Major Record Labels: Business Model Evolution | In Practise

Major Record Labels: Business Model Evolution

Former Chairman and CEO, Sony Music, UK

Learning outcomes

  • Evolution of the music industry and parallels between MTV, Apple and Spotify
  • How A&R executives scout and sign artists
  • How the commercial terms between major labels and artists are changing
  • How to think about the risk of a major record label moving from rights owner to pure distributor
  • Why artists now have more power and options to come to market
  • The competitive moat around record labels in the old physical world
  • Spotify’s two-sided marketplace and its role in the ecosystem
  • How major record labels need to evolve to serve artists
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Executive Bio

Nick Gatfield

Former Chairman and CEO, Sony Music, UK

Nick is a British music industry executive with over 34 years of experience scouting, signing, and working with global artists such as Amy Winehouse. Nick started his career as a musician in the band ‘Dexys Midnight Runners’ before moving into recorded music. At the age of 26, he was made Director at EMI Records, the youngest in the company’s history. Over the next 20 years, he went on to lead global labels such as PolyGram and Island Records and has worked at three of the four major record labels. More recently, as the Former Chairman of Sony Music, he was leading negotiations with Spotify and both new and old artists in the repertoire. Nick currently runs Twin Music, an incubator for new talent, which funds and services new artists coming to market. Read more

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Nick, can you provide a short introduction to your background and experience in the music industry?

I am a 30 year plus veteran of the recorded music business. I started my professional career as a musician, as a member of a band called Dexys Midnight Runners. By various osmoses and relationships, I ended up taking an A&R job at EMI Records, back in the mid-80s, after I had had enough of touring. The plan around that was always that I was putting my own band together and I was writing songs. I was explaining to people that I had nearly got the set together.

So I started in the recorded music side and the business side, in the mid-80s, at EMI Records, as an A&R manager. For the benefit of those who don’t know what an A&R manager is or does, A&R stands for artists and repertoire. We’re the people who go out and identify talent to sign and then work with that talent to develop their artistry, their material and really represent the artists within the major recorded music companies. I started doing that and some in-house production, so I worked in the studio with quite a few of EMI-signed artists at that time. As things evolved, I was lucky enough to have a reasonably good degree of success and became head of A&R at EMI in 1987. I was 26, at the time; apparently the youngest director in EMI’s history, for what it’s worth. Probably the worst paid, as well.

I worked with a whole range of artists and, again, we were lucky enough to have a good degree of success, in terms of reinventing the roster. Funnily enough, EMI in the mid-80s was actually in the doldrums. It was still considered The Beatles company. It always has been, which is always great, as well as being associated with Pink Floyd and Queen. But in terms of its recent history, at that time, breaking new artists had been pretty poor and, believe it or not, I was still getting queries as to why EMI dropped the Sex Pistols. From the artist’s community, it was a no-no, although I was at school at the time.

We went through a course of really reinvesting in the roster, rebuilding the artist’s roster and that resulted in developing breaking acts, such as Blur, Radiohead, who I was deeply involved with. We did unusual deals at the time, with imprints, like Food Records. In fact, Blur came via the Food Records imprint, as did an act called Jesus Jones, who is somewhat forgotten now, maybe, but there was a wonderful moment in the early 90s, where Jesus Jones and another act that we’d signed, called EMF, traded number one places in the US chart. I got calls about coming to America and I decided to go to the States in the early 90s. I went for Polygram, from 1992 to the end of that decade. At that time, Polygram was the biggest recorded music company in the world and were very European centric.

I ran Polydor Records there and Polygram Music Publishing. The company was then acquired by Seagram, who also had a small music play, called MCA and has morphed into what, today, is the Universal Music Group, which is by far the biggest music company in the world. By some strange quirk of fate, when Polygram was acquired and they, effectively, shut down the US operation, I had that wonderful moment where I wasn’t allowed to work for a period of time, but I was then hired by Universal, to go back to the UK and I took over the running of Island Records. Again, that was a label with a fantastic history of, obviously, Bob Marley, U2, but had been in the doldrums for quite some time, with regards to newer artist signings.
Out of all the majors, Universal was very A&R centric. They were very aggressive about reinvesting and rebuilding the roster. Of course, you rebuild the roster to grow your catalogue, which is the bedrock of your business. We had a very good run with Island Records which, obviously, culminated in amazing acts like Amy Winehouse and Keane.

Towards the end of 2008, I was approached by Terra Firma, Guy Hands, who had recently acquired EMI Records. This was very big news at the time, because it was the first time that an investment business had acquired a music company and saw the value in those assets, beyond the catalogue. I was charged with running a division called New Music, which is really the current artist roster for North American and the UK, which were the two primary repertoire markets. It was a very interesting time, firstly, because it was a very controversial takeover of the company. Music companies have always, basically, eaten their own. Music companies acquired other music companies. There was very rarely a time where a company which had no relationship in music at all, had acquired, at the time, the third biggest major music company in the world. There were a lot of question marks about what they would do with it.

They got a huge amount of flak from the artist community and the existing business community saying, you can’t run a music business, as a banker. It’s a dark art and you’ve got to have the feel and instinct. A lot of that is true, but an awful lot of that is nonsense. There were a lot of practices that we adopted, because of Terra Firma, which I then took on in EMI. Unfortunately, EMI imploded basically, because Terra Firma could not refinance the debt for EMI and EMI was partly broken up, but was then acquired by Universal Music Group and I left and became chairman of Sony Music in the UK.

