Digital-distribution of music goes from fee to flat rate

The music industry may be bellyaching about how tough times are as revenue continues to sink like a rock for traditional music companies, but don't tell that to Jeff Price, CEO of TuneCore.

"Unit sales are up, not down," Price said. "That means people are buying more music, not less."

That's sweet music for TuneCore, which makes money by charging fees to distribute music to online merchants such as Apple's iTunes, Amazon.com's MP3 store and Microsoft's Zune.

Less than five years after Price launched it, TuneCore has become the world's largest distributor of music, as measured by volume of releases. The New York company pumps out 15,000 to 30,000 new songs each week, more than most major record labels do in a year.

And it achieves that without scouting and signing artists, operating a recording studio or cranking up a huge marketing machine.

Established musicians such as Jay-Z, Trent Reznor and Aretha Franklin use TuneCore's services, as do lesser known artists.

The story of how TuneCore became a key part of the digital-music ecosystem parallels the rise of the digital-music business, once the shock of widespread piracy began to wear off and executives began to question every assumption they had about the industry.

For Price, the day of reckoning came in October 2005 when his small New York record label, SpinArt Records, started to go under. In anguish, Price laid off employees and had no money to pay his artists.

A few weeks later, a friend, Gian Caterine, asked Price to help get his songs on iTunes, which does not deal directly with musicians but goes through distributors to get music into its digital store. As the owner of a label, Price was able to post Caterine's rock album on iTunes.

Price later found out that companies charged artists between 10 and 15 percent of an album's digital sales for what he did free for a friend. Record labels also digitally distribute their artists' music, but they, too, charge a percentage of sales rather than a flat fee.

"As a musician, I make and record all the music, drive hundreds of miles to do concerts, eat ramen and sleep on floors. And here these companies were charging up to 15 percent of my sales in perpetuity, just for sending a file from one server to another," Price said.

"It really upset me that people were getting ripped off like that."

So he set up a website that charged artists a flat fee to distribute their songs. That meant Jay-Z paid the same amount to post his music on iTunes as someone recording in their suburban garage: $9.99 a song.

When TuneCore launched in January 2006 it disrupted a tradition of taking percentages of sales, which can mean thousands of dollars for a song by a major artist.

"I was kind of stunned it existed," said Jim Guerinot, who manages Nine Inch Nails, No Doubt, The Offspring and others as owner of Rebel Waltz, a management company in Laguna Beach, Calif. "When I found out about it, I said, 'Wow. You've got to be kidding.' Jeff completely changed the way you did business."

Guerinot now uses TuneCore exclusively to distribute his clients' digital music. He and his clients like that TuneCore doesn't demand ownership of music rights.

While TuneCore also doesn't front money or market bands in the way a label would, its service is part of a burgeoning digital toolset that allows artists to be more self-sufficient, bypassing the labels and turning to Topspin, for example, for online marketing and TuneCore for digital distribution. In July, the latest month reported, at least eight of TuneCore's top 10 artists had no major record label contract.

Last year, TuneCore disbursed $30 million to its artists. This year, Price forecasts that number will be $65 million to $75 million. Many of his highest grossing artists aren't top 40 bands. They're do-it-yourself musicians.

As a result, TuneCore has positioned itself directly in the mainstream of one of the music industry's few growth curves: digital distribution.

The number of album releases more than doubled in the past five years, soaring to 97,800 in 2009, from 44,500 in 2004, according to research group Nielsen SoundScan. A greater portion of the albums are digital-only — 56 percent in 2009 versus just 10 percent in 2004.

And more digital releases mean more money for TuneCore, which generates an estimated $10 million to $20 million a year in revenue.