THE INTERNET’S IMPACT ON MUSIC INDUSTRY NETWORKS WITH A FOCUS ON MUSIC PRODUCTION, DISTRIBUTION, AND MARKETING
A Research Paper submitted to the Department of Engineering and Society
Presented to the Faculty of the School of Engineering and Applied Science University of Virginia • Charlottesville, Virginia
In Partial Fulfillment of the Requirements for the Degree Bachelor of Science, School of Engineering
Emily Mussey Fall, 2020
On my honor as a University Student, I have neither given nor received unauthorized aid on this assignment as defined by the Honor Guidelines for Thesis-Related Assignments
Signature ______Date ______11/30/20 Emily Mussey
Approved Date 12/01/2020
Richard D. Jacques, Department of Engineering, and Society
Introduction
At the turn of the century, half of the American adult population used the Internet. By
2019, nine out of ten adult Americans used the Internet (Internet/Broadband Fact Sheet , 2019).
The increased accessibility of the Internet has changed how we live and interact with the world around us. It allows people across the globe to connect in seconds, large amounts of data can be transmitted, and people have ages of research at their fingertips. We will evaluate the Internet’s impact on music industry networks with a focus on music production, distribution, and marketing. We will specifically look at three periods: from 1960 to the early-1990s, from the mid-1990s to early-2020, and the remainder of 2020
The Science, Technology, and Society actor-network theory, hereafter ANT, is how our timeline will be evaluated. ANT strives to look at the relationships between different actors and how changes in one relationship can impact the network as a whole. An actor does not need to be a single individual. It can be a company or a group of individuals. Actors can enter and leave the network based on their ever-evolving relationships (Law, 1992). In this study, we will look at multiple actors, including artists, music labels, virtual coordinators, and the government. More than one million individuals are included in this network (Siwek, 2018) along with immense data and physical resources.
We are currently living in an unprecedented time with the COVID-19 pandemic, making it challenging to analyze future trends. Although some relationships evolve slowly over many years, the pandemic illustrates that a situation where immediate changes are required.
Due to my increased research and experience within the music industry, the networks mentioned in this thesis will be different from those listed in my prospectus. Please we aware that the music industry has a small group of tight knit power players. Although peer-reviewed
articles are available, some of the research has come from personal interviews with industry insiders and my first-hand experience.
Definitions
Throughout this thesis, you will notice consistent usage of specific terms and phrases.
These terms will constitute the actors within our networks. Although the way they do their jobs have evolved, basic descriptions of their roles remain consistent.
1. Artist - Performs and record music or works of art
2. Record Label - Signs artists and produces recordings. Commonly referred to as labels
3. Manufacturer – Creates physical media, including CDs, tapes, and vinyl
4. Distributor – Provides an artist’s work to retailers and sometimes takes a promotional
role
5. Retailer – Shop or website that sells an artist’s products
6. Marketing Agency - Promotes an artist’s work through various mediums
7. Consumer - Watch, buy, and listen to the artist’s work
8. Virtual Coordinator - Online resources to connect different actors
Pre-Internet Actors & Network
History and Changes from the 1960s to the early 1990s
The path to the modern music industry began back in the 1960s. Smaller labels began to merge in an attempt to control the market. Not only did they want exclusive recording contracts with top artists, they also wanted to lower costs by moving music marketing, production, and
distribution in-house. Labels that proved to be the best in those areas were acquired and these newly merged companies began using vertical integration. This is the beginning of the major music labels (Bielas, 2013). There are primarily two types of music labels: major and independent. As previously mentioned, major labels use vertical integration and are heavily funded. They have a large network of connections and are well-known in the industry.
Independent labels generally have a smaller roster of artists, less funding, and outsource manufacturing, distribution, and marketing (Justin, 2020). Nearly all independent labels created before 1970 have either gone out of business or been acquired (Kennedy & McNutt, 1999).
