Are advertisers the new record labels?March 14, 2012: 12:57 PM ET
More and more, companies are heading to festivals like SXSW and sidestepping record labels to get to new talent.
FORTUNE -- The South by Southwest Music festival in Austin, Texas has always been about putting on a good show, according to Brent Grulke, the festival's creative director. That hunt for artists who can turn it on live hasn't changed much, even though the music industry has been scrambling for a new business model ever since the rise of mp3s rattled the old one.
But in recent years, Grulke says, big companies have taken on a larger, more direct role in the music industry, and it has played out in a big way at festivals like SXSW. "What really kind of blows my mind is how enormous corporations still place tremendous value in music." Many massive companies, aching to stay relevant, send employees to SXSW Music, he says.
Of course, companies have always wanted to be associated with talent, and there certainly are large, flashy partnerships at SXSW this year: on Monday, Jay-Z and American Express (AXP) teamed up to promote a new feature on Twitter for AmEx customers, and tomorrow night, Pepsi (PEP) will unveil a 56-foot-tall vending machine to keep concert-goers loaded up with a new Doritos product.
But many companies also want fresh songs from lesser-known musicians to represent big brands, and those companies are now, often, circumventing record labels to get to those artists.
SXSW Music, in fact, has panels this year that specifically address that shift. Wednesday, there will be a talk called "Maximizing Alternative Income as a Hip Hop Artist." Another panel, "Advertising IS the new radio," will address how commercials, not airtime, can launch a music career.
"The best thing for me was all the commercials," says April Smith, a vocalist with a big, throwback sound. Her band, April Smith and the Great Picture Show, has never signed with a label. Recently, her song "Colors" was featured on a Lowe's (LOW) commercial, which has provided the band with the money to fund a tour this spring.
Companies, or the advertising arms at companies, are increasingly connecting directly with musicians. Last July, Coca-Cola (KO) bought a minority stake in a company called Music Dealers, which links lesser-known musicians with companies looking to use their writing skills or performances for commercial purposes. The partnership provides Coke with a shortcut through the reams of red tape it takes to work with many artists signed to labels.
"These music supervisors and these creative people at ad agencies, they're the new A&R people right now," Smith says -- A&R meaning, Artist & Repertoire, the division of a record company that traditionally searches for and cultivates new talent. "They're breaking a lot of bands. It used to be the Apple commercials. If you heard a song on an Apple commercial, that was going to be the song, and that was going to be the band."
This model has developed over time, says Peter Alhadeff, a professor of music business at Berklee College of Music in Boston. "When I started at Berklee 20 years ago, the idea of branding and music were not that close," he says, and artists intended to finance themselves by selling recorded music. Things are different for musicians these days, he says, "They're looking at other ways to monetize their music. Any exposure is good, including a top consumer brand."
But an artist still needs some kind of intermediary, insists Kevin Liles, president of talent management company KWL Management. "The brand will never take the position of a curator," he says. Liles is, of course, a curator himself. He manages artists who are either staging comebacks, such as R&B artist D'Angelo, or taking off, such as hip hop artist Trey Songz, singer of Top 40 numbers such as the modestly titled I Invented Sex. "I always say to brands, 'You're not trying to get into the music business, you're trying to be in the relevant business,'" Liles says. Managing and branding musicians require a separate skill set, he argues.
But Liles adds that artists have more power than ever now to decide how they advance their careers, and that doesn't always require the support of a label. Sure, megastars like Beyoncé or Justin Bieber still sign -- with Columbia (SNE) and Universal Music, respectively -- for the incredible clout and connections that go along with those deals. "The labels still get you that global exposure, and they know how to do it very well, but there is a different mentality now than in the early 90s and late 80s when you made your music selling records," says Alhadeff, because there are so many other ways to distribute music now.
"The big break these days is not really getting signed," Smith says, "because sure, you might get an advance, but that's coming out of your record sales."
Up-and-coming musicians today are operating in a world where record sales do not capture the value of talent. That's especially true for new artists with a niche sound. "That was part of my problem, I have a different sound." Smith says. "A lot of people don't know what to do with that. They would say, 'Oh well we love you, but we just don't know how to market you.'"
Smith, who is working without any manager or PR agent, says that a record company would have to offer a pretty sweet deal for her to consider it. "I'm not going to sign with a label who two years ago told me they didn't know what to do with me," because she figured out what to do with herself, thank you very much.