November 22, 2004

Another Music Biz Model Experiment [8:04 pm]

Music Industry Is Trying Out Digital-Only Releases [via Derek; also CNet] For those of you in my classes, you will recall how the risk structure of the industry has led to a certain way of producing and developing music products. This approach, which formally addresses the costs of uncertainty in the marketplace, represents an important way of thinking about how to leverage a label’s internet presence.

[M]usic industry executives say they can also use the Internet to measure fan interest or start a buzz for a new act before releasing an album. Universal’s new label represents another leap - the belief that by signing enough acts with small, established audiences, the company can earn a profit on digital sales alone. The new unit, Universal Music Enterprises Digital, could become a model for labels that are seeking a low-risk way to market an act without producing a physical album or underwriting a band’s tour or music videos.

“It’s just so expensive these days to record an artist and make a video and put them out on the road to properly develop them,” said the executive responsible for the digital label, Jay Gilbert, a senior director at Universal’s Music Enterprises unit. “This is an alternative to that that’s not very expensive but can be highly effective.”

[...] The artists retain ownership of their master recordings but license them to Universal for a limited time; if online sales of an artist’s music reach a certain point - around 5,000 copies of a particular song - the company has an option to pick up distribution of the CD to record stores.

Universal is paying the musicians an estimated 25 percent royalty on the retail price of the downloads, without taking the industry’s standard deductions for CD packaging and promotional giveaways, according to people with knowledge of its contracts.

In exchange for the music, Universal is throwing its considerable muscle behind promoting the artists, including them in its own advertising and seeking to license their music to films and television shows. The company will also handle online marketing.

The trick will be to “reach the next frontier of consumer, the consumer searching in the digital world,” said Mr. Resnikoff of Universal Music Enterprises.

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