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Record biz taking Hits on all sides

V2's Gershon issues call for a new paradigm

It was the Email Read ‘Round the Rock World.

When V2 Records prexy Andy Gershon recently sent a missive to Hits magazine, he struck a nerve. He claimed V2 had received negative press in Hits since it declined to buy ads.

But this was more than a feud. In the murky swamps of the music business, Gershon was pointing up a key to survival in the 21st century: Don’t spend money “the old-fashioned way.”

The music biz has been following the same fiscal formula for decades and — when you read between the lines — Gershon was issuing a clarion call for a new paradigm, lest the music industry be overrun by outsiders who understand the consumer better than the content providers do.

According to Gershon, Hits had characterized V2 as an underfunded and understaffed label incapable of generating considerable sales for the new release by the White Stripes, one of the hottest alternative acts going.

“You trash people that don’t pay you. Pure and simple,” Gershon wrote to Hits editor Lenny Beer. “You are grasping to get every last dollar while you can, continuing to try to instill some sort of fear with your power of the pen and your so-called influence with MTV and radio.”

The snarky-toned Hits, along with its, are generally well-informed — and oftentimes amusing — gossip sheets. The apparent editorial modus operandi at the Hollywood-based mag: Pay for the Hits service and favorable press treatment will follow.

But Hits is more than a trade publication; it’s also a record promoter, drawing the bulk of its income from record companies that hire Hits to pitch specific records to radio stations. Ads in the mag note the number of stations that have added a particular tune to their playlists; in other words, the ads reflect Hits’ success rate in pitching the records.

While not spelling it out directly, Gershon demonstrates how much the radio promo biz is part of the old paradigm, one that has G-men like New York attorney general Elliot Spitzer requesting documents relating to the nefarious world of diskery-to-radio payments that have skirted payola laws for five decades.

As more and more labels get out of the business of paying radio promoters six and seven figures to get airplay, Hits magazine’s advertising has dwindled dramatically.

Over the past five years, new revenue streams have popped up that affect the way the diskeries produce revenue, with digital delivery of music to computers and cell phones topping the list.

A report issued last week by PricewaterhouseCoopers predicted that consumer music spending will rise 8.3% between 2004 and 2009, but PWC’s managing director of global marketing, Peter Winkler, said at least 6% of that increase will be created by purchases of digital downloads and mobile music. Physical CD sales will actually be down from the current $12 billion and the average price is forecast to be about a buck less than it is today.

All of this has diminished the power of radio, which doesn’t deliver hits the way it used to and doesn’t create stars as it once did. The business model operated by Hits and its brethren is about as relevant today as a 45 rpm single.

But record companies are notoriously slow to embrace change. It’s no wonder that it took the president of an indie label — one who has management and major label experience — to spill the beans on an outdated practice.

That means the benefactors, the ones that can convert music into a growth industry, are online sellers such as Apple’s iTunes and the cellphone companies, which are driving hard into the ringback tone business that involves master recordings and gets performers and songwriters a payday as high as a download. (Ringtones only benefit songwriters and publishers).

The content providers in the music business are therefore looking at a flat decade that will send mixed messages about the value of any company that makes new recordings or has a catalog. The struggles of Warner Music since its May 11 IPO — it has yet to top $17 a share and analysts continue to recommend “sell” — may be attributed to the label’s lack of a plan to adapt to the new music world. Warner Music may have been commended for making cuts in the operation and for creating an “incubator system” for its smaller labels, but there’s no evident plan for a new paradigm.

That pipedream of getting Neil Young and Green Day streamed into the SUV suddenly looks like the necessary highway to profitability. Gershon would argue he’s already on that road.

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