A Quick History of the Recording Industry

Music business is a human activity that answers the need for quality music to be created and heard. Ancient civilizations had it, even if they didn't have the same kind of economy as we do. Maybe musical instrument makers and musicians were paid in food, community honors, or time off from hunting or gathering or putting up standing stones in gigantic circles. Probably, systems were set up to pass musical skills to the next generation.

We call the Stone Age “prehistory” and are only beginning to learn about its music from the new field called paleomusicology. There is of course lots of evidence of the central role musicians have played throughout known history. Modern modes such as Dorian, Phrygian, and Lydian were named after slave groups of ancient Greece, who apparently pioneered those modes of music. The mathematical Pythagorean scale may have been a reaction to less predictable scales used by influential female singers such as Sappho, who sung about personal emotions that, apparently, those in charge found disturbing and tried to destroy, in favor of songs paying tribute to heroes and leaders and battles. (If you're interested in exploring these ideas, you may enjoy the book The Subversive History of Music by Ted Gioia.) In Scotland, traditions placed great value on the bagpipe players who psyched warriors up for battle, or honored special days; a piper was a must on all ships sent across the sea to Canada. On many cross-Atlantic sailing ships, fiddlers were required in order to entertain travelers and give them exercise through dance. In Ireland, customs and laws in the 17th century placed a high value on musicians by charging special fines if a musician was to be injured.

So in a sense, some form of music business has been around for millennia. But in the past century, most people have thought of music business in terms of the record industry. Let's take a look at a brief history of recording, but it’s good to keep in mind that recording represents a tiny portion of humanity’s need for music. Not only has music business been with us for millennia, it will continue to be needed for future millennia, even if formats keep changing, as they have from vinyl to cassette to CD to download to streaming to whatever comes next.

Before people knew how to make recordings, the only way to hear music was through singing or live performance. The music industry of the 1800s consisted primarily of selling sheet music so that people who loved songs in a show could buy the music and learn to play or sing them at home. Late in the 1800s and into the early 1900s, player pianos were invented, allowing people to buy a piano roll, insert it into the instrument and have a song played for them at home. Sheet music publishers were alarmed until Congress passed a new copyright law in 1909 that protected the rights of original works and gave the publishers “mechanical royalties” for each piano roll sold, and this extended to any copyright owner of music whose work was recorded without permission. We still use mechanical royalties today, and they extend to performances and radio play as well.

Many instruments were automated in the early 1900s, not just player pianos. These included stringed instruments and even player organs, which had such a huge capacity to play many notes at once that they could play symphonies, and through vents, could modulate dynamics. In order to transmit so much information to the player organ via a simple piano roll, special codes and a special interpreter had to be invented, which took up the space of a whole wall and used binary coding just like a computer. Of course, only the richest families could afford a player organ!

Also in the late 1800s and early 1900s came the invention of wax cylinders, then wax disks, then plastic disks so that records could be mass produced and sold. Contrary to fears of the publishers, the prevalence of records only spurred people to buy more sheet music than ever.

Then in the 1930s came the radio. The availability of music for free on the air waves terrified the music industry until they realized that popularizing songs only made radio musicians into celebrities who soon became record stars as well. When television arrived and broadcast live performances, once more the music industry only grew. In the 1950s, television took over airing the dramatic programs that radio used to specialize in, and radio stations took to simply playing records on air, popularizing them even more. Fears that the new jukeboxes would replace live music and keep people from buying records for themselves disappeared when rock and roll showed up, and music sales tripled in only four years during the mid 1950s.

A procession of changes in music kept improving the listener experience while shaking up the industry and forcing it to adapt. Long playing records (LPs) on vinyl allowed people to hear a whole series of songs or a whole piece of classical music on one disk. Reel-to-reel audio tape and cassette tape became popular and allowed people to make copies of songs they liked, and even make their own personal playlists. In the 1980s, the Sony Walkman allowed people to carry those playlists with them in their pockets.

Then CDs took over, with digital music allowing perfect copies of the original recordings. Sales were driven by people replacing their LPs and cassettes with CDs, until 1999, the peak of music sales and the peak of CD sales. That's when online piracy took hold.

The subversive online service Napster figured out a way in 1999 to let people with online computers illegally share their digital music for free worldwide. Lawsuits about copyright infringement brought Napster down, but soon enough new developments began a slow recovery for music sales, including iTunes in 2003, which began to popularize once more the idea of people buying single songs instead of whole albums. Internet and satellite radio began, and Pandora had the idea of allowing people to register to listen to online music for free (with ads) or at a price (without ads).

Downloads overtook CD sales, and then streaming began, with Spotify, Rhapsody and others soon dominating the marketplace. Now people were buying subscriptions to hear everything, instead of buying individual albums or songs. Thanks to streaming, music sales in the U.S. have recovered from the post-1999 slump when piracy took down CDs.