Those that survived tapped into the resources of big labels for manufacturing, distribution, and marketing (Knopper, 2006).
Also, in the 1960s, the consumer tape recorder was released. Individuals could record songs they heard on the radio, but degradation was high, so they still purchased the media
(Balaban, 2001). Although this innovation did not have a large-scale impact on artist’s and label’s income, it provided one of the early methods for obtaining music without compensating the artists or others within the networks. This was one of the first entries in the story of how modern copyright law was created.
Throughout the 1970s, rack jobbers controlled 80% of record sales (Lopes, 1992). A rack jobber’s role was to select, price, and display physical media in non-specialty stores, such as department stores and gas stations (Klein, 1912). They did not take risks and stocked shelves with artists that would give them guaranteed sales. This left little room for newer acts to gain publicity. In the late 1970s and early 1980s, major record labels began to work directly with retail stores and consumers. Due to their strong financial backing, major labels could take more risks on newer artists and add more diversity to the network. Independent labels did not have this
cash flow and the power imbalance between the independent and major labels became more obvious (Lopes, 1992).
Unfortunately, in 1979, one man nearly caused the demolition of the music industry:
Steve Dahl. In the late 1970s, major labels decided to put a majority of funding toward disco, and as it boomed, the search for new talent slowed. Steve Dahl was a prominent rock disk jockey and refused to give into the rise of disco, causing him to lose his job. He made it his mission to stop disco. By the end of 1979, he was successful. Since labels were starting to financially back distribution of records to retailers, the labels lost millions when disco stopped selling and thousands of records were returned. With the industry’s reliance on record labels, this almost signaled the collapse of the music industry (Knopper, 2006).
In 1981, MTV arrived and the industry was saved. Up until that point, radio had controlled what music and artists topped the charts. They stuck to conservative styles of music and refused radio play to songs discussing sex, drugs, and other taboo topics. The creation of
MTV brought rise to New Wave music targeted at the youth. Unfortunately, although New Wave music was drastically different from traditional songs on the radio, it did not provide adequate representation to the black community, females, and genres like rap. MTV provided new opportunities for major labels to continue gaining industry control. At the time, video and audio recordings were both analog. High quality analog recordings proved difficult to produce, but major labels could provide their artists with funding. This gave major labels control of what
MTV played (Lopes, 1992). After the fall of disco, labels were also struggling to understand their consumers’ tastes. MTV allowed them to test an artist before putting big money behind them. The success rate of new artists was under 10%, so they spread their risks and released a large volume of media. (Huygens, 2001). Later in the 1980s, more TV and radio stations came
on air, allowing the populous access to a wider range of music. Still, these were controlled by major labels and independent artists felt increasing pressure to join them (Lopes, 1992).
In 1982, the first commercially available CD player was released. By 1988, CD sales overtook vinyl and in 1991, CD’s eclipsed cassettes (Waniata, 2018). Labels used the rise of CDs to renegotiate contracts with their artists. The new contracts reduced the royalty fees artists received. Before CDs, artists were making a little more than 75 cents for each $8.98 LP that was sold. Now, artists were making about 81 cents for each sale of CDs, which were priced at $16.95
(Knopper, 2006). Then, labels discovered consumers were willing to repurchase old albums on new media formats. Major labels realized that they could use this to their advantage and began purchasing smaller labels around the world to obtain their back catalogs. By releasing the music on CD’s, they could generate profit with little work or investment. This was also a big step in the internationalization of the music industry as labels began releasing back catalogues of foreign acts (Huygens, 2001). Major labels were spending millions from their CD profits to build new artists and independent labels could not keep up. Luckily, the sudden market interest in old recordings allowed many independents to be bought instead of falling into bankruptcy (Knopper,
2006).
Backing up a few years, in the mid 1980s, the Digital Audio Tape (DAT) was released.
Consumers could create and distribute perfect copies of recordings without compensating artists.
