The Music Industry - Part 1: The Basics
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This post outlines the general structure of the music industry and how and where money is generated, and most importantly if you’re an artist, songwriter, or rights-holder — how you actually get paid. There’s never been a more exciting time in the industry and I’m stoked to write about this weird and wonderful world of the music business. I’ll be digging into how the industry functions and share some opinions, thoughts, and insights along the way.
The Basics
The foundation of the music industry is intellectual property and copyright law — understanding the rights involved is critical to understanding the business and its revenue streams. The two categories of copyright involved are:
Sound Recordings
Compositions
The sound recording copyright applies to the specific recording, whereas the composition copyright applies to the composition or underlying notes, melodies, arrangement, harmonies, and lyrics of a song. These copyrights generate royalties in various ways for their creators and owners under copyright law.
It’s important to note that compositions can have a one composition —> many sound recording relationship. For example, the underlying composition of David Bowie’s song “Life on Mars?” has been recorded many times in various ways throughout the years, but the underlying musical composition remains constant.
The music industry breaks down into three main segments:
Recorded Music (sound recording copyright, artists and labels)
Music Publishing (composition copyright, songwriters and publishers)
Live Music (elements of both)
That’s the core structure of the music business. Exploiting sound recording and composition copyrights and collecting royalties from uses governed by copyright law as well as generating sales and revenue from live performances. These three segments generate over $60B in annual industry revenue and continue to grow.
Recorded Music
The recorded music market is primarily driven by record labels. Labels seek out and work with artists to fund, distribute, license, and promote recordings of songs. Record labels fund artist recordings in exchange for ownership of the master recordings and/or a license to collect the associated sound recording royalties. Historically record labels demanded ownership of the master recordings and would pay the artist a fee/royalty, however it’s becoming more common to see artists retain partial ownership while licensing collection rights to the label.
There are three major record labels: Universal Music Group, Warner Music Group, and Sony Music Entertainment.
The major labels and their subsidiaries have an estimated 70% market share1. Each major label also has its own distribution services and music publishing division (more on that to come).
The remaining 30% market share consists of the larger independent record labels and the thousands upon thousands of smaller independent labels and artists.
Historically distribution referred to manufacturing physical vinyl records, cassette tapes, or CD’s and shipping them to stores, but in today’s context distribution primarily refers to releasing music on streaming services such as Spotify, Apple Music, Amazon, YouTube, etc. Distribution plays an increasingly important role in the industry as the democratization of recording software and hardware means artists no longer need to spend tens of thousands of dollars booking recording time at a top-tier studio to release their music to the world.
The major labels have always maintained a dominant position with regards to distribution, and today is no different. In addition to their own distribution services, the majors have acquired or taken ownership stakes in a number of smaller distributors as well. Like everything in today’s economy, controlling the distribution pipeline is a key battleground.
Sound Recording Royalty Structure
I’ve simplified the above chart, but as you’ll see when comparing with music publishing it’s pretty straightforward.
Music Publishing
As mentioned in the introduction, music publishing relates to the composition rights of a song. The primary responsibility and role of a music publisher is to license, exploit, and collect royalties on behalf of the songwriters they represent.
Back in the day, songwriters would write a song and pitch it to a label/artist — if they thought it had potential they would record or “cut” the song. Songwriters would generate royalties every time the song was played publicly or a copy was created. Today it’s more common for artists and musicians to also write and record their own songs so the line between artist and songwriter is more blurred than in the past. Note that this also means that the artist who writes their own songs stands to make significantly more money.
It’s important to understand the royalty structure of composition rights and music publishing because it’s complicated and misunderstood — but also highly lucrative. There’s three main categories of revenue generated in music publishing:
Mechanical Royalties
Mechanical royalties (also called reproduction royalties) are generated each time a musical composition is reproduced, whether physically via vinyl or CD sales or digitally via on-demand streaming services such as Spotify, Apple Music, YouTube Music, and Amazon Music.
Performance Royalties
Performance royalties are generated when a song is "publicly performed". This includes when a song is streamed, broadcast on radio and television, performed live, and played in restaurants, bars, or nightclubs.
Synchronization License
A synchronization license, or “sync”, is a license granted by the copyright holder to synchronize a song with visual media such as films, television shows, advertisements, video games, movie trailers, etc. Sync licenses are needed from both the sound recording and composition owners - generally via labels and music publishers.
Mechanical & Performance Royalty Structure
As on the recorded music side the big three major music publishers control the lions share of the market, with several large independents followed by thousands of smaller independent publishers and millions of songwriters.
For a deeper look, I highly recommend reading Exploration’s explainer on music publishing here. They’ve compiled an outstanding educational resource for all things music industry. I’ll be going more in-depth with royalties in Part II of this series.
Live Music
The live music industry is a complex logistical network that involves artists, labels, managers, concert promoters, booking agents, venues, sound and lighting technicians, and much more — it takes a herculean effort to arrange tours and get artists on stage night after night while also delivering on an amazing experience and performance.
For major acts, artists and their managers in conjunction with the record label will often arrange tours directly with large concert promoters such as Live Nation or AEG — who own or have partnerships with local venues around the globe. Smaller bands or artists often work with booking agents who pitch tours to concert promoters who work with local venues to book shows. At the end of the day it’s all about selling X tickets for X show to maximize the number of fans in attendance for the size of a given venue.
Live music operates somewhat in its own bubble but is absolutely critical for the health of the industry — it’s a significant revenue driver for artists as well as songwriters who collect royalties from live performances — as well as the entire industry that exists to support live music and entertainment.
Coming Soon - Revenue & Royalties
In the next series of posts I’ll dive deeper into royalties, collection societies, streaming services, DMCA and fair use, industry data issues, web3 applications, and much more.
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Omdia, Music & Copyright