Pitchfork interviews Bruce Pavitt and Jonathan Poneman, the founders of Sub Pop, on the 20th anniversary of the opening of the label’s office in Seattle. (Pavitt is no longer with the label and the pair were interviewed separately, which is why there is a disconnect between their comments.)

Lots of interesting details about the scotch-tape-and-staples financial arrangements the label had to finagle to survive. But first, about Nirvana….

Bruce Pavitt: … By ‘88, selling 5-10,000 copies a record was considered doing very good business. The idea of selling millions of records was almost inconceivable… I remember Bleach in its first year selling 40,000 copies, which was amazing.
Pitchfork: It’s platinum now, right?
Bruce Pavitt: Bleach is almost double platinum, yeah. And it cost $600 to record, so…I would venture that, just from a business point of view, the return on investment from Bleach might make it the most profitable record in the history of the world. $600 for two million in sales, that’s pretty unusual.

Pavitt doesn’t mention that the band had to pay that $600 itself. Sup Pop did pretty well with Nirvana, considering the initial outlay of zero dollars. (My source is Heavier than Heaven, Charles Cross’s Cobain bio; he says the band borrowed the $600 from a friend … and never paid him back. In the indie world of the 1980s, every great fortune was based on a petty crime.)*

On the other hand, there’s this:

Jonathan Poneman: To give you an example of the sort of choices we had to make: A lot of the bands in Sub Pop’s early years went on to have early success and attract the interest of larger labels. In the early 90s, bands got scooped up by larger labels in this belief that “alternative music” was going to be the soundtrack to a generation, yadda yadda yadda. So a lot of bands we would work with for, you know, budgets of a thousand or two thousand for an album– and that’s the high end– would end up signing quarter-million, half-million dollar record deals with larger labels. One of the decisions that we had to make along the line was: We have two thousand dollars. Do we either pay that as a retainer to a business attorney who helps legitimize our business, or do we turn around and put out three or four singles? More often than not, we would make the latter choice, because that allowed for the momentum to continue. There was so much great music at the time—first and foremost, we wanted to document this music that was vital. Then somewhere along the line we also had to start taking care of the business of being a legitimate operation.

That’s a fair comment, excusing even the Sub Pop singles club, an entirely unnecessary scene accouterment. (The interview also has a lot of interesting background on the label’s selling 49 percent of itself to Warner.)

Pavitt goes out with a shot at the sellouts of today:

Pitchfork: The rise of indie culture and how it’s more visible now—is it comparable in any way to the grunge hysteria of the 90s?
Pavitt: [pause] It’s different. It’s matured into a really…it’s a cool scene, there’s a lot of a diversity. You look at the festival you’re putting together, there’s a lot of diversity there and a lot of people going to see it. I don’t think it has the insane buzz of what was going on in Seattle. At the same time, there’s so much material out there and it’s a really healthy industry, people have jobs selling records and making records and promoting them. Because there is so much material, I don’t think it’s having the same cultural impact as the late-70s punk rock scene. If you walked into [Chicago record store] Wax Trax in 1978, 79, the whole vibe was so against the grain that it was revolutionary. Indie rock is very healthy, there’s a lot of diversity and a lot of creativity, but it does not have the revolutionary spirit of the late-70s punk scene in regards to design and politics and fashion and stuff like that. I really miss that, and I’m looking forward to a youth musical cultural scene that’s a little more revolutionary, where indie bands aren’t vying for McDonald’s commercial spots.

Emphasis added—the Shins, one of Sub Pop’s biggest latter-day successes, of course, did a McDonald’s commercial. Poneman, who still runs the label, rationalizes things this way:

Pitchfork: What went into that decision of pushing artists toward licensing?
Poneman:  Well, we didn’t really push them that way. We said, the choice is yours. We understood that there was an ethical dilemma. If you’ve read Fast Food Nation, which I did at the time, you’re going, “Eww, McDonald’s.” But on the other hand, there’s a couple of other things to consider: First, the nature of radio play, which up to that point had always been the holy grail. Radio essentially is the same thing– you’re padding the advertising with music. The music brings people to listen to the radio, but the reason why advertising and radio stations themselves actually want people to listen to the radio is not so much for the music, but for the advertising because that is what pays the bills. This was put on its side to a certain degree, or seen a different way. This was kind of the same premise, but the artist gets cut in more directly on the revenue side.

