Madonna gives record companies the blues

Sir Paul McCartney is selling his latest album through Starbucks, while The Charlatans plan to follow Radiohead in offering their music for free. And now Madonna is jumping ship for a concert promoter. Is there a future for record companies?

The music industry has grown accustomed to prophecies of doom over the past few years and news that Madonna and Radiohead have abandoned their former paymasters has bolstered the perception that the end of the major record label is nigh.

Madonna – the most successful female artist of all time – is the latest high-profile artist to turn her back on the music majors, ending a 25-year relationship with Warner Music in favour of a lucrative deal with Live Nation, a company that organises live events and owns venues including the Brixton Academy and Hammersmith Apollo in London. The deal follows the recent excitement around Radiohead's decision to ditch EMI and offer their new album for download with the consumer choosing what to pay – a move set to be echoed by The Charlatans.

Earlier this year, Prince gave away his new album to readers of The Mail on Sunday. Meanwhile, a slew of yesteryear's superstars, including Paul McCartney and Joni Mitchell, have signed record deals with Hear Music, which is owned by the coffee chain Starbucks.

It appears that artists of all calibres are forsaking the traditional route to fame and fortune – making a hit record with a household-name label – in favour of giving music away and making money off the back of touring and T-shirts. Arguably it reflects the way that consumer attitudes have changed toward music over the past decade, with today's consumers happy to pay vast sums to see a band but unwilling to pay for songs they can download for free. Many of today's music fans – and artists – hold a very dim view of the music majors, arguing that they have charged too much for CDs for too long and that the dinosaurs of the industry – namely Universal Music, EMI, Warner Music and Sony BMG – were too slow to harness the power of the internet and the way the industry has changed.

All of this paints a pretty grim picture for major music labels. David Pakman, chief executive of eMusic, which is the second-largest digital music service in the world behind iTunes, said that the largest music companies have lost touch with the consumer, particularly in the youth market where children can spend their money on video games or DVDs if CDs are too expensive.

"Major labels have dropped hundreds of artists over the past 10 years to focus on superstars. They no longer develop artists over long periods of time. But if those superstars are leaving the majors, what do they have left? It's a very troubling sign for them," Mr Pakman said.

Yet music majors such as Warner Music and Universal Music may find the reports of their demise somewhat ironic given the accusations levelled at them earlier this month by trade bodies representing independent music labels. In the wake of the European Commission's decision to green-light the 2004 merger of Sony and BMG, Impala – which represents 3,500 independent labels – said that the four largest music companies control 95 per cent of the music that consumers hear and subsequently have a stranglehold on the market. In the UK, Universal has been accused of "creeping dominance" after it acquired two struggling independent labels.

Despite the negative publicity surrounding the move by Madonna and Radiohead, music-industry insiders are fairly sanguine about the so-called "earthquake" and "seismic shift" that the new business models represent. Perversely, both deals could yield benefits for the jilted parties. "These developments illustrate that today's artists have more options than ever before but it doesn't mean the record companies are cut out of the picture," one source said.

As proof that the gloomy headlines don't necessarily match reality, the source pointed out that Radiohead are locked in negotiations with a number of music majors to distribute physical copies of their new album.

Another point made by insiders is that established acts like Radiohead and Madonna are in a strong position to experiment with their content but the story is very different for new artists who don't necessarily want to have total responsibility for driving their own success.

"It's great for the champagne socialists to pursue these types of deals but its not much use for those that are just starting out. As long as there are artists that need services out there, there will be a place for record companies. If those record companies provide a service that is useful to the artist, they are likely to succeed," one source said.

Critics of the sector have written off record labels before, most notably when cassette tapes that enabled copying were introduced around 30 years ago, but also when bands like The Beatles and Led Zeppelin set up their own record labels. Madonna herself set up Maverick Records in the early 1990s only to sell it to Warner Music earlier this year.

Warner Music could be the unlikely beneficiary of Madonna's latest voguish move as she has to release one new record and a greatest hits package with the company, which will retain the rights to her back-catalogue. While the deal with Live Nation has yet to be confirmed, the magnitude of the contract being offered to the singer has echoes of EMI's disastrous decision to pay Mariah Carey a purported £60m to sign to Virgin Records earlier this decade.

Sources confirmed that Live Nation has offered Madonna a 10-year deal worth a staggering £60m. The deal – which Warner refused to match – is for three records and includes concert rights and merchandising sales. Despite losing one of its highest-grossing acts, Warner Music was unwilling to stump up such a huge sum. The three albums would have to sell 15 million units each for Live Nation to break even – and Madonna has not commanded sales at that level since her 1990 "greatest hits" collection according to sources – despite unofficial industry data suggesting she has come close. Whether she will be able to shift that many units at the ripe age of 60 when the Live Nation deal ends is debatable. A hit album in the 1980s could be expected to shift 15-20 million units worldwide but in today's climate, a successful release could be expected to sell around nine million.

Michael Savner, a Bear Stearns analyst, said that the price being offered by Live Nation is too high to match. "The bigger risk in our view would be to overpay for an artist that does not seem to generating revenue to support the contract being discussed. We think the deal is more a bold statement by Live Nation that it wants to quickly get deep in the music business," he said. Madonna's latest tour grossed more than $250m (£125m) according to the investment bank, business that Live Nation is keen to tie down.

Despite the perception that the music industry has been broken beyond repair by digital piracy and the artist-power engendered by the internet, independent labels fear that the future is bright for major music companies that could soon dominate the online sector. The marketing power of the two largest labels has led Alison Wenham, head of UK independent music label trade body AIM, to complain to the Office of Fair Trading that Universal's recent acquisition of V2 and Sanctuary is anti-competitive.

Universal Music, the world's largest music company, recently reported a 50 per cent rise in its digital sales. Its acquisition of Sanctuary was driven by its investment in a '360-degree model' where the record label also manages an artist, participates in organising concerts and selling merchandise. Independents claim that, alongside Sony BMG, Universal controls 50 per cent of the market and 70 per cent of the vital Top 100 charts in many key European territories.

Mr Pakman said that EMI and Universal's decision to test the water for digital music sales that do not encrypt songs with anti-piracy software could give digital music the kick it needs to offset the inevitable decline of CD sales. All of which suggests that those hoping that Madonna and Radiohead have dealt a fatal blow to the music majors may yet be disappointed.