Generator blog

I once made most of my money designing print materials. CD packages, book covers, print ads, posters and fliers. Occasionally clients would ask me to do things out of the box, but usually those things tied directly into print products they had already designed and simply needed reconfigured.

About three years ago, I started seeing the handwriting on the wall for the print world. The most obvious sign was when we did our taxes that year and discovered that our income on marking up print went to almost nothing. I was also a partner in a sports web community with network titan Rivals.com, a network that uses a massive content management system that makes millions without creating a physical product. Hey, if you can make money on a web site that is solely dedicated to promoting Vanderbilt football — the only private school in the cheat-at-all-costs Southeastern Conference — you can make money at anything.

When I started delving into Web design, what looked the same as print was suddenly and obviously totally different. After slogging it through learning Dreamweaver, HTML and Flash, I’ve discovered why the two worlds are so different, and why you have to pay a premium to have a great Web site.

1. In Print, the software does all the code work. Most Web designers who never worked in print think there’s no code in print, but they are wrong. Quark and Photoshop write millions of lines of code for any print package design, you just don’t get access to it. Print, for decades, has essentially been the same process repeated over and over again. Software programs created for print design were therefore able to (relatively) quickly figure out how to do what we need while keeping the code off of our grubby hands. On the Web, things are changing so quickly that even Adobe can’t keep up with the demand. So, that means the only way even great programs like Dreamweaver can give designers what they need is to allow them to alter the code by hand.

Eventually I believe this will go away. It’s inevitable. Designers don’t want to write code any more than you do. Right now, though, the only way you can create a good Web site is to know HTML.

2. In the Web, there are no standards. Okay, that’s not true, and increasingly less so of late. But in Web design you must always accommodate:

1. Three operating systems (Mac, Windows and Linux);
2. At least three browsers (Firefox, Safari and Explorer) which look different on each OS;
3. A variety of monitor screen sizes;
4. A variety of Internet connection speeds (DSL down to dial-up); and,
5. At least four main server operating systems (ASP, PHP, Cold Fusion, Ruby on Rails).

Imagine if a CD package could be in three different sizes, printed on five different kinds of paper, and the music had to be saved in a way that would play on four different kinds of CD players! That’s what the Web is right now — a mess for all.

3. Microsoft sucks. Unbeknownst to most, Microsoft’s Explorer web browser is the single worst thing to ever happen to the Web. We designers must hand write all sorts of code into every HTML page to fix things that Explorer does wrong. And by wrong, I mean things that totally violate web standards that every other browser does right. Because most people use Windows, and therefore use a PC, and therefore often know nothing about the Web, they unknowingly use Explorer as their default web browser.

Note: Microsoft is no longer developing Explorer for the Mac. Do not even attempt to use Explorer if you have a Macintosh computer. Explorer for Mac has not been updated for five years, and that’s 500 years on the Web. Furthermore, when Safari and FireFox came out and were free, and customers refused to not block ads that came into their browser, Bill Gates realized there was no good rea$on to invest in developing Explorer.

My word of advice to you: Use FireFox. It’s the best, most secure and most updated browser out there, it’s free, and it is being constantly updated. Yes, Safari is good too, but FireFox runs the same on both the Mac and Windows. Use it and all good web sites will work great.

4. It’s interactive. A web site is increasingly less about pretty pictures, and more about user interaction. When Web sites were online brochures, they displayed text and pictures just as a magazine ad would. But when Web sites became interactive, everything got exponentially more complex.

Think about it this way: Print versus the Web is like comparing a color-by-number painting to a Rubics Cube. The painting may look good even if you change some of the colors; The Rubics Cube only looks good if every single dimension of the puzzle works together. If one thing doesn’t work, everything else doesn’t work.

5. The education gap. Clients understand print; They mostly don’t know jack about the Web. The gap between what even smart clients know and what is really going on is massive, and in many ways getting greater. That makes it very difficult for folks like us to estimate jobs and charge what it’s worth. Many times, what is easy, fast and cheap in print costs a ton on the Web. But we talk in a language they don’t understand, so their defenses are up. And, most of them have been burned by Web designers who took advantage of their ignorance and charged them for sites that never worked right.

I’ve given the above speech many dozens of times now, both in formal conference presentations and in casual conversations. The facts are pretty simple and undeniable. The business of music has changed, and will never go back to the old model. And now, with the artists and fans in control — and not the door-keepers at retail, distribution and the label — there is no motivation to try to go back to the old model. The new way is easier, faster and cheaper, which is pretty much a three-way body slam in any product category. Add to that the cool factor of Apple and the iPod, and there is nothing the old guarde can do to stop the tidal wave.

