Terry McBride has an idea. Another idea. A good – no, a great idea. McBride, CEO of Nettwerk Music Group, is sitting in his Vancouver, British Columbia, office with his local marketing staff discussing strategy for the release of a new album by Barenaked Ladies. The marketing departments in three other cities are conferenced in. The conversation ping-pongs from Nascar promotions to placement in a Sims videogame. McBride is on a roll.
"This one’s a real wingdinger," he says, leaning into the speakerphone so New York, Denver, and Los Angeles won’t miss a word. "Let’s give away the ProTools files on MySpace. Vocals, guitars, drums, and bass. We’ll let the fans make their own mixes." The room falls quiet. Musicians usually record their instruments and vocals on separate tracks; the producer and mixer combine those tracks into a finished product. McBride wants to make the individual files available so that amateur DJs can use them like Lego bricks to create something all their own. The record industry likes control. McBride is proposing unfettered chaos.
A voice from LA breaks the silence: "For the single, you mean, right?" McBride’s features screw up in concentration, then quickly expand into a grin. "What I’m proposing," he says, "is that we make all 29 songs available as ProTools files. In two weeks." The Internet marketers in Vancouver look worried. "But," he adds, "we’ll get the files from the single up on MySpace by Monday." Libby White, a member of the department, shoots McBride a skeptical look. Can they make it? McBride asks. White sighs. "We’ll make it," she says.
To all appearances, Nettwerk is just a midsize music management company with an indie record label on the side. Many of the artists on its client roster – which includes Avril Lavigne, Dido, Sarah McLachlan, and Stereophonics – are mainstream acts. But McBride, the company’s cofounder and creative force, is quietly carrying out a plan to reinvent the music industry, including legalizing file-sharing and giving artists control over their own intellectual property.
Which puts Barenaked Ladies, the goofy folk-pop jam band from Canada known to their fans as BNL, at the vanguard of this stealth revolution. Three years ago, on McBride’s advice, BNL left the Warner Music Group imprint Reprise Records to create its own label, Desperation Records. The upcoming album will be the first major test of that decision. It will also reveal whether Terry McBride is a crazy genius or just crazy.
The music industry is suffering. The major record labels – which rely on CDs for most of their revenue – are in decline. CD sales in the US have dropped more than 20 percent from a peak of $13.4 billion in 2000. But don’t be fooled: The market for music is thriving. With the rise of peer-to-peer networks, the iPod, and other digital technologies – plus a 100 percent jump in concert ticket sales since 1999 – the world is awash in music. The industry now has more sources of revenue – ringtones, concert tickets, license agreements with TV shows and videogames – than ever before.
Record labels have always been the center of gravity in the industry – the locus of power, ideas, and money. Labels discovered the talent, pushed the songs, and got the product on the air and into stores. The goal: move records, and later, CDs. "The labels were never in the business of selling music," says David Kusek, vice president of Boston’s Berklee College of Music and coauthor of The Future of Music. "They were in the business of selling plastic discs."
Musicians generally make very little from the sale of their records. The costs of production, marketing, and promotion are charged against sales, and even if they go multiplatinum and cover those costs, their cut of any extra revenue is usually less than 10 percent. On top of this, the labels typically retain the copyrights to the recordings, which allows them to profit from the musicians’ catalogs indefinitely. "It’s as if you received a loan for a house," says Ed Robertson, one of BNL’s lead vocalists. "But when you finish paying off that loan, the label says thank you and keeps the house."
And, funny thing, this model isn’t just bad for artists, it’s increasingly bad for business. Because the label makes most of its profits from recorded music, much of the money spent marketing an artist benefits third parties like concert promoters and music publishing companies. In addition, copyrights to a piece of music are usually divided between a label and a publisher, which collect royalties every time the work is recorded, performed, or played publicly. "What other business splits up its key assets and sells them to separate businesses that wind up in conflict with each other?" asks Duncan Reid, a venture capitalist who now helps run UK-based Ingenious Music.
Industry insiders like McBride think the old model is as antiquated as the 8-track. "The future of the business isn’t selling records," McBride says. "It’s in selling music, in every form imaginable." And by establishing a series of so-called artist-run labels, McBride is creating the next-gen music company. "We become the management company, the publishing company, and the record company rolled into one," McBride says. "We take our 20 percent cut of the whole pie."
More important, he says, the new model frees him and his artists from the overgrown bureaucracy of the music industry, and that means more money for everyone. He can book tours, sell ringtones, peddle songs to advertising agencies and, yes, give away free downloads without any of the complex, multiparty negotiations that once gummed up the works. "It used to take months to sell a frickin’ ringtone to Bell Canada," McBride says. "With BNL, one phone call gets the job done."
