Your Music is a Loss Leader

In business there is a term used to describe products that are designed to get you in the door and buy bigger ticket items. It is called loss leader pricing. When you break that phrase down the first word “loss” is because the business is probably loosing money selling those items. The word “leader” means it leads you to buy other products. We see this all of the time, but probably don’t even realize it.

For instance you can buy a brand new razor with two cartridges for around $10, but if you want to buy additional razors themselves you will have to fork over $25 for an eight pack. 

Have you ever purchased a new printer? What a steal you can get a whole unit with ink for under $50. It isn’t until you need a refill that you realize the cartridges alone will cost you over $50. 

Loss leaders are everywhere. Go into a supermarket and buy an 18 pack of water for $3, two bags of chips for $4, or a 12 pack of coke for $3.99. These are all tactics to get you to buy other, more expensive, things.

Well that is what music has officially become… a loss leader.

According to Apple’s 10-K filings for 2011 iTunes made $5.4 billion. Amazing right? Now think about this. Forbes reported that Apple sold five million phones within three days of their iPhone 5 launch on September 21st, 2012. Now even though the vast majority of these phones were at reduced rates through cellphone carriers, companies such as AT&T, Verizon, and Sprint still needed to pay Apple a subsidy to get the new highly in-demand product. According to CNN money that subsidy averages about $450 per phone. That equates to $2.25 billion dollars for Apple. A little under half of what their iTunes division made last year. So in three days Apple's iPhone made half of what their entire iTunes store made in a year. 

Last week Samsung, Apple’s biggest rival, announced they will start buying up smaller music streaming and distribution companies to strengthen their own music network called Hub. The technology bohemian isn't doing this to sell more music. They are doing it to "lead" consumers into buying one of their Galaxy smartphones or tablets. Samsung is finally catching on to something Apple, Amazon and Google have known for years. You sell more technology devices if you can easily fill them with low cost music. 

Using music to get consumers through the door to lure them to buy bigger ticket items isn’t necessarily new. For years Wal*Mart had isles of CD’s. That’s right I said “isles” of CD’s. They did this because you had to go somewhere to buy new music. This was before you could beam it to your phone while you borrowed your neighbors Wi-Fi connection. When you went to Wally World to buy that new Pearl Jam CD. I know I’m old. You were forced to look at those beautiful big screen TV’s, stereos, DVD players, and other high priced electronic items, and chances are, at least once,  you walked away with one of them. In the end your $16 CD purchase cost you about $500. That is a loss leader.

But today music has completely become a loss leader. If you don’t believe me look around. If you are a Starbucks card holder you will get the occasional free download of a new music track, or you can buy those albums in their stores for $10 while you drop another $8 on a cup of coffee, plus another cup for your friend, and, oh wait, one of those awesome muffins.

  

Artists don’t make money by selling music anymore. That is an antiquated business model and if a manager or record labels is telling you otherwise start running back to your day job because you will make more money and work less there. Just take a look at the sales numbers according to www.gloriousnoise.com.  Total album sales were at $616.6 million in 1996 and have dropped to $330.57 million last year, and yes that includes digital sales for 2011.

But for some reason artist’s still think that they make money by selling albums. The truth is in today’s market they don’t. The smart ones understand how to use their music as a loss leader just like Apple, Samsung, Coca Cola, and Starbucks. Trent Reznor gives his music away and uses those free tracks to encourage fans to buy his concert tickets, merchandise, autographed memorabilia and anything else he can make money on. He understands that the market has changed their valuation of music. To them music no longer has a monetary value. Napster has taught them otherwise. Incubus’ manager Steve Rennie said it best “for some reason college kids can afford their beer and weed money, but will not pay for their favorite song.” 

On a good note music has not lost its intrinsic value and that is why ad agencies, film companies, and big businesses still fork over money to attach their brand to a particular tune. To make money in today’s market artist must stop thinking that people will pay for their music. Instead they must start using their music to get those consumers to buy into their brand. Hell it worked pretty good for Apple.  

The street fight over EMI's publishing catalog.

On April 19th it was announced that Sony Music had gotten the nod from the European Union to go through with their purchase of EMI's publishing rights. You can read the full article on The Guardian's website. Warner has been fighting Sony's attempts ever since EMI defaulted on a $5.4 billion dollar loan in early 2011 and was put up for sale by CitiGroup to ease the debt. Almost immediately the big four major labels were left to but three, Sony, Warner, and Universal.

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At that time Universal already controlled the market with roughly a 27% of the business and was able to pounce on the fire sale going after EMI's recorded music division which holds the rights to such artists as Norah Jones, The Smashing Pumpkins, Keith Urban, Brad Paisley, and some small band known as The Beatles. The purchase will boost Universal's market share up to 36% dominating Sony's at 23% and Warner at 15%. Despite this fact the war over EMI's assets hasn't revolved around their recorded music division, but rather their publishing division which, according to Rolling Stone Magazine, holds the rights to 1.3 million songs including works by Rihanna, The White Stripes, Sting, and many others.

Ever since EMI's publishing assets were put up for sale Sony and Warner have gone to war trying to secure these copyrights. Each company has attracted outside investors to help sweeten their offer until Sony was able to throw down $2.2 billion for the catalog ousting Warner from the race. But the third largest music conglomerate in the world wouldn't go down without a fight. Since then Warner has challenged the deal both in the U.S. and European court systems hoping to thwart Sony from gaining such a huge market share in the publishing business of the music making world. But why such a fight for publishing rights?

The reasoning has to do with the current trend of musical consumer buying behaviors, and how these behaviors can equate to large amounts of income for whomever owns the proper rights. Recorded music rights provide income to the persons who control the actual recordings of a work. So if you buy a CD, or you license Sting's recorded version of "Every Breath You Take" for a movie you have to fork over some dough to whomever owns the copyrights to the actual recordings you use. Publishing rights on the other hand cover many more situations. Not only would you have to pay whoever owns the recorded version of the Sting tune you plan to use, but you would also have to pay the publishing company for the underlying music and lyrics in the song. So what's the big deal if you own the recorded music you are getting a piece of the pie and if you own the publishing you get the other half? The answer lies in how we are using music today.

Take for example the popular FOX hit Glee. These teenagers, whom all appear to be in their mid twenties by the way, perform a number of popular music hits in each episode, but because they are the ones performing the hit the owners of the recorded music are paid less, if even paid at all. This is because they aren't using the original recording of the song, instead they are remixing it in their own way.  Yet despite this fact they still must pay the publishing holders the statutory rate. Now think about all the television shows, movies, and advertisements that do this. We've got American Idol, America's Got Talent, and The X Factor all presenting contestants singing their favorite hits and that's just in the U.S.. Still don't think it's a big deal? Now think about the millions of videos on YouTube of people performing these hits with their own bands or by themselves with their dogs singing harmony.

But the income stream gets much larger for publishing rights holders. In the current musical landscape touring has become a major breadwinner for bands. In these situations the only people getting monies from these performances are the performance rights organizations whom pay the publishing holders of the songs that are performed. Many of these publishing houses also own the rights to the Artists images, signatures, fragrances, and whatever else can be branded with their namesake.

So to put it in simple terms the recording music royalties will make you money on the uses of the actual recording while the publishing royalties will earn you money on those items plus any other way that the song may be used in the marketplace from other performers singing your tune, to public performances, and even a bunch of people trying to impress judges or sing about their high school angst on television. Which income stream would you rather have?

That is why there is a street brawl over EMI's publishing division. The big boys know how much money is at stake, and the company whom holds the largest stable of hits will eventually win the battle when it is time to knock it down to the big two.