This led Congress to pass the Audio Home Recording Act of 1992. It provided protection against copyright infringement by requiring DAT devices to include a copy control mechanism. DAT’s could create a copy of media once, but they could not create a copy of a copy. The bill had numerous loopholes, including one allowing consumers to store copies of data on CD’s
(Balaban, 2001). This loophole proved to have immense impacts that were not predicted.
Computer makers had aggressively pushed for the loophole in the Audio Home
Recording Act of 1992 and used it for their benefit. The idea that one person could buy a CD and make copies of it for all their friends proved to be a vital marketing tool. Computer sales rose, while the music industry’s profits plummeted as people obtained music for virtually free
(Knopper, 2006). The ease of burning CD’s helped independent labels and artists as they could reproduce and share their music for a nominal charge (Knopper, 2006).
Although CD’s helped keep independent labels alive, by 1998, many smaller labels had merged giving us six big names: Warner Music Group, Universal Music Group, EMI, BMG,
Polygram, and Sony Music Entertainment. In 2020, there are only three left: Warner Music
Group, Universal Music Group, and Sony Music (Lynskey, 2018). This period provided immense technological changes and provided early legal guidelines around copyright protection.
The industry got a taste of the impacts of innovation, but they were not prepared for the Internet.
Before moving onto the later years, we will take a closer look into the standard network that existed from the 1960s to the early 1990s.
Actors and Networks
Before the Internet, production, marketing, and distribution of music consisted of one directional connections between actors. Artists were highly insulated from consumers and consumers also had little connection with each other (Wikström, 2020). We will not consider legislation or copyright protection as an actor in our network, but we need to be aware of the implications legislation had on relationships between our actors.
Figure 1: Music Industry Network Pre-Internet represents the music industry immediately prior to the introduction of internet file sharing. We see eight major actors, which are represented by circles. Their basic definitions are provided in the Definitions Section. The
previous section gives details of how actors roles and relationships have evolved. In this part, we will use ANT to isolate the most important and common interactions.
Figure 1: Music Industry Network Pre-Internet
In a regular ANT diagram, regular lines are used to connect actors since relationships work in both directions. For Figure 1, I have opted to use arrows. During this time period, information and products most commonly flowed in one direction. Therefore, relationships going the opposite direction need not be represented to provide a suitable outline of our network. The main responsibility of each relationship is labeled on the arrow.
As mentioned in the above section, major labels performed a number of acquisitions to allow for vertical integration. In Figure 2: Major Label Structure Pre-Internet, I have provided a relevant subsection of departments within a major label to explain its structure.
Figure 2: Major Label Structure Pre-Internet
These departments existed both within major labels and as external, single role companies. Although independent labels could utilize the resources of major labels, sometimes for a hefty price tag, separate actors still existed to help with marketing, distribution, and manufacturing. Between the two figures, you will notice that major labels had internal retail departments, alongside relationships with external ones. Major labels transitioned to handling large chunks of the retail experience in the 1980s, but the labels still had to work alongside retail shops to ensure the product reached the broadest market possible.
Within this network, there is an obvious process flow with the two endpoints being artists and consumers. From start to end, this process primarily went three ways. In the first route, an artist connected with a major label, recorded their music, and signed a contract ensuring they get royalties. The major label handled all aspects required to get the music into retailers and ultimately, to consumers.
In the second route, the artist connected with an independent label, recorded their music, and signed a deal with the independent label. The label then tapped into the connections and production network of a major label, for a charge. The music then made it to the consumers and retailers.
In the third process, an artist connected with an independent label. This label handled production of the music. The label then passed the masters to a manufacturer who created the physical media. The media was sent from the manufacturer to a distributor, who put the media in stores. Then the media finally made it to the consumer. Independent labels usually worked with a marketing agency or a distributor to promote the music.