The other thing is, as formats change—through CD burning, through music being made available through different means, and the channels of music distribution loosening up—a lot of the revenue that was coming from sales is actually…more bands are relying on the revenue derived from film and TV licensing than ever before. It also comes down to where the music is positioned in the culture, because there was a real feeling that the music was sacrosanct, back in the 1960s. “How dare you use this Jefferson Airplane song to market blue jeans or cosmetics or whatever.” But now, while I totally understand and respect those feelings, as a practical matter there’s so much cross-pollenization of media at this point anyway, that it just seems to me to be another facet of that. If that makes any sense.

It doesn’t, but whatever.

* Bleach has probably sold a lot more overseas, as well. The only other record I can think of in the same realm as Bleach’s profitability is the Offspring’s Smash, which has supposedly sold over ten million worldwide. It too was recorded at the height of the DIY days, but since it wasn’t the band’s first album wasn’t put together on quite so much of a shoestring.

A column in the latest Billboard ($) by the mag’s retail expert, Ed Christman, has some interesting facts about the Virgin music stores:

1. The Times Square store in Manhattan is going to shut down next year.
2. The 14th Street outlet is going to as well.
3. That will leave the chain with eight left around the country, but …
4. … the two big NYC stores collected half of the chain’s revenue.

The chain is co-owned now by a Manhattan real estate operator named Vornado; a rep from there says, “We bought the Virgin business to wind it down to get a hold of the real estate.”

Christman ties this news in to the departure of Handleman, one of Wal-Mart’s two main distributors, from the music business. He asks whether even solvent retail operations will start to liquidate, figuring the time to get out of the business is now.

He blames the labels, which he says didn’t help land retail operations get out in front of the digital train:

What would have happened if the majors had agreed on a CD evolution or replacement technology three years ago when retail asked them to? What would have happened if the major labels actually took their head out of the sand and heard the consumer tell them—over and over again, louder each time— that the CD is not worth more than $10 retail?

From the it-couldn’t-have-happened-to-a-nicer-group-of-people desk:

Susan Butler, Billboard’s legal columnist, has a copy of the European ruling on the merger of Sony and BMG. The EU approved the merger a few years ago, only to have a court annul it due to insufficient reasoning. So a new approval has been filed, with a lot of the gory details of how the industry, in Europe at least, is faring. She says:

This report is unlike any other because it follows the most in-depth government investigation of the record industry in the history of recorded music, and it reveals digital pricing information in the European Union long held secret.

While the report doesn’t share the actual money figures, it does give a window into the crazy complexity of the world the majors now have to find their way through. For example, the report examined the deals the majors cut with five digital sellers and five mobile sellers.

Before you read her description of the deals, put yourself in the position of being the head of an international record corporation, faced with precipitously declining sales of your traditional product, the CD.

Oh yeah: Plus, remember that in your entire history you’ve had firm control over the product; had to deal with basically only one way to sell it; and been able to raise prices at will, withhold royalties from artists with impunity, and pay off radio stations to get your product played on the public airwaves to boost sales. Now, consider this:

In 2004-07, the agreements became more diverse and more complex. The contract terms and wholesale pricing structures are often customized to reflect the market position of the digital retailer and how much the label values the services that the digital company provides.

Each of the majors’ deals vary with each of the digital business models that exist in the online and mobile markets. These models include subscription, streaming and advertising-supported services.

There are different pricing conditions, discount structures, user conditions, digital rights management restrictions and other contractual conditions. In each of the major’s contracts, the way the label shares revenue or marketing costs is also significantly different from one another.