McBride’s success will depend on what he calls "collapsed copyright." Nettwerk will represent artists like BNL, but the bands will record under their own labels and retain ownership of all their intellectual property, an anomaly in the industry. The bands, in turn, can expect to earn considerably more money – say, $5 to $6 from the sale of each CD instead of the standard dollar or two.
Nettwerk is also poised to take advantage of the significant changes in music marketing wrought by social networking sites like MySpace. Radio, and the labels that provide tunes for radio playlists, are no longer the gatekeepers to stardom. Some of the most promising new bands, like Arctic Monkeys and Arcade Fire, owe their success to online word of mouth and grassroots marketing. Nettwerk has tapped this phenomenon to the fullest, offering prizes to people who sell a certain number of CDs to friends and using software to keep close tabs on its extensive network of volunteer marketers, formerly known as fans.
It’s a risk McBride is willing to take. Twelve of the nearly 40 acts on Nettwerk’s roster now have their own labels, and McBride says that within six years nearly all his artists will have shed their major-label partners. "The old system kept us from imagining what a music product could be," McBride says. "Now we can really start to have fun."
McBride’s growing empire started small. "There were these great bands in Vancouver that didn’t have managers," says McBride, who founded Nettwerk Productions with an old friend, Mark Jowett, in 1984. By the late ’80s, their fledgling music management company was beginning to deal in major-league talent, including a classically trained up-and-comer named Sarah McLachlan. Her first release, Touch, eventually went gold in Canada, and her second, Solace, went platinum up north. Still, she wasn’t able to penetrate the crowded American marketplace. McBride and Jowett were convinced that her third album, Fumbling Towards Ecstasy, could become a breakout success. The product of more than a year’s collaboration with producer Pierre Marchand, it showed considerably more maturity and musical sophistication than her previous work. But after the first single failed to light up radio stations, Arista Records stopped pushing the album.
"That’s how we discovered we could do a lot of things major labels do. Sarah had made this incredible album, and we felt that if we were just persistent, it would find an audience," McBride says. And, eventually, it did. Traditionally, a management company limits itself to things like booking tours and helping artists negotiate deals with their labels. Marketing is left to the labels. But for McLachlan’s Fumbling Towards Ecstasy, McBride had his employees call radio stations and record stores to push the disc. Slowly, it inched into popular consciousness. "It sold a quiet million," McBride says with a chuckle. "We went from city to city and spent a year working the album." The grassroots effort built a following for McLachlan, and four years later, her next major album, Surfacing, debuted at number two on the Billboard charts.
During this period – the early to mid-’90s – the record industry was soaring. Aging boomers were replacing vinyl with CDs, and grunge ignited a rock renaissance. CD sales were growing at double-digit rates, and label execs developed an addiction to easy money: manufactured hits by pop acts like ’NSync or compilations that could be sold in volume at big-box retailers like Wal-Mart.
This was a high-water mark for corporate rock. Recent consolidation and acquisitions meant that almost all labels were owned by one of five companies: BMG, EMI, Sony Music Entertainment, Universal Music Group, and Warner Music Group. A new emphasis on quarterly results discouraged label executives from nurturing new bands and focusing on long-term development.
Meanwhile, Barenaked Ladies was running into the same problems Sarah McLachlan had faced. The band was a sensation in Canada in the early ’90s when an independently released cassette tape went gold – a first. The Ladies were quickly courted by all the major labels, and they signed with Reprise in 1992. But their second album failed to meet Reprise’s sales expectations, and on the eve of its next release in 1995, the band found itself facing an artistic and financial crisis.
"Radio just didn’t believe in us, and Reprise wasn’t doing anything to convert them," recalls Steven Page, the band’s cherubic lead vocalist. "They signed us at the height of the grunge era, and we were playing this folk-pop music that they just didn’t know what to do with," he says. "We would have been dropped after the second album, except we had this success in Canada." In late summer 1995, BNL asked McBride to become its manager. The band had finished recording its third album, Born on a Pirate Ship, and all the members were burned out, says McBride. He told them to take some time off, then give him 18 months of their lives.
Album sales in both countries were lackluster. But following the template he created for McLachlan, McBride chose a single, "The Old Apartment," and sent the band out on tour, pushing the single one city at a time. "Terry worked it like crazy, basically doing the label’s job," Page says.
McBride micromarketed the album, slowly expanding BNL’s fan base in the US to set the stage for its next LP, a live album called Rock Spectacle. "The first two albums didn’t get any airplay in the US, but they had great singles," McBride says. Rock Spectacle became a minor hit, priming American audiences for BNL’s breakout 1998 album, Stunt. "Stunt blew the industry away. It debuted at number three on the charts, and no one even had us on the radar screen," Page says. "It was all because of the work Terry put in."
