Hip Hop Invented Modern Music Economics

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Perhaps no entertainment industry has been challenged by the Internet like music. Consider this statistic: At the end of the 1990s, artists made $15 million a year from record sales. In the digital decade that followed, music sales fell 60 percent. What's an artist to do?

Diversify, diversify, diversify.

These are boom times if, like the Dave Matthews Band, you're a popular group with affluent middle-aged fans who are willing to shell out $50 - $100 for a concert ticket. That's one reason why DMB made $500 million in the last ten years from touring alone, as Annie Lowrey writes.

But most bands cannot live on concerts alone. They have to get creative. By seeing record sales as a secondary, even tertiary revenue stream, hip hop paved the way for modern economic thinking about the music biz.

Damian Kulash, Jr., the lead singer of the innovative band OK Go, wrote that his group forged an independent path by asking companies to underwrite their concerts and videos. "We once relied on investment and support from a major label. Now we make a comparable living raising money directly from fans and through licensing and sponsorship," he wrote. And OK Go isn't alone. "Corporate sponsorship of music and musical events in North America will exceed $1 billion in 2010, up from $575 million in 2003," he continued, adding that "outside corporate investment in music is rapidly climbing into the range of the traditional labels."

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The Web turned songs and albums into commodities -- easily downloaded, uploaded and distributed with the free click of a button. These days, to mint what they make, bands have to put their music to use -- by hitting the road, by licensing to commercials, by excepting corporate underwriting, and by diversifying their appeal.

Rappers have long understood that the real money in music isn't from selling tunes, but from selling lifestyle. Dan Charnas' new book on the business of hip-hop The Big Payback reminds us how Def Jam realized the potential of marketing music before Sony. Per BusinessWeek's Steven Daly review:

In the early '90s, Charnas writes, Sony was exasperated at the "endemic disorganization" through which its Def Jam imprint, under Simmons' stewardship, had accrued some $17 million in debt. If only they'd realized that record sales were becoming a secondary revenue stream. With the creation of the clothing line Phat Farm in 1992, Simmons became the first rap entrepreneur to look beyond mere music and attempt to market the ghetto-quixotic lifestyle preached in hip-hop's lyrics...

Simmons, Def Jam and Phat Farm started the fire. Today you can see it everywhere from water to sneakers:

After Simmons' initial success, virtually every major rap figure tried to establish a presence in the rag trade. Combs' Sean John label and Jay-Z's Rocawear line were among the most prominent companies to follow in Simmons' footsteps. (Combs recently signed an exclusive distribution deal with Macy's (M), while Rocawear was sold for $219 million in 2007.) Rapper 50 Cent also launched a successful clothing line, G-Unit, before entering a 2004 partnership with Vitamin Water parent company Glacéau. 50 Cent's unimpeachable street credibility--he was shot nine times at close range in 2000--helped sell millions of bottles of his signature drink, Formula 50. In 2007, Coca-Cola (KO) purchased Glacéau for $4.1 billion, and "Fitty" walked away with, Charnas writes, upwards of $60 million.

Just as Dave Matthews' pop-bluesy jam band style is uniquely suited to selling out middle-aged affluent concerts, hip hop may be uniquely suited to marketing lifestyle in way that other popular bands cannot. (Imagine a line of flip flops from Coldplay. Then again, don't.) The point is that by seeing record sales as a secondary, even tertiary revenue stream, hip hop paved the way for modern economic thinking about the music biz.