What people always ask me at this point in the conversation is, “Why didn’t the labels see this coming, and why don’t they do something about it?” This leads to three more secrets in the music business that most people don’t know or at least realize:

1. The old music business is a wholesale business. Record companies are wholesalers, not retailers, and all of their contracts with bricks and mortar retailers require them to never, not ever, not even one time, sell their products directly to the customer. They get around this by selling CDs to the artists, but not collecting mechanical royalties on them — thereby officially making that relationship the same as a retailer. I cannot tell you how many meetings I had over the years about promotions that got killed because someone in the sales department was concerned someone at Family Bookstores would disapprove of us getting any direct access to the fan.

If you saw the employee list at the major record companies, and drew a line through the names of people who only have a job because they are selling a physical product to a store, you’d eliminate at least 70% of everyone working at a record company. Switching to a non-retail business model would require them to jettison most of their employees, which would also jettison all of their cash flow. And, it would immediately signal to retailers to return all the CDs that are sitting in their stores, giving them a billion dollar hit that would put them out of business the following morning.

There have been several super-secret attempts by the labels to get into the direct to the fan business, especially three years ago when the Internet started taking off. But all of them pretty much disappeared just before launch, when word leaked out to retailers. A couple survived in form only, existing as email newsletters that drive fans to bricks and mortar stores rather than to the artist’s web site.

Record companies are built to sell products to stores, and market products to push sales at stores. They don’t do concerts, they don’t run fan clubs, they don’t sell tickets, and they don’t build viral online communities. All of those businesses work on the direct model, which is anathema to the labels’ cash flow life blood: consignment sales to stores.

(Note: iTunes is the one exception to this rule, and that happened only after the retailers and record companies realized they were both uniquely on the wrong side of the equation. But the problem is that the labels will not allow the artists to sell their music to the fan, even digitally, unless it is through iTunes. This ensures that the artist stays “under” their label, the fan stays out of direct monetary relationship with the artist, and the retailer still gets to believe they are the dog wagging the sales tail. Of course, it also ensures that the label can make a third of the money on digital music sales.)

2. Why didn’t the record companies do something? First, there is a general misconception about record companies, that they are technology companies. Record companies employ technologies to run their business, but they are not technology companies. They don’t make any electronic devices, and they don’t write any software. Their job is 80% selling physical product to retail stores, and 20% making and marketing the music on those products. Close to zero percent of a major record company is dedicated to new technologies and software development.

When Music Today exploded, all of the label heads took notice. But when they started looking at the Music Today business model, they immediately saw three problems: 1. They cut out the retailer (see #1); 2. They ran on a proprietary software content management system; and, 3. They didn’t own masters or copyrights — in other words, they were a service business, and not a product business. If all of your income comes from wholesaling products to retailers, you don’t cut out the retailer. If you don’t have a software system to run Web communities, you have to write one, which would cost seven figures and about a year of time — neither of which record companies have. And if you don’t use masters and copyrights as collateral, then your collateral has to come from something else — and record companies are music companies. They don’t make T-shirts, or sell seats in concert halls.

Service businesses are hard work. Not to say record companies don’t work hard, but they don’t like to do things that require one to one work with the customer. They would rather deal with the artist, and let the store deal with the customer.

Now, of course, the record companies are scrambling. With retail sales down 30% in the last two years, and projected to be down 40% this year alone, they have to get off the boat before it sinks — or, at least be close enough to land to swim to shore when the boat goes down for good. That’s why we see record companies getting into management, merchandise sales, and all sorts of things that will bring them money whether or not the artist sells product at retail.

But the problem is, the artist doesn’t trust the label. And if you ever sign with a manager, you trust them implicitly. The record companies in the past brought cash and clout — but not trust. That’s why they required very onerous contracts with lopsided options. A manager, though, only wins when the artist wins. And the artist sure isn’t going to cut the label in on what little money they are making, if the label won’t share the CD sales money with them.

So, the die is cast. We don’t know what the future holds, but we know it won’t look like the past.

Or will it? I believe it actually may. And I’ll tell you why, next time…

Most of us here at generator spent most of our careers working at and for major record companies. People would often ask me if working for a record company was fun. I’d always say, “I get to wear whatever I want, listen to music all day, talk about music all day, go to fancy parties, get any CD I want for free, go to awards shows on an expense account, become friends with famous, creative and otherwise interesting people…and they pay me! Who wouldn’t like that job?”

When I started at Word Records in Nashville back in 1985, we had about a dozen employees. When I left eight years later, we had more than 300. Our artist roster was quite literally a who’s who of the Christian music business. Suffice it to say, I had a good ride.