Stunt went on to sell more than 5 million copies, a major success. But the band’s subsequent albums fell far short of that mark, and by 2003, when BNL’s contract with Reprise expired, the members were unsure of their next move. In December of that year, McBride traveled down to Portland, Oregon, to discuss the band’s future. "We were at this Vietnamese restaurant, and I think they were totally unprepared for what I said," McBride recalls. "I told them not to sign a new contract, that they could do better on their own." It was a big step, and while the band’s first effort on its own label, a Christmas album called Barenaked for the Holidays, has sold a respectable 400,000 units, the real test of McBride’s model is still to come.
The freedom from major-label constraints that BNL now enjoys was at first "nerve-racking," Page says. The feeling passed. For the new album, Barenaked Ladies Are Me (read: army), McBride and BNL have reinvented the release campaign, starting with the music itself. The band wrote 29 new songs, which will be packaged and sold in a variety of formats, including a CD, four different digital versions, a 14-track collection for Starbucks in Canada, and a second full-length disc, Barenaked Ladies Are Men, due early next year.
And that’s just the beginning. Between ringtones, acoustic versions, and concert recordings, those 29 songs have been multiplied into more than 200 "assets" – song versions – that can be used individually or in conjunction with others to create a product. "Because the copyrights are in one place [in BNL’s hands], we can be really creative," McBride says. Hardcore fans can buy 45 of those assets on a USB drive; others can download the special Sims versions (recorded in Simlish, no less). "For decades, people in music have used the number of albums sold as a measuring stick for success," McBride says. "We’re trying to get people to see beyond that. It’s about revenue from music, however you make it – selling concert tickets, licensing to TV, or selling packed USB drives."
Eventually McBride would like to pioneer another source of revenue with even greater potential: P2P networks. Earlier this year, he sparked a music industry uproar when he announced he would pay the legal defense for a Texas man being sued for piracy by the Recording Industry Association of America. "The lawsuits are hurting my bands," he says. "If you could monetize the peer-to-peer networks, everyone would make more money."
But even such a radical step is just one facet of McBride’s larger strategy. In May, President Bush signed into law a revision of the tax code that will make it easier to sell intellectual property as a stock, with profits being taxed at the same lower rate as other capital gains. "Once we have access to all the intellectual property, we’re going to offer shares in individual artists and take in equity investments," McBride says. "Eventually, a major band could be its own public company." The key, he adds, sounding like an overzealous investment banker, is that the value of a band would be measured like a stock and would receive capitalization in expectation of future earnings. "At that point, even a band selling 100,000 units a year becomes profitable," McBride says.
McBride isn’t the only industry executive who sees music and musicians from the perspective of an investment banker. In 2005, Ingenious Media launched Ingenious Music, which operates more like a VC firm than a label, running several equity funds that invest in bands, managers, and small labels. "We’re not interested in making a record company; we’re making a music company," says Duncan Reid, the firm’s commercial director. Like Nettwerk, Ingenious wants a slice of every pie, not just the increasingly small morsels from CD sales.
On this side of the Atlantic, Dimensional Associates has a similar long-term goal. The firm owns eMusic, the second-largest digital music service after iTunes, and The Orchard, a digital distributor of independent music. Dimensional has invested in a variety of music industry services, including a mobile recording studio and a publishing company. And like Nettwerk, the company is starting to back artists who will hold the rights to their own work. Even the major labels are beginning to experiment. Warner’s all-digital label, Cordless Recordings, for example, gives bands their masters in exchange for a cut of concert and merchandising revenues.
McBride has every reason to be confident that his experiment with Barenaked Ladies will pay handsomely. The band has a loyal following that has warmly embraced its new independence. If Barenaked Ladies Are Me can bring in even modest returns, both Nettwerk and the band will be in the black. The real test will come as Nettwerk tries to launch bands like the Format, an indie act with a small following and no real presence in the popular consciousness. "If we can break bands using this model," McBride says, "the industry will never be the same."
Contributing editor Jeff Howe (jeff_howe@wiredmag.com) wrote about crowdsourcing in issue 14.06. 
credit Photo: Peter Yang; Hair and makeup: Lavone Anthony/The Artist Agency
The future of the music industry, according to McBride, isn’t selling records. It’s selling music ’in every form imaginable.’
credit Photo: Peter Yang; Hair and makeup: Lavone Anthony/The Artist Agency
Barenaked Ladies (from left): Ed Robertson, Kevin Hearn, Steven Page, Jim Creeggan, and Tyler Stewart.
Music Reborn
