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Who needs record labels?

The majors tried to justify their existence this week. But they need to smarten up their act to stay in business, says Fiona Sturges

Record companies. Who needs 'em? Well, if you believe a report released this week, every would-be musician currently sitting in their bedrooms with their eye on the big time does. The International Federation of the Phonographic Industry (IFPI) says it wants to counter the "myth" that new artists can make it on their own in the age of the internet. In its report it says that no new artists have broken through without a label behind them. Even those, such as Lily Allen or Sandi Thom, who claim to have made their names through MySpace pages, did so with the silent backing of a label.

If this smacks of record companies trying to justify their existence, you can hardly blame them. For years record labels have been told that their days are numbered. New technology has marked a shift in how music is sold and made it possible for the self-determining artist to make and distribute music on their own terms and independently of the major corporations. And this week Charlotte Church abandoned record labels in favour of a new business model when she signed a £2million deal with an investment company. But there's more to making it in the music business than recording an album and releasing it. So let's look at exactly what record companies have to offer the aspiring musician.

As labels see it, they can offer knowledge of the market and the latest trends, as well as crucial relationships with other industries that can take the music to the wider audience. They have a crack team of experts, from radio pluggers and publicists to seasoned talent scouts, all under one roof to make sure that the artists get what they need. Need to book a nationwide tour? No problem. Want to get your picture in the paper? Done.

But what record companies really have, and what the artist generally doesn't, is money. The IFPI estimates that record companies spend an average of £700,000 breaking a new artist, even though only a small proportion are expected to make a return. If the artist is successful that outlay is recouped in royalties. If they don't then both the artist and record company lose out.

So what is this money spent on? There's the initial artist's advance, which can range from several thousand to several million pounds. Then there's the studio and musician hire and the producer's fees – some artists may go through two or three producers before they find the necessary chemistry, though each will be handsomely paid for their time. For the more mainstream artist, professional songwriters might be brought in to "co-write" material.

Next up, marketing. Attracting the attention of newspapers and magazines, radio and television programmes can be pricey. Promotional copies of singles and albums used to be essential to secure reviews and airplay though that is now increasingly done digitally. But publicists and pluggers still need to get their people to gigs, which invariably means shelling out for tickets and, on occasion, drinks and dinner. For the priority artist, they might also be flown abroad for interviews and put up in swanky hotels.

Then there are the stylists, the make-up artists and the hairdressers. There are videos to be made, stage sets to be built, albums to be pressed, EPKs (electronic press kits) to be filmed and adverts to be dreamt up and placed across the media. Add to that legal fees, management costs, corporate hospitality, launch parties, playbacks and awards ceremonies and before you can say, "send for the bailiffs", the record company coffers are empty and the artist is up to their neck in debt.

Record companies broadly assume that one in five of the artists they sign will bring some sort of profit, with the others quickly cast aside. It's sometimes the case that an artist will record an album and do the promotional legwork before being told, at the 11th hour, that their record is to be shelved, with resources being redirected to the more bankable artists on the roster. In other instances, a record company may throw everything at an artist's first album, often with great success, only to ignore the second. Still want that record deal, kids?

But let's play fair for a second. Record companies have been making a concerted effort to tighten their belts of late. This has meant less foreign travel and fewer parties and fancy restaurants. And while plenty of emerging artists in recent years have been dubbed an "internet phenomenon", many were backed by record label budgets and a promotional team.

But there's no doubt that a small number of musicians can now make a living by releasing their own material and gigging hard. A recent case in point is the multi-platinum US artist Ingrid Michaelson, who circumvented the usual routes by starting her own label and, at her own personal expense, putting together a bespoke team of promoters and publicists.

But record companies needn't always be the bad guys. Even in the age of MySpace, there's still a role for them, and their know-how, though they need to move with the times. If they could just learn to put musical innovation and artist longevity ahead of instant profit then they might just surprise themselves.