How Does The Music Industry Work?

Artists who are major stars work with dozens or partners to tour the world, release albums, singles and videos, appear on TV, sell merchandise and promote their shows and music. To maintain large careers, you need a lot of people. The teams for developing acts tend to be much smaller but someone has to maintain all revenue streams. Working with young artists requires you to wear many hats and learn how the music business works while on the move. You also need to expand your knowledge in order cover all the gaps.

Fuel is what drives these teams. While not all aligned, artists, managers, independent labels and major labels as well as publishers, distributors and promoters work together towards a common goal. Over the years, collaboration has been the driving force behind the music industry.

Nevertheless, every music career is different, and the laws and business practices vary from country to country. The music industry is interconnected as well as fragmented. It is difficult for newcomers to have a coherent, complete picture of the music industry.

We’ve decided to lift the curtain and show you how the music industry really works.

We will be sharing the knowledge that we have gained throughout our career and what we have learned from the people we met in the “Mechanics Series”. We will try to explain what goes on behind the scenes by dissecting the various building blocks in the industry. We will sometimes have to simplify things and use shortcuts in order to explain them. We will try to remain neutral and stick to facts, rather than opinions.

To understand where we’ve come from, we must first know how we got there. In the next section of this article we’ll trace the evolution in the music industry. We will highlight the major promotion channels, and how they have evolved over the years.

The Music Industry in Ten Key Parts

The music industry is a network of partnerships that connects companies and individuals from the creation side of music (singers and songwriters), the customer side (streaming platforms and venues, as well as public performance platforms such radio) to the business side (labels and managers, publicists and Performance Rights Organizations), and those who are involved in the business (distributors, booking agents, and others).

Our Mechanics Project aims to break down this structure in simple terms. We often hear “music industry” used as a unified term. What may seem like a cohesive, single industry is in fact a complex web of parts that overlap and sometimes do not. We decided to structure it and give each of the building blocks a separate chapter. The breakdown is subjective, and not exhaustive. There are certainly more topics we could cover.

1. Recording Industry

In the 2000s, record labels were the worst affected by piracy. In 15 years the recording industry has experienced 3 distinct realities: CD, digital piracy and streaming. The recording industry has changed as a result of the changes in business models. The recording industry faces new challenges even today. DIY artists are bypassing labels by working directly through artist aggregators such as Soundcloud, and the manager is increasingly involved in the promotion of releases.

Labels are still the first thing people think about when they hear the word music. Hip-hop fans are familiar with Def Jam; EDM lovers, OWSLA; and country music fans, Big Machine. Universal, Sony, and Warner are all considered to be “record labels” even though they cover more than just the “recording companies”, including the entire music industry.

+ Bonus We have built a model that allows us to simulate the P&L for a recording release cycle. This is not part of the Mechanics Series, but will be useful to those who are interested in how labels make money.

2. Digital Music Distribution Industry

Distribution is technically a part the recording chain. Distributors have a simple role: they deliver releases to stores and ensure that the money flows back to artists or labels. It sounds pretty simple, doesn’t it?

Not really. DSPs have become a one-stop shop for music discovery, monetization and consumption as streaming has taken over the music industry. Spotify is not just a platform for artists to monetize music, but also a prominent channel of promotion. For 90% of artists, the promotion effect of streaming playlists is more important than revenue they receive from streaming services.

Distributors have become more important in the industry as they are the intermediaries between DSPs, the recording industry and their DSPs. Their business model has expanded far beyond administration and aggregation.

3. Streaming

The adoption of streaming has been the biggest shift in the music industry over the past ten years. And it’s still happening. Even today, streaming service providers are still looking for new ways to grow their audience, improve their product, increase revenues and create a long-term sustainable business model. The music industry is caught up in this process. Streaming has already transformed the way recording companies operate and how we listen to, share and enjoy music.

4. Live and Touring Industry

Slowly but surely, VR is entering live industry. With start-ups like TheWaveVR or NextVR making the case for a new type of experience live, we could see the industry take a turn towards digitalization in the near future. It’s still 99% physical, which means it is the least scalable aspect of the music industry.

It makes no difference, (at least from a resource perspective) whether you distribute a digital album to 100 or 1,000,000 fans. The amount of effort required to organize an international tour that reaches the same million fans is huge, because the industry is still localized and based on networks. Booking a Wellington venue from Berlin is difficult, so booking agents focus on one market. Even international players have to rely upon the local promoters’ network.

5. Licensing & Sync

Music has played a major role in the creative industries, such as film and video games. Sponsorship deals with musicians have become standard practice across all consumer product sectors, from Luxury to FMCG. The licensing department manages all those relationships with external players. Brands and other media are much more than a source of revenue. An artist can benefit from a successful integration if it is done well. We can all think of artists we discovered at the cinema.

6. Artist Management

Managers are unique in their relationship with artists, as they are always on the same page financially. Managers work on global strategies, rather than focusing on one subset of the business. They also help artists make important decisions. Managers coordinate the work of all the professionals involved in an artist’s career, so they must have a thorough understanding of the industry.

Managers are also the best in filling gaps due to their all-round expertise. Managers can take on many roles, depending on what an artist needs. They may replace publishers, get involved in record promotion, or negotiate live performances. The manager is the backbone of an artist’s career.

7. Music Publishing Industry

How do musicians earn money? The answer may not be as simple as you might think. Publishing is the most complex and misunderstood revenue source. The goal of a music publisher is to collect royalties on the artist rights related to the musical work itself, not the recording. This is the domain of the recording industry.

Doesn’t this sound complicated? The process of distributing royalties to authors and composers can take as long as two years. They must go through mechanical collection organizations, such ASCAP, BMI and SACEM in the US and UK, sub-publishers, and publishers. There are also statutory author’s/publisher shares, legislation that varies from country to nation, fragmented rights for music, and many other intricacies.

Bottom line, publishing can be confusing even to experienced music professionals who have never worked in the vertical. The fact that Michael Jackson held the rights to The Beatles catalogue tells you a lot about this side of the music business.

8. Radio

Radio’s future in the music business is still not clear. Radios are also finding it more difficult to reach their audience due to the rise of streaming services. Due to copyright laws, legal barriers and FM/AM frequency restrictions, even large corporations such as iHeart Media, Bauer Media, and SiriusXM cannot reach the same audiences that streaming giants can.

This local focus has a double-sided coin. While radio cannot compete with streaming at a global level, it still retains its power as a channel of communication that is localized. In keeping with the times, traditional radio has invested heavily in the digital world. Radio can now interact in new ways with their audience. While it may no longer be the primary medium for music discovery, radio is still an important promotional tool and a vital part of the music industry.

9. Legal Disclaimer

Each side of the music industry has its own set rules and regulations that are commonly accepted. This helps to facilitate relationships between partners when the law isn’t explicit. Local laws that vary from one country to another can also override these practices in the event of a conflict. Gleichzeitig, legislators try to find new solutions for the challenges of the digital world and bring light to the gray areas of business. These initiatives, such as the recent Article 13, affect the entire industry.

We end up with an industry that is one of the world’s most globalized, but is governed by a system of legislation and contracts that are disconnected. Music professionals need to have a basic knowledge of music law, whether they like it or dislike it.

10. Fans & Audience Attention

The relationship between an artist and his fans is a key resource in the development of a career. Fans always promoted artists and raised awareness within their social circles. As fan-clubs gave way to social networks, the interaction between artists and fans became more important than ever. The technology has transformed the way in which artists and fans interact, as well as how fans communicate among themselves and with the public. In Web 2.0, the fans is media itself – and can be more effective than the traditional channels.