… and—ringtones aside—none of it anywhere near as remunerative as a good old-fashioned $18.98 list price CD! Butler has another dozen grafs of similarly complex detail for other parts of the new spectrum of income streams.

What this means for artists isn’t good:

[…R]ecording artists may never truly have transparent royalty accounting. The labels’ wholesale prices charged for digital and mobile distribution must not be transparent if the companies want to avoid violating antitrust laws. The more complex they make their pricing models, the less able they are to ever fix prices and thwart competition.

This could create an immense challenge for artists who audit the labels, especially when the labels’ deals with digital and mobile services are made on a catalog basis rather than a per-artist basis.

What the industry is already seeing is that current artists with some leverage at the label might get a piece of that action; old and nonactive ones might not.

And one final note we should remember as we read reporting on how the industry is doing in the future:

No one outside a major label can estimate how much revenue that label receives from digital uses. The digital pricing structures and other contractual terms, which are all confidential, are too complex. As a result, any market-share analysis based on unit sales will likely be misleading relative to actual revenue earned from the digital marketplace.

Portfolio.com has an exclusive story detailing another shoe-drop in a slowly coalescing line of music-industry thinking that ISPs should charge customers fees to compensate the labels for their losses to online downloading. That idea has been floating around for a long time, and even has a history; cassette tapes were taxed back in the day to compensate the industry for the scourge of that era, which was known as “home taping.”

The interesting twist this time, which takes it out of the no-go category, is that the fees would be voluntary, and allow those paying it to download all the music they want for free.

The thrust of the Postfolio account is that Warner capo Edward Bronfman has hired a guy named Richard Griffin, who used to run Geffen’s digital operation and who according to the story has a reputation as a “industry critic.” Here’s his money quote:

“Today, it has become purely voluntary to pay for music,” Griffin told Portfolio.com in an exclusive sit-down this week. “If I tell you to go listen to this band, you could pay, or you might not. It’s pretty much up to you. So the music business has become a big tip jar.”

Go ahead and savor those last words for a few seconds. Coming from someone in an industry that has treated its customers like an ATM machine for the last fifty years, it’s a heady concept.

As for particulars, the story says:

Bronfman has asked Griffin, formerly Geffen Music’s digital chief, to develop a model that would create a pool of money from user fees to be distributed to artists and copyright holders. Warner has given Griffin a three-year contract to form a new organization to spearhead the plan.

Later in the story, Griffin says he’ll be forming a company that in the long term will not be owned by Warner to somehow institute the plan. The story includes some critics of the idea, on the predictable grounds. A$5 per month fee is floated, but Griffin says the figure would somehow be negotiated in each country.

To Hitsville, the big problem doesn’t really get addressed. The labels’ chief raisons d’etre—finding artists, developing their careers, manufacturing and marketing their music—have all been shown to be done better by different institutions. The main effect a new cash pool like this—which Griffin speculates might raise as much as $20 billion a year—would have is to prop up an industry no one really wants or needs any more.

In this sense, the plan may be a hail mary pass by a guy leading a company, the Warner Music Group, whose stock price is about a sixth of that it was two years ago, and his buddies, all of whom are in the same sinking boat.
Griffin carefully says the industry has no set $5 a month fee in mind—that was Portfolio’s supposition—but freely uses the $20 billion figure. That’s a little strange; the music industry right now represents only half that, in the U.S. at least, down from about $15 billion in the 1990s. (He may be talking globally.) But if you were running a music company in today’s climate, wouldn’t you love something that would take you back to your revenue levels before the digital tsunami hit?

To which a consumer might respond: Your idea has merit—but how about we institute it without you?

———-

Previously in Hitsville:

Should the record industry tax ISPs?

Nine Inch Nails has gotten a slew of publicity for a tiered sales system for its new release, “Ghosts I-IV.” The album, a 36-track collection of instrumental meanderings and riffs, is a novelty; but, as we’ve repeatedly seen in the brave new world of the record industry, the lesson is this: When you can’t sell the music, sell the way you sell the music. (See also, Paul McCartney et al., and Starbucks.)