In fact, judging strictly by the number of dollars earned, music sales have not only recovered but have reached an all-time high. However, when adjusted for inflation, music sales have not completely recovered following the big peak of 1999. You can see the numbers on two charts put out by RIAA (Recording Industry Association of America). You can switch between the two charts by clicking on one of the buttons in the upper right, either showing Revenue, or Revenue Adjusted for Inflation. The Revenue chart shows music revenues steadily going up; the chart as adjusted for inflation is not quite so optimistic but it does show a big recovery since Napster in 1999, though mostly in streaming. Streaming has created one of the great difficulties for musicians and record labels today -- accounting for streaming in a fair way is a tough puzzle that hasn't yet been figured out.

Digital capability allowed for do-it-yourself (DIY) recording and uploading. A flood of new recordings forced traditional CD stores, who used to try to carry “everything,” to limit their stock only to recordings that they knew would sell, and therefore to force labels to take returns on items that didn't sell within a certain time period.

In the meantime, everyone has been scrambling to adapt to the fast-changing world of music. Major record labels gobbled each other up until there are now only three left: Universal, Sony, and Warner, which are responsible for 90% of records today. And yet, there are many independent labels as well. Not everything happens on a big scale; often the smaller-scale operations are more sustainable and less subject to the whims of the marketplace.

While all this crazy stuff's been happening on the recording side of things, live music grew a great deal too, with new festivals and music clubs popping up everywhere. But that’s another story, and major players such as Live Nation have tried to take control of as much of it as possible.

That's some of the big picture. Here’s a window into some of the inner workings. I created a CD distribution business from scratch in 1991, just from the desire to allow people to hear some great music from Scotland and Cape Breton, Nova Scotia, that was not available in the U.S. As I began to make these CDs available to U.S. stores of all sizes that wanted them, I found that I could bring more and more artists and record labels on board, until eventually I had 1800 items in the catalog, including most of the music from Scotland and Atlantic Canada, plus selected titles from Ireland, Brittany, Wales, and some U.S. Celtic titles.

CD distribution used to be a big deal -- distributors had special relationships with artists and labels as suppliers, and with retail stores as customers. It was hard at first to convince some of the competing labels to be listed together in my catalog, but they soon realized that they would have more visibility if they were all present in my catalog than separated and possibly not noticed at all. Stores that wanted Celtic music, and particularly Scottish and Cape Breton music, knew that they could find it all in our catalog.

In the distribution business, the profit margin was typically about 20% or so, meaning that I could buy a CD from a record label for $7.50 and sell it to a retail CD store for $9.00, allowing me to earn 20% profit. The retail stores then tended to mark up the CDs about 100% for a much larger profit, so they would sell that CD for $18 (or, more likely, $17.95). The retail store would try to sell that CD as soon as possible so they could pay me within 30 days. Meantime, I needed to sell and collect for that CD so that I could pay my suppliers within 60 days.

Sometimes all this sales timing didn't work out for everyone, so you had to have enough other sales or cash in hand to cover any gaps in the "cash flow." Cash flow is what often drags unsuspecting businesses down, especially if they didn't bother to look ahead and project their likely budgets or make a business plan so they could be ready with enough cash on hand for emergencies. One record label I knew was thrilled to sell a huge order of CDs to Borders for their 350 stores; the order was so big that the label ordered a new manufacturing run of the CD in order to send that big order out. But then, when the money from Borders came due, what they got instead was a return of most of the CDs, because they didn't sell well enough! That record label was sure Borders would be paying for all those CDs, which would cover all their manufacturing costs, but it didn't work out that way, and they actually had to go out of business.

Nowadays, instead of selling primarily to CD stores as I did, distributors such as CDBaby have cultivated relationships with streaming providers. They arrange to provide a good quantity and quality of music to the streamers in exchange for a decent cut of the return, most of which they pass along to their artists and labels, while keeping some for themselves. In the meantime, the distributor promises their artists and labels to make things easy for them by managing distribution to a wide variety of important streaming services, and handling all the payments.

Sales between labels, distributors, and retailers were primarily based on who you got to know. One of the main ways distributors, labels, and retail stores cultivated their relationships was by attending music business conferences such as the Music Business Association conference (in 2013, this association had to update their name to keep up with the times -- they used to be called NARM, the National Association of Recording Merchandisers). Indie labels might attend a conference put on by the American Association of Independent Music (A2IM).

As in so many parts of the music business, success in the recording industry is built on personal relationships made at conferences or among peers.

As tech grows and changes, and musical tastes evolve with new ideas, often blending in and reconstituting old ones, people keep putting their heads together to puzzle out the next best kind of music, the next best tech, the next best method of getting music out to people, of teaching new players. And above all, human expression continues to drive musical ideas and lyrics, as it always has done and always will do, whether coming up with innovations or tapping into ideas as old as the Stone Age.