"Even the top-tier name-brand artists in the world have royalty rates far below 20 percent of the retail price," Sinnreich said. And the royalties are paid after the labels recoup their extensive costs, which he said they usually fail to do.
To top all of that off, the record labels alienate some fans by suing customers over illegal downloads.
"So if I'm already a household name … what reason do I have to stay with the majors?" Sinnreich said. "It is far better to either team up with a powerhouse company like Starbucks, Wal-Mart or Live Nation, who are going to be able to give me much more leverage in my deals with them and much more attention as one of the only artists in their roster."
Madonna's reported intention to sign a $120 million recording and touring deal with live entertainment promoter Live Nation Inc. shows just how much the industry has shifted.
Live Nation has 160 venues, including House of Blues and Fillmore locations, Jones Beach in New York and London's Wembley Arena. It is Ticketmaster's largest single generator of ticketing fees, according to The Associated Press.
But most of its Ticketmaster contracts expire in the next year, with House of Blue expiring in 2009. Live Nation wants to bring the ticket-processing fees — often $5 or more — into its own coffers.
Madonna might also benefit significantly from a touring component of the deal, which was reported to give Live Nation the exclusive right to promote her tours.
Warner was reported to have pursued a possible partnership with Ticketmaster to keep Madonna.
Sinnreich said that record labels need to find a way to increase financial incentives to marquee artists to stay with them once they are household names. At the same time, in order to stay financially viable, the record labels somehow need to capture some of the merchandise and touring revenue that currently flows to the artists.
Warner Brothers quickly countered that Madonna's loss would not hurt its business. The music company released a report from a Bank of America subsidiary saying that Warner Brothers will get negative press for losing Madonna, but that is nothing compared to what it risks for overpaying "an artist that does not seem to be generating the revenue to support the contract being discussed."
And what about Madonna? Will she suffer from leaving the safety of a major label?
Sinnreich said that Madonna has been very savvy in technology from the start and looks carefully at what business deals she does.
"Her and Michael Jackson were the first to use music videos as marketing tools," he said. "Madonna was really the first MTV superstar."
The Material Girl also has taken extensive steps to hinder the illegal downloading of her songs, including publishing dummy copies of her songs on file-sharing services to thwart downloaders.
Basically, Sinnreich said, "I think she's a very, very sophisticated thinker."
With reports from the AP