The actors shown in my network are separated into broad categories. Not all individuals or companies grouped into an actor category had the same resources available and they could have a different version of the process. The three methods listed above provide an outline of the most common paths at the time. Also, in all three methods, the lack of feedback loops provided insulation between the different actors. This insulation can be seen as one reason why the industry did not predict disco’s death and why negative consequences from the Audio Home
Recording Act of 1992 were not foreseen.
Post-Internet Actors & Network
History from the mid-1990s to early-2020
Before the adoption of MP3 technology, the major record labels were dominant players within the music industry. In recent years, their influence has decreased and questions about their role have arisen (Bielas, 2013).
Where we left off in the early 1990s, CDs were the most popular form of physical media and the music industry was making $40 billion a year across its different sectors (Bielas, 2013).
When vinyl was the main form of physical media, labels would release artist’s singles for a low price. When the CD took over, labels began releasing full albums and no longer released physical media with just singles (Knopper, 2006). In the early 1990s, the MP3 format was created, allowing digital audio files to be compressed and passed from computer to computer
(Taintor, n.d.). The rise of pop stars like N’SYNC and Backstreet Boys left young fans wanting a way to purchase only their favorite songs instead of full albums. Since labels stopped producing physical media with only singles, fans turned to obtaining music illegally by sharing files
(Knopper, 2006). The loopholes in the Audio Home Recording Act of 1992 prevented the music industry from taking action (Balaban, 2001).
The Digital Performance Right in Sound Recordings Act of 1995 strove to close some loopholes of its predecessors. It was early legislation regarding file sharing and was used liberally in the years to follow. In 1998, the Digital Millennium Copyright Act was passed by
Congress. With a better understanding of the Internet’s potential and its ability to facilitate illegal media sharing, this new act provided clarity on who is responsible for the content sharing and what preventative measures need to be taken by different actors. Within its text, it determined it was illegal to circumvent digital rights management technology like watermarking or encryption.
Another important point was its statement that Internet service providers (ISPs) were not responsible if pirated content passed through their channels. This new law was beneficial to major labels and their roster of artists, since they had the money and resources to litigate copyright infringement cases (Balaban, 2001). There have been thousands of lawsuits regarding copyright infringement since the passing of these laws (Taintor, n.d.).
Above, we make a brief mention of “piracy”. In this context, piracy is the act of illegally obtaining and sharing an artist’s work online without providing them compensation. Computer innovations allowed pirates to pull, or “rip”, music from CD’s and distribute it online with very little audio degradation (Balaban, 2001).
The year 1999 will go down in history as the first step in the new music industry. This was the year Napster debuted. Napster allowed individuals to freely share music online without any money going to artists or labels. By 2000, Napster had 75 million users. Although profits within the music industry continued to grow, profits were down 4% in college towns that had a large number of Napster users (Balaban, 2001). A majority of the music that was distributed via
Napster was being distributed illegally and in 2001, the courts ordered Napster to shut down
(Case Study: A&M Records, Inc. v. Napster, Inc., 2013). Similar services arose in the next few years, though they also faced a slew of lawsuits. As one service would shut down, another would arise to fill its place. Although it was short-lived, Napster showed how quickly a technology could enter a network and drastically modify relationships. These changes will be discussed more in the following section. It also became clear that traditional music industry structures were struggling to adapt to the changing times.
Until 2003, the main sources of music industry revenue were recordings, publishing activities, and live performances, in that order. Since 2003, live performances have become the dominant revenue source for artists (Bielas, 2013). This shift is due, in large part, to the 2003 launch of iTunes. iTunes struck distribution deals with major labels and in its first year, sold 70 million songs for $0.99 each (Taintor, n.d.). Instead of buying an entire album, individuals were able to just purchase their favorite songs. This solved the main issue that drove individuals to piracy and piracy numbers began to decrease. Since individuals were able to buy just their
favorite songs on iTunes instead of paying for a full album on CD, the amount paid to artists dropped drastically.
