Let us take a trip back to the 60s. Back then, American railroads were in trouble. Cars, airplanes, and even telephones were eating away at an industry that was expected to grow to no end. Eventually, the railroads ended up on life support and relying on government subsidies to survive.

The late Theodore Levitt wrote in a 1960 issue of the Harvard Business Review:

“The railroads did not stop growing because the need for passenger and freight transportation declined. That grew. The railroads are in trouble today not because the need was filled by others (cars, trucks, airplanes, even telephones) but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business.”

Contrast this to the current music industry. New forms of entertainment are eating into its profits (kids will easily spend £40 on a new video game, but not £15 on a new album), and the piracy issue has been ferociously nibbling away at cd and mp3 sales since the stone ages of Naptster in 1999.

The record executives, like their railroad counter parts in the 60s, have now run to the government for help. In the UK we have the digital economy bill which can have persistent online sharers disconnected from the internet and in Japan they are looking to use software to block music being shared on mobile phones.

The customer wants more music, and they want to share it. But record labels don’t seem to understand this. They are far too ‘product-oriented’, as Levitt would put it, and are somewhat more focused on digital mp3 and cd sales.

We are seeing some change in this perspective however. The music business is shifting from “record sales”, to “entertainment”. So some labels are looking to 360-deals, which entitle the record label to a percentage of income from all of an artists activities (concerts, merchandise, endorsements etc.). This gives us some insight as to what the future record labels will look like.

Future labels will not rely on revenues from record sales, instead they will feed off of an artist in every single imaginable way they can. In-effect, they will be more like personal brand managers and specialist marketers than manufacturers and distributors of music.

This is because the cost of manufacturing (recording) music has been driven down by technology and now any average Joe with a decent computer can put together a radio ready song.

Record labels used to have an edge with their large recording studios but today they are finding it hard to justify the costs of maintaining them (EMI for example thought about selling its world renown Abbey Road Studios).

I suspect the future label will most likely do away with large studios for pop music, except for recording symphonies and music for film.

As for distribution (another advantage of signing to a record label), its costs have also been driven down by technology. The marginal cost of selling another song is virtually zero and so is the marginal cost of producing another copy of it. This means that average Joe can distribute his music online without a huge capital investment.

Therefore the future label will be lean and entirely focused on what the current labels do best: marketing and brand management. This will be the selling point of signing to a major.

In summary, the record label 2.0 will be an equity investor in an artist and will expect to reap benefits from whatever an artist produces; whether that be a book, a role in a hollywood blockbuster, concerts, or more generically, royalties from music.

Also, since the customer wants more music and the ability to freely share it, the future label will loosen its grip on trivial matters of online copyright infringement and focus more on facilitating the exposure of an artist brand to new markets in order to generate further revenues from other sources of income.