Ten years ago, Trent Reznor put out a couple of good albums of what was at the time some fairly challenging music, and had a hell of a stage show. His popularity has since waned.

I don’t have the SoundScan figures at hand, but the RIAA certifications for NIN follow the usual half-life trend for once-popular artists: Each successive release does roughly half the sales of the previous one. (This process generally continues until the artist gets around to doing a standards collection or some variant thereof.) In this case, NIN’s last certification was merely gold, for “With Teeth,” which could mean actual sales of as little as 400,000 copies.

Anyway, for this album, fans have a number of choices: You can download a limited selection of the 36 total tracks for free, or get a) the whole set for $5 as a digital download; b) a couple of actual CDs for $10, c) a deluxe edition with a DVD and Blu-ray disc with all the individual instrumental tracks for each song and more; or d) a super deluxe edition with all of that, plus everything on vinyl, some pretty pictures, and other things, all for $300.

This last has gotten all the attention—here and here and here, among other places—mostly focusing on how Reznor made a quick $750,000 on the super deluxe edition alone. We can applaud his business acumen, but in the end it represents merely 2500 fans, which isn’t that big of a deal for a guy who used to go quadruple platinum.

It’s much more indicative of the lingering financial opportunities available even to faded stars; in the good old days, of course, Reznor might have grossed $750,000 from mersh alone at a couple of shows. And the whole affair, as with the Starbucks artists, smacks of the novelty.

I don’t mean to make it sound like commercial success is a be-all or end-all. It’s not. But there is a pattern we’ve seen repeatedly with certain stars.

Their talent fades or they become self-indulgent and lazy; album sales tank. They then attack their record company for poor marketing or worse. They then go into the wilderness and figure out ways to extract more money from a narrowed fan base. That’s where Reznor is now. The next step, after even this level of fan support fades, is to “get back to basics” and put out a release of songs in one’s original fan-friendly mode, go out on tour, and ride that for one or two final paydays.

For decades artists have marketed themselves in various ways outside their record companies; that what those TV ads for repackaged greatest-hits sets for established artists are sometimes doing. “Ghosts I-IV” is just a modern twist on that gambit.

The real test of the digital future of the business is going to come when an artist we’ve never heard of puts their music online for free and, a year or so later, is playing arenas while never having had a record company.

Another dispatch from the It-couldn’t-have-happened-to-a-nicer-group-of-people Desk:

Billboard ($) reports that Wal-Mart is proposing a humiliating price reduction on CDs to the majors. The company wants to make CD prices come in at one of five round figures, Ed Christmas writes:

According to sources, the Wal-Mart proposal would allow for a promotional program that could comprise the top 15-20 hottest titles, each at $10. The rest of the pricing structure, according to several music executives who spoke with Billboard, would have front-line hits and current titles retailing for $12, top catalog at $9, midline catalog at $7 and budget product at $5.

The story doesn’t say it, but the move is similar to what the retailer has been doing to myriad other of its suppliers. Still there is something pathetic about the once-mighty record industry being dictated to in this fashion. Was it really just a decade ago that the majors were jacking up the retail price of CDs a buck anytime they had a new superstar release?

At the same time, the company is obviously seeing an enormous dropoff in volume (physical CD sales are down almost 20 percent from last year in the first two months of 2008) and, one assumes, a softening of the loss-leader effect CDs have had for it and other big box stores.

The story says that, in raw wholesale terms, Wal-Mart is asking for reductions ranging from 25 to almost 30 percent, depending on the particular tier. The company sells about 22 percent of the CDs in America, Christman says.

The story says at this point it is a proposal; it’s unclear what the company will do if the majors don’t go along. Christman: “[One executive] says, ‘This sounds like the Hail Mary pass and if it doesn’t work, they could be out of the music business; or maybe they reduce music down to a couple of racks’ from the 4,000 titles carried by Wal-Marts with larger selections.”

Emphasis added.