In 2006, Spotify launched. Although there were previous attempts to build subscription streaming services, Spotify became one of the first major success stories. In 2011, Spotify had two million paid users and in 2019, Spotify had 26 million paid users and 191 million users overall (Yassin, 2019). Apple and YouTube released subscription streaming services shortly after Spotify. Artists have publicly decried the how little they earn in royalties from streaming platforms (Pastukhov, 2019) and have prioritized other revenue streams, such as live performances. The live performance network does not fall into the scope of this paper, but it is important to acknowledge that the shift away from selling recordings as the main revenue stream changed the relationships between actors.
Services such as Spotify and iTunes led to the drastic decline of physical media sales. In
2017, revenue from CD sales fell below a billion for the first time since 1986. In 2018, subscription streaming services made up 75% of the recorded music revenue (Wang, 2019).
Streaming services allow music to be accessed anywhere. This is a strong selling point for consumers. Vinyl has been an outlier, with its sales continuing to increase due to the format’s high fidelity and tangibility (Gibson, 2015). Although vinyl sales are increasing, consumers are unlikely to entirely switch back to physical media given the benefits of streaming services.
In 2008, Trent Reznor of Nine Inch Nails began questioning the current need for major record labels in the age of technology. He wanted to release an album without signing away a majority of his money. With this thought, he decided to self-release a new Nine Inch Nails album. He was able to directly interact with fans and gave them a place to interact with his music and upload remixes. Although he was successful, he found drawbacks to this method. In 2012,
Reznor opted to sign his other band, How to Destroy Angels, to Sony. In interviews he discussed this decision, stating there were pros and cons to being independent, but it really boiled down to one thing; in this age, money does not come from album sales. New releases are a way to raise awareness about an artist, but the real money comes from touring. Major labels have the financial backing and connections to promote albums, which then leads to more fans at shows and more money in the artists pocket (Wikström, 2020).
Outside of the music industry, online services, like Facebook, email, and Google, have created new ways for actors to connect. These resources provide methods independent artists can use to promote their music, connect with fans, and research different companies so they can release products for the best value. We will call services like this virtual coordinators, since they allow actors to connect and coordinate activities.
With the increasing popularity of streaming services, the rise of social media, and the measly payouts artists receive from selling recorded music, major labels' roles have changed drastically. National acts still find the value, but in the late 2010s, rising acts began questioning the value of labels, both independent and major.
Actors and Network
Figure 3: Present Day Network shows an outline of the network as of early 2020. There are a few major changes between this figure and Figure 2. Given decreasing physical media sales, manufacturers have been removed from the diagram. Independent and major labels have been combined under a general “Record Label” umbrella. The internet has decreased the importance of a major label’s once coveted vertical integration. Labels primary roles now are to sign artists and produce their recordings. This consolidated role allows us to combine
independent and major labels into one actor. The biggest addition to this network is virtual coordinators.
Figure 3: Present Day Network
In the above section, virtual coordinators were briefly mentioned, but Figure 3 makes their importance incredibly apparent since they are situated in the center of the diagram. These coordinators facilitate communications between all actors in the network. Actors are no longer isolated from others and the relationships between two actor’s runs both directions allowing feedback. Even within a single actor group, more communication is possible due to virtual coordinators. As shown, the number of relationships had exponentially increased in comparison to Figure 2, so we will only focus on a few different scenarios.
Scenario 1: An artist is interested in getting their music onto Spotify, a retailer. They first turn to Google, a virtual coordinator, to learn the process. They determine that they need to find
an online distributor. They Google more and find DistroKid. DistroKid handles the licensing, distribution, and royalties with Spotify (Spotify, n.d.). As the music is streamed on Spotify,
DistroKid provides communications between Spotify and the artist.
