The Music Industry: Lost in the Shuffle

The music business has found itself a new poster girl. Adorned with tattoos and a beehive, and blessed with a smoky voice beyond her 24 years, Amy Winehouse sat proudly atop the U.K.'s album charts this spring after scooping up five awards at the Grammys in Los Angeles. She sang her signature tune for the audience there via satellite from London: "They tried to make me go to rehab/ I said 'No, no, no.'"

In reality, though, Winehouse — following months of much publicized troubles with drugs — had checked herself in to a treatment clinic just a couple of weeks before the show. It's a path the recorded-music business knows well. Long resistant to change, it, too, has finally accepted the need for rehabilitation. The industry's woes have, for some years, been glaringly public. Rising sales of digital music can't keep pace with the fall in sales of CDs: record-company revenues from such tangible products tumbled roughly 6% in 2007, leaving firms with some $19.3 billion in total sales last year, a quarter less than in 1999. The digital market is hardly new, yet it still seems to catch major record labels dozing. Alt-rockers Radiohead last year famously distributed their album In Rainbows without the help of their former record company, EMI, instead letting fans decide how much to pay the band to download it. Meanwhile, adding to the sense that this entire industry is in flux, musicians' other means of income — from T-shirt sales to concert tours — are booming. "The whole industry is moving into a new phase," says Mark Mulligan, an analyst at JupiterResearch in London. "This isn't a blip — it's a realignment."

The major record companies have the most to sort out. The problems at EMI, the smallest of the Big Four record companies, have been getting more ink lately than its artists, which include the likes of Lily Allen and Coldplay. With EMI's slice of the world market under pressure — its share fell to 12.8% in 2006 from 13.6% the previous year — U.K. private-equity company Terra Firma acquired the firm for $6.5 billion last August. The new owner has been quick to make its mark: earlier this year EMI announced it was axing as many as 2,000 jobs in a bid to pare costs by $400 million a year. But the overhaul is not just a matter of numbers, says Guy Hands, ceo of Terra Firma and chairman of EMI: "What we are saying to artists is: The current model is broken. Unless we find a new model, new music is dead."

While EMI has had an especially tough time, it is also something of a barometer for the biggest players in the business. Universal Music, the world's largest record company, saw its revenues dip slightly last year. Low margins at Sony BMG, the industry's No. 2, have left its own music business ripe for a private-equity buyout this year, says Gerd Leonhard, a music-industry consultant in Switzerland. And shares at No. 3 Warner Music have been in freefall for months; a $16 million first-quarter loss was announced in February.

As if it weren't worrying enough that their revenues are sliding, the major record labels are also having more trouble than ever controlling their artists. Prince cut out Sony BMG last July to give away his latest CD through a U.K. newspaper, cannily betting that he'd make up for this lost income by boosting sales of highly lucrative concert tickets. And in October Madonna abandoned Warner Music to throw in her lot with Live Nation, a California-based concert promoter. "The record-label system is built on 100% control," says Leonhard, and major labels "have lost that."

So are the majors turning into minors? Despite the bad news, that fate remains some way off. Big record companies still excel at winning their bands airtime or prime space on stores' shelves. And for every rebuff from a Madonna, there's an award for a Winehouse, thanks to support from tuned-in record execs. "It's all very well to say bands can do it all themselves; some don't want to," says Max Hole, executive vice president of Universal Music Group International, which oversees Winehouse's label. Many now acting alone admit they got a leg up from a record company. "The only reason we could even get away with this," Radiohead's lead singer, Thom Yorke, said recently about selling its album directly to fans, "is that we've gone through the whole mill of the business in the first place."

Still, high-profile departures like theirs could lead fresh talent to think twice about signing to one of the majors. And persuading established artists to stick around is especially tricky when labels are asking for a bigger slice of the revenue pie. Traditionally, when record companies signed an artist, they bought into the promise of an album; an act's other sources of cash — its concerts, say, or merchandise sales — weren't any of the label's business. But now, with album sales plummeting, music companies are chasing juicier income from touring and branded goods. Part of that revenue stream figures in Live Nation's $120 million deal with Madonna. Likewise, U.S. rock group Korn now carves up its nonmusic income with EMI; Interscope Records, a U.S. label owned by Universal Music, even gets a cut from a Las Vegas nightclub endorsed by the Pussycat Dolls. The appeal for artists? Labels can pledge greater, longer-term support — and big, upfront payments in many cases — if, in return, they get a stake in almost everything their musicians sell.