In an overly air-conditioned Marriott ballroom on Times Square, nearly 1,000 music industry executives, Internet entrepreneurs and record label representatives settled into Jupiter Communications' Plug.in conference last month to debate "The Future of Music." As suit after suit clambered onto the stage to promulgate concepts like "data mining," "secure music distribution" and "monetizing radio," the rapt audience took notes on the ways record labels might reap the riches of the Net.
Meanwhile, in a much smaller room upstairs, Marc Geiger -- founder of Lollapalooza and now CEO of the start-up ARTISTdirect -- was evangelizing his own idea: Musicians should maintain their own Web sites and sell merchandise directly to their fans. With Beastie Boy Mike D. in tow, Geiger promoted his company's ability to build a "direct relationship" between musicians and fans, without necessarily getting the record label involved at all.
There's a conflict brewing here. Record labels are quickly getting hip to digital distribution and the promotional power of the Net, and are hoping to monopolize every moneymaking angle of the online world. On the other hand, new online marketing networks like ARTISTdirect and Electric Artists are encouraging artists to reap those profits for themselves.
Who actually owns the digital rights to Web sites, fan databases and online merchandising?
"When something is new and is there to be captured, I don't know why it's assumed that the label should be owning it," posits Geiger. "The Net channel as we see it spawns multiple new revenue opportunities, including the opportunity to have a relationship with the fan. Artists have the ability to forcibly claim those rights today."
Traditionally, record labels have brought in the lion's share of their revenues by selling records, often using Draconian contracts to minimize the artists' take of the profits. Record labels took ownership of the music, its marketing and sales, reserving only a tiny percentage of the take for the artists. So, the artists made their money by merchandising ancillary products, like concert tickets or T-shirts.
But the rise of MP3s and freely available digital music online has record labels reassessing their business models. If you give the music away, how does the record label generate revenues? Over and over again at Plug.in, record labels advocated the idea of making money from products that have traditionally been ancillary to their business: those tickets, T-shirts, and other promotional gimmicks. Some labels represented at the conference said they would be willing to offer downloadable songs in the MP3 format free of charge, but would demand demographic information and an e-mail address in exchange -- valuable data that can be used for marketing and promotional purposes across the label.
Already, many record labels have started their own online stores, selling music directly to consumers instead of simply sending them to make purchases at Amazon.com or CDNow; some include band merchandise in the mix. Universal Music and BMG Entertainment, for example, have partnered to create Getmusic.com, selling CDs and autographed posters directly to fans. Sony not only sells music in its online store, but baseball hats, sweatshirts, band T-shirts and CD cases. Each site, of course, also collects e-mail addresses from every fan that visits or purchases. (Repeated calls to representatives of Sony and the record labels backing Getmusic.com were not returned.)
Meanwhile, online marketing consultants like Electric Artists and ARTISTdirect have been working with the artists themselves to build promotional Web sites of their own to sell similar ancillary material. The year-old ARTISTdirect has signed 25 bands -- names like Metallica, the Beastie Boys, Korn, Limp Bizket and Marilyn Manson -- to its network of band Web sites. For each artist, ARTISTdirect builds a customized retail store selling CDs, memorabilia, T-shirts, tickets, posters and other odd items, such as a car once owned by the Beastie Boys. Electric Artists offers clients such as Depeche Mode and the Counting Crows similar promotional and retail services. For example, the firm built a Web site for Garbage that peddles stickers, mousepads and bright orange "Garbage" nail polish.
As Geiger puts it, "The artist is a complete business -- the ancillaries are all core products that revolve around the brand, and the brand is the artist. If there are new revenue streams, they are built because traffic is coming to the artist's channel. Why would someone else derive the revenues?"
Bands like the Counting Crows believe they should control their online representations. The band built its Web site without its label's assistance four years ago and has since built up a database of nearly 100,000 fans, whom it sends frequent e-mail about band activities. The band has shared that mailing list with its record label, Geffen, to promote the Counting Crows, but the revenues from online T-shirt sales belong to the band itself.
"I think it's really wrong for labels to think they have any right to an artist's Web site altogether -- because this is a business that is about the music, it's not about the record companies," says Steven Jenson, the manager of the Counting Crows. "It's about the artists who create the music; when it comes to anything creative -- and the Net is a creative outlet -- the artist should control it."
But most record labels salivate over the idea of a mailing list of 100,000 fans, for multiple reasons. A list of fans of the Backstreet Boys, for example, could easily be used to promote another upcoming pop boy band -- this is what is known as data mining, and is a hot topic within the record industry. As Marc Schiller, CEO of Electric Artists, puts it, "The label wants the data not necessarily for the artist -- they are looking for that data for their artists who are similar to that artist. Should you use one artist's leverage to create a database of consumers that is used for other artists? That is going to become more controversial."
Geiger and Schiller assert that ARTISTdirect and Electric Artists have had no friction from record labels pursuing the same profits, and that the bands that sign on as clients are working to keep their label in the loop. But that doesn't necessarily mean that such arrangements will last. If projects like ARTISTdirect prove profitable, it's quite likely that record labels will try to weasel their way into those revenues and get their hands on the data that is generated.
It's the question of "online rights" that has labels and artists concerned. Some record labels are already working to ensure that they have control over all of their artists' Web sites, revenues and online properties. According to four music industry insiders, Sony Music Entertainment now includes a "digital rights" clause in its contracts with new artists -- requesting ownership of the artists' Web sites and rights to the associated digital data. Sony did not return calls requesting information about its contracts.
According to Ken Hertz, a senior music partner in Beverly Hills law firm Hansen Jacobson Teller, few record labels other than Sony Music have attempted to write "digital rights" into the artist contracts; most labels are only now starting to sort out the online space and its business implications. But he says he soon expects to see claims to these rights written into the contracts that cross his desk. In fact, he says, many labels could already lay claim to an artist's online rights, because in current contracts "they already control the content and they have the exclusive right to use the artist's name to promote it, and that arguably includes the domain name."
In an ideal world, of course, the record labels and the artists would work together. Artists would be allowed to create and profit from their own online projects, even as the record labels build their own Web sites. Thus far, a number of artists have made this work: The Beastie Boys, for example, have both an ARTISTdirect Web site of their own and an official label Web site. The sites graciously link to each other, but do introduce the potentially messy issue of fan confusion: Which of these Web sites puts fans most "directly" in contact with the band?
It's still early in the online merchandising game and right now artists have a chance to seize a corner of profit in an industry that has increasingly denied them the spoils of their success. It's too soon to know just who will control the new territory, but the Internet could be a force in reshaping the recording industry power structure.
As Geiger envisions, "I think you're at the beginning of the revolution of music -- a revolution which will empower artists, give them more options, and change the economics in the industry for the artists."