Scenario 2: A record label is looking for new artists. Using Facebook, they are able to publicize they are looking for artists. Artists are able to reach out via email or a labels website to submit their music in a digital format. The record label decides they are not happy with the submissions and decides to do their own research. They search for rising, unsigned artists using
Pollstar, a concert industry trade publication (Pollstar, n.d.). They also look on Spotify to see artists numbers. They find the band’s contact information via Facebook and their websites and reach out. Facebook, email, artist websites, and label websites all act as virtual coordinators in this scenario.
Scenario 3: An independent artist wants to communicate directly with their fans. They decide to run a contest on their social media platforms, which are virtual coordinators. Their fans have to tag three friends in the comments to enter. This allows the artist to gain more fans and the fans to connect with the artist. This is a win-win situation for everyone involved.
Early Analysis of the Impact of the COVID-19 Pandemic
At the date of writing this, the traditional live music industry has effectively shut down as the number of COVID-19 cases increases by 100,000 per day (The New York Times, 2020).
Although it is too early for detailed case studies, we are able to observe early changes within the networks.
A study in Colorado analyzed changes to the music industry between April and July 2020.
They determined 8,327 jobs were lost along with $345 million in sales revenue. This represents
51% of music industry employment and 24% of music industry revenue in Colorado. A majority of these job losses are within the live music sector (Hunt, Gedgaudas, & Seman, 2020). The
National Independent Venues Association estimates 90% of independent venues will shut down if they are not provided government relief. Artists fear Live Nation and AEG, the major players in the live music industry, will control a majority of venues (Tsioulcas, 2020). Since artists make a majority of their income from touring, this could be detrimental to independent artists. Live
Nation and AEG work with the major labels, so those artists will generally be safe. Independent artists have started to fear that touring post-pandemic will be harder without a label, so many are looking to sign with those big names. Live Nation and AEG are also suffering during the pandemic, so it is unrealistic to think they will purchase every venue, as we can see by the shutdowns of U Street Music Hall in DC, Starline in Oakland, California, and the Lizard Lounge in Dallas, Texas (Mims, 2020). Once live music returns, many of these spaces will be bought and return as independent venues once again.
Since the in-person live industry has shut down, artists are working on new music in the studio and playing livestreamed shows. Recording and production jobs within the industry have seen very little negative impact due to the pandemic (Hunt, Gedgaudas, & Seman, 2020).
Consumers are being blasted with information from artists about their new music and upcoming livestreams, making it hard for the average consumer to keep up. This is another place where artists signed to record labels have seen an advantage. Their labels are able to put money into marketing to make sure the maximum number of people see their updates and consume their product. This was a benefit labels provided pre-pandemic but has become even more important in the age of COVID-19. Therefore, label’s power has grown and the longer the pandemic continues, we can predict they will continue gaining power.
It is hard to determine how the network will look post-pandemic. Per my conversations with industry executives, once a vaccine is released, live events will resume with a virtual component.
Once the vaccine is widespread and the number of cases has drastically decreased, I suspect labels will begin to lose power again. It may take a few years, but the network will return to the state it was pre-pandemic as described in Figure 3.
Conclusion
With the widespread use of the Internet, we have seen the rise of the independent artist, increased interactions between different actors, and questions regarding the record labels’ role.
Although the basic roles of actors remained the same, actor’s relationships have drastically changed.
In the present day, many national acts still opt to work with big name record labels. It decreases artist logistical responsibility, provides funding, and gives them connections with others in the industry. Those artists come to terms with their label taking a monetary chunk from everything they do, but there are an increasing number of artists who have taken responsibility into their own hands. From my discussions with Jonathan Slye, the CEO of Blue Ridge Rock
Festival, I learned Tech N9ne owns the rights to all of his music and has full control over his career. He was an early adopter of this method and it has paid off tremendously. He does not sell as many records as top names in hip-hop (Forbes, 2014), but the control over his career ensures his high profits. Though COVID has changed the landscape and provided value to record labels, post-COVID-19, success stories like this will become more common as artists realize the benefits they can receive from independence.
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