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Record Labels: The Third-Party Monopolies in the Music Industry

By Mohan Rajagopal

Music, once viewed solely as an art, has now expanded to a large audience base and repertoire of artists. It has assumed the form of an economic venture, transforming the sector into a fully-fledged industry. Often, one may hear about a record label backing the activities of a particular artist, but the role that they play within the musician’s discography is left unclear in the eyes of the public. For the past century or so, it is the record labels that have been influential in the growth of the music industry, developing it into a commercial enterprise rather than artistic pursuit. 

A record label is essentially a firm that manages the logistical aspects of an artist’s music career. It deals with aspects such as the production, marketing and distribution of music, securing brand deals for their talent, and even developing new artists who one day might be the next big pop star. Their name is derived from the circular “label” in the centre of a vinyl record, on which is displayed the name of the manufacturer and other copyright and trademark details. 

What are the roles of record labels?

Record labels enter into business deals with different artists with an agreement to look after the promotion and advertising of their music, as well as other business-centric factors like the manufacture of CDs and album units, or merchandise. While the artist focuses on making the music that people around the world listen to, it is the label’s responsibility to make sure that the music reaches these people in the first place. Hence, while the musician represents the artistic aspect of the transaction, the record label is the backstage logistical head. Financially, it is also the labels that provide budgets for the production of songs and albums, as well as the filming of music videos. They work just as the producers of a particular film would, in securing funding and administrative assistance for the stars in the spotlight. 

In their activities, two distinct types of labels may be distinguished. It is major labels that represent the world’s biggest artists. These are supported by corporate backers and have several sub-labels, each of which is engaged in a different aspect of the music industry, such as publishing, distribution, or talent scouting. Some of the prominent major labels are Universal Music Group (representing Taylor Swift and Ariana Grande), and Capitol Records (with Katy Perry and The Beatles). On the other hand, independent labels are much smaller and run on their own funds without any corporate backers. It is usually these independent labels that give support to the smaller, up-and-coming artists (known as indie artists), and they are regarded to be the equivalent of small businesses in the music world. Artists who are not represented by any label at all are said to be unsigned. 

Unsavoury negotiations and disadvantages

The scouting for these smaller artists is an essential aspect of the labels, giving birth to the A&R (Artists and Repertoire) division of the record label. These sectors are responsible for finding artists who have the potential to grow, such that they may blossom into greater success under the guidance of the label. Although A&R is vital for the continued growth of the industry, recently, it has come under great fire for the blatant exploitation of signed artists. Most famously, Taylor Swift has spoken out about how, as a young artist, her record label contract with Big Machine Records forced her to give up ownership of her songs to the label. She was unable to negotiate a better deal with the label, and this is the story of millions of new artists around the world. Swift and other global stars have been vocal about the need to protect the rights and interests of these smaller artists, and to prevent their exploitation in the contracting process. 

That isn’t to say only newer artists are harmed by such contracts, though. The majority of profits derived from the sale of music units is given over to the record label due to the nature of the contract drawn up. This is because an artist is expected to pay back the money that has been used by the label in their support, with the revenue from the sales. Consider a record deal where an artist gets an advance of $500,000 at a royalty of 10%. Without delving into the complex mathematics required, by the time the artist breaks even (recovers the expenditure on the album from the sales, when profit is 0), the label has already profited $500,000.

Internal politics and preferences within a label can also hamper larger artists. For example, let us consider the real case of Justin Bieber and Demi Lovato’s new albums which were released in the same week, in April 2021. Both are signed under Scooter Braun’s record label; however, greater funding and promotional campaigns were provided for Bieber’s release due to his close ties with Braun, while Lovato’s album was practically hung out to dry. The natural result was that Bieber performed better commercially, and this initial (illegitimate) success was used as a further incentive to fund Bieber rather than Lovato.

A potential shift in the music business

A natural result of this foul play, catalysed by the rise of the internet, has been unsigned artists attempting to make their own mark in the world without any label support. With YouTube and TikTok, it is exponentially easier to produce and distribute music for a larger audience, even from the comforts of one’s bedroom, on one’s own terms. Shawn Mendes is only one of the few who found popularity by sharing covers on YouTube. The growing trend nowadays is to initially put out music independently, and sign to a label only after achieving some initial prominence. This puts the artist in a successful position to leverage and negotiate a deal with the higher-ups, with lesser chances for exploitation. 

The third-party involvement of the record label seems to be diminishing in importance, with the relationship between the suppliers and consumers of music becoming more direct via the internet. This spells out an interesting future not only for the music industry but also for the commercial enterprises of any artistic pursuit. Democratisation and accessibility to resources have been emphasised by governments for firms and business ventures, and the need for a gradual movement away from the record label could be compared to a government’s regulation of monopolies. Through price capping, encouragement of competition, and other measures, governments ensure that monopolies do not exert control over the entire market to prevent price gouging and exploitation of consumers and to promote the involvement of other private entities. Similarly, musicians becoming less dependent on the services of a record label is essentially a reclamation of their commercial power. While the artist can make their music on their own terms, consumers and audiences would also be required to pay lesser prices for the songs they listen to due to the elimination of various overhead and intermediary costs charged by the label. 

A discussion about the economic importance of record labels cannot omit their impact on the larger economy, though. According to the Recording Industry Association of America, the contribution of the music industry to the US GDP was 170 billion USD in 2021 or approximately 0.75% of the total GDP. It is undeniable that this large sectoral share is due to the interaction of record labels with other firms in the economy, without which music would only be an artistic pursuit as opposed to an economic entity. Considering these large contributions, it is unlikely that record labels will be disappearing anytime soon. In all likelihood, the government will attempt to promote the involvement of these companies to encourage greater returns to the national economy. The intersection between these two bodies has already come under great criticism. Music policy in the US has resulted in controversial decisions such as reductions of royalties paid to musicians for streaming services and greater controls being given to record labels in controlling the financial and commercial ventures of a particular artist. Since government interference in music has already taken place to a certain extent, it would not be entirely surprising for this interaction to increase in the years to come, in order to combat the growing potential of up-and-coming artists to release music without the third party record label. 

The road ahead

While labels are losing their prominence in the A&R division, they are still essential for the growth of an artist after the initial success. Independent artists can only go so far: it is only with the funding and budgets of a record label, along with large-scale frameworks for production and distribution, that an artist can be propelled to global fame. It is the balance between the creativity and freedom of an artist and the business propensity of a label that allows a contract between the two to flourish with mutual benefits. However, it is important for these labels to be monitored closely, lest they destroy the soul of the art that still persists within the industry: after all, it is the music that remains the most important aspect of this venture. The complicated relationship between artist and label is one that is sure to be of great relevance amidst conversations of egalitarianism and deregulation of economies. What cannot be denied, though, is that without record labels, the music industry would cease to be just that: an industry. 

Mohan Rajagopal is a first-year undergraduate student at Ashoka University. He intends to major in Economics and Finance, with a minor in Mathematics.

Image credits – Rap TV

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