Today, you’d barely recognize Word, or any other Christian record company for that matter. To understand what happened, and why, you first need to understand the basic underpinnings of the old music business — the one based on a physical product business model.

1. Only one in 10 albums is a success. We used to joke that one Madonna record covers a multitude of sins. You literally would not believe how many truly awful, forgettable and nonetheless expensive albums are created every year that you’ve never heard of — and never will. So long as you can continue to maintain that one in 10 ratio, you can stay in business in the old record business, because when you do have that one big hit, your lock on distribution and pricing guarantees a completely disproportionate return on your investment. And those other nine failures that returned more than they sold actually accrue value over the long haul, because of the sheer volume of songs and masters that are collected in vaults.

2. A good profit margin in any one year is about 7%. And when I say good, that’s pretty much as good as it gets unless the stars all align in the fourth quarter. One year you might have a major release that doesn’t come out, and you go into the red — for the entire year. Yeah, those were the fun times around the record companies I worked at. Break out the Monopoly boards, we used to joke, because marketing is gonna get slashed. So, you can see how precarious this business was when your best case scenario success rate results in single digit profit margins.

3. About 98% of all recording artists never make one cent selling their CDs at retail stores. The record company owns the masters and copyrights as collateral against the money they essentially loan to the artist to make and market their project. The artist gives 100% of their sales royalties (mechanicals) to their record company until their debt is paid off — which, 98% of the time, is never paid off. That’s no exaggeration: 98% of the artists you’ve heard on the radio and seen in concert never have, and never will, make one penny from the sale of their CDs in stores. They make the deal, because they risk all the cash. The artist writes and performs songs, and makes 100% of their money from concert income.

4. CDs sold by the artist in concert don’t bear royalties. In other words, a Christian artist could sell 30,000 CDs to their fans in one year and not a single one of those sales counts toward their recoupment. And to add insult to injury, that product is usually purchased by the artist at a rate many times greater than the actual manufacturing cost of the product.

5. Even if you ever did recoup (which you won’t), you still won’t own your masters. That’s right. Even if you are fortunate to be one of the 2% that does somehow manage to get to the point where you are making a buck fifty when one of your CDs sells in stores, you still don’t have any more rights to distribute or exploit your master recordings than you did before. I have a friend who is the president of a major label who recently described the scenario by saying, “We’re the only business on the planet that requires you to pay off your mortgage, but we still own the house!” No wonder there’s so much animosity in the artist world toward the record companies.

6. All those CDs in stores are still owned by the record distributor. All of them. Get that visual in your mind of the old Tower Records — a veritable sea of CDs. Tower didn’t actually own a single one of those CDs. They brought them in on consignment, and could return and exchange them at any time. In fact, record distributors would even pay what was called co-op to the stores as de facto slotting fees. Record stores could actually make money by not selling music by virtue of taking pay-offs for pricing discounts (off of inflated retail prices, of course), retail promotional items (that they rarely used), and catalogs (that hardly ever got read). It was a beautiful system for the stores, which ended up so deeply in debt to the record distributors that the distributors literally couldn’t afford to demand payment for CDs they actually did sell without putting them out of business. Wow, what a mess! No wonder there isn’t a record store chain left!

Most artists don’t ever figure out these six dirty secrets until it’s too late. Frankly, most just started figuring it out recently, when digital music and direct manufacturing unlocked the true secrets of the music business.

Now, before you peg me as a hater of record companies, let me stop you. There is an even uglier reality that is just now beginning to emerge for all of the artists who used to have major label deals: The record companies paid for everything. And by everything, I mean everything. Marketing, promotion, advertising, design, copywriting, packaging, production, accounting, distribution, collections, returns, taxes, stolen and damaged goods, lawyers…fill in the blank. And consider that every single one of these costs were incurred for every single release — including the nine projects that tanked.

They could only afford to pay for all of these expenses because they owned every master and copyright that they paid to create (also known as collateral), and could negotiate absurdly cheap costs by virtue of their volume and lock on the market. Put more simply, that $15.00 CD costed the distribution company about 50 cents, because they owned the CD manufacturer and printer, and monopolized the channels to sell that CD to stores.

Now, if ever there was an industry set for a Titanic fall, it’s the one I’ve described above. When you talk about a “heavily leveraged” business, nothing tops the old music business. That slim 4-7% profit margin depended entirely on every single part of the above production, manufacturing, marketing, copyright, pricing and legal equation falling squarely in their corner. Take even one domino out of the chain, and disaster happens.

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“Didn’t they see this coming?” Tune in next time when I explain how and why the record companies came to believe their unique business model would never change — and why they are not likely to survive past this coming Christmas.