to sign with the label.

In 1977, WEA became the distributor for several punk rock and new wave bands including the Ramones, the Dead Boys, and Talking Heads for Sire Records, which it acquired in 1978. WEA jump-started the U.S. careers of Madonna, Ice-T, Depeche Mode, Echo & the Bunnymen, The Pretenders, and The Cure, and later successfully promoted Seal, k.d. lang, Tommy Page, and Ministry. WEA labels also signed contracts with The Cars and Prince. During the 1980s, WEA also distributed a number of successful independent labels.

In 1988, WEA acquired the German classical label Teldec and the UK Magnet Records. In 1989, it bought Italian CGD Records and Japanese MMG Records. From 1981 to 1984, Warner Communications was a partner in the launch of MTV. In 1990, Warner Communications merged with Time Life® to create Time Warner Cable, the largest media company in the world at that time. The same year, WEA purchased French label Carrere Disques. In 1991, WEA was renamed Warner Music. In 1992, it acquired the French classical label Erato and in 1993 the Spanish DRO Group, Hungarian Magneoton, Swedish Telegram Records, Brazilian Continental Records, and Finnish Fazer Musiiki. In 1992, Time Warner acquired a 50 percent stake in the Rhino Records label. Rhino signed an agreement that allowed it to begin reissuing recordings from Atlantic’s back catalog. By 1998, Time Warner completely owned Rhino Records.

In 1994, the Warner publishing division, now Warner/Chappell Music, became the world’s largest owner of song copyrights and the world’s largest publisher of printed music when it purchased CPP/Belwin. In 1996, Time Warner took over the Turner Broadcasting System. In 2000, Time Warner consolidated with AOL but suffered reverses when the dot-com bubble burst. In 2004, Time Warner sold Warner Music Group (WMG) to a group of investors led by Edgar Bronfman Jr. for $2.6 billion. In 2009, WMG acquired Rykodisc and Roadrunner Records.

During the first decade of the 21st century, like all major record labels, WMG evolved to adapt to rapid changes in the way music is distributed through digital media. It moved out of record production and sold off its manufacturing operations in 2003. At the end of 2007, Warner became the third major label to sell digital music without Digital Rights Management (DRM), the technology that inhibits the use of digital media, through Amazon MP3 (Amazon.com’s digital music store). In November 2008, WMG’s Atlantic Records reported that 51 percent of its revenue from music sales in the U.S. had come from digital products. WMG as a whole reported that digital sales