I kind of ran out of jobs after that point. Apart from Warner’s. For some reason, I never worked for Warner’s; I don’t know why. I went to Sony in 2011 and was there for three years, as Chairman of the company. That was a really interesting period of music. I was entering my fourth decade in the business, but had been in that period, from the mid-80s, right they way through the mid-90s, which was a boom period for music. The mid-80s were incredible and I was a kid who really didn’t know anything about budgets, but I just knew there was an awful lot of money in the business. That was largely driven by the CD boom. CDs started to hit their stride in the early 80s, and you had this huge regeneration of the business, because people were buying their catalogue again, on CD.

It started to slow down a little bit, in terms of that changeover of format and then really hit a brick wall at the end of the 90s, 2000, with the advent of Napster. Napster was the absolute shell-shock of the industry. The music business had actually been guilty of doing this a number of times, where they had looked at new technology or they looked at the new business path and decided it was not for them. They will hand the keys to someone else to build the business and they gave it to MTV in the 80s. MTV totally grew on the back of free content provided by music companies. Music companies paid for the videos, paid to promote them. MTV broadcast them and built this incredible brand, off the back of major music companies’ content.

You could see the same thing happening, at the end of the 90s, when Napster just decimated the business. It’s controversial to say this now, but I think there was an element where Napster was of its moment and music companies had been somewhat cynical about how they were charging for CDs, how they were charging for music and how they were bundling the hit with 10 tracks that nobody wanted, but you’ve got to buy the 10 tracks you don’t want, to get the hit. There was a certain degree of cynicism in there. Of course, the margins were very, very high.

Napster came along and blew that all apart. That was the beginning of a really significant downturn in the business. It was very interesting for me, coming back to the UK and seeing all this happening. Still, the bedrock of the business is, you find great talent. The very peak of the business was the year 2000. That was when the music business was really firing on all cylinders. The volume of the market was incredible. Albums, routinely, would do 10 million plus, globally, at high margin. Napster changed all that and you saw the erosion happen very quickly.

You went through a period, certainly from 2004, 2005, where music companies had to take an almost defensive position. Investing in new talent was a high risk. It has always been high risk, but the rewards, in terms of the return on that investment was much lower. Albums that would have done 10 million, would now do five million, or even less. You could see the volume of the market going down, but consumption going through the roof. More people were accessing music, listening to it and consuming it, but less people were actually buying it legitimately.

There was a lot of retrenchment and a view of taking defensive positions. Even when iTunes came along and said, hey, we’ve got a solution here for you, the digital download market and we can make this highly convenient; we’ve got this device called an iPod, around 2004, 2005. Again, that was a savior, to a degree. Not a huge degree, but it certainly was a savior. Apple controlled 80% of the download market, which is incredible when you think about it now.

Yet again, you see this now happening with streaming. There was a time, eight to 10 years ago, where certainly the major music companies and the bodies that represent them, such as RIAA in the US, could have said, it makes sense for us, collectively, to create a consumer-based platform for accessing our content. We have a mutual ownership here and we can contain this business. But it didn’t happen. Hence the keys to the business were handed to Spotify. The conditions, in terms of licensing major music repertoire to Spotify, were pretty onerous on Spotify. It was hard for Spotify to make money but, obviously, they had to play with the majors because the vast majority of consumption was major recorded music repertoire and the majors all turned the screw, in terms of what they had to pay. 70% of their revenues were paid back to rights holders.

On that basis, it’s incredibly difficult to make a profitable business. At the time, there was a certain degree of cynicism around streaming and consumer adoption. Obviously, over time, it was proven that consumers absolutely wanted to adopt it. Certainly, when I was in business, from a Universal and Sony point of view, it was deemed that we all license our repertoire to anybody who has a legitimate business, who we are confident will pay us for our repertoire, because we want to grow this market and we want to make sure that all boats rise with the tide.

That is largely what happened. You had a significant number of players enter the market. Obviously, there is Apple Music, Spotify, Deezer, TIDAL. YouTube is by far the biggest streaming platform, globally, although the least monetized. The view of the music industry was that we need to have a very vibrant, competitive retail market space. We need Amazon to be as strong as Apple to be as strong as Spotify. We don’t want one dominant player, because that skews the market. What you, kind of, have now is one dominant player, which is Spotify. Amazon, certainly, and YouTube, on scale, is certainly bigger, in terms of global consumption, but there is a value gap between what YouTube to the rights holders, compared to what Spotify pay and certainly compared to what Apple pay.

If you play this forward, five to seven years, do you think how much Spotify have to pay back to the labels, for the repertoire, will decrease, as they gain scale?

No; I actually don’t see that there will be much change there. The reality is – and I think Spotify have realized and this is why they have such an emphasis on third-party content, such as podcasting – it’s very hard to build a significantly profitable business, licensing third-party repertoire, regardless of what it is. Yes, there are minor tweaks, in terms of the pay away but, by and large, the range will be 65% to 70% of major repertoire, because that’s what is now. Now, the majors look at it and go, Spotify are kind of in control and driving the market. In some of those initial discussions with Spotify and as recently as three years ago, there used to be a minimum guarantee that Spotify had to pay the rights holders, regardless of whether the streaming consumption was there or not. There were penalties built in for missing subscriber growth targets. The rights holders really screwed it to Spotify. Spotify always hit their targets and, generally, exceeded them. But they realized, we’re never going to be able to get our pay away significantly lower where we are going to be able to drive a profitable business this way. We have to diversify our revenue streams. We have to find alternative, non-major owned repertoire; we have to build what they call a two-sided marketplace, as well. We have to provide tools for artists and we have very rich data that we provide to artists. We are a marketing platform, as well, so we can start monetizing those aspects of what we have.

That is absolutely what has happening. But I think the majors’ ability, right now, to demand too much of Spotify has gone. I think the balance of power has shifted to them.

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Major Record Labels: Business Model Evolution

October 8, 2020

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