This guest post comes from Sean Goodman (on the revenue potential in lyrics) and Shadi Sedidghzadeh (economics in the recording industry), who both recently finished the Entertainment Law and Web 2.0 miniterm class:

It seems like just a blink ago that the then-dominant record companies looked up and started to notice that, due to huge changes in technology, their business model was unraveling. They responded with a tidal wave of unpopular litigation with the music industry’s very base — its fans. And ever since that legal stumble, there’s been a steady tumble in the once-enormous profits that the industry racks up — to the point now that those inside and out of the trade hunt for every source of revenue and continue to speculate as to what, fundamentally, may be wrong with a onetime money machine. Do words matter in the music business and why aren’t there spectacular profits in recording any more? Try these two takes:

A change in tune: some see big dollars in lyrics 

Those who pen the music and who publish it typically thought of the creation, consisting of music and lyrics, as a consolidated whole. But who knew there was substantial value in not only the works, especially the tunes, and recordings, but also in the lyrics? Song lyrics are among the most searched for items on the web and, according to at least one analysis, displays of the words in music produce more publishing revenue than a play on Spotify, the popular streaming service that  pays for licenses on recordings it serves up from its library to its customers.

Lyrics, typically,  have not been licensed and have been an insignificant source of revenue for song writers. But a recent panel at a Digital Music Forum East in New York took up the topic of publishing revenue from the licensing of song lyrics. As little as five years ago, zero dollars were paid to the owners of lyric copyrights; today millions of dollars get paid to publishers and song writers to make their lyrics available for search and discovery on the web. It seems that learning the words to  favorite songs is priority for kids and grownupss alike.  That demand and the online searches it launches for lyric displays now provides a real source of revenue for lyricists. How? Check out, for example, lyrics.com to search for your favorites.

 Piracy or poor economics?

The root problem record labels really are wrangling with as their business plummets is not piracy but poor economics, a recent report finds, noting that major labels are losing money due to poor management.  NPR’s Planet Money tried to break down the economics of Katy Perry’s hit album “Teenage Dream.”  The reporters said they found that the problem in records is that labels spend so much to create a “great” or “hit” album that sometimes they forget they’re part of a business.  Labels incur the expense of paying, at minimum, $100,000 for a guest artist on a track, producer costs, songwriter costs; some pay $250,000 for radio airtime for a new single. Perry’s label, Capitol, which is under EMI, paid $4 million to create the album; producers forked over a $2 million dollar advance to Perry and ended up seeing the total cost of her album skyrocket to almost $6 million. The label made all this back with the sale in the U.S. alone of two million albums and 24 million sales on iTunes (of which the label just a third, with Apple Inc. and the artist getting the rest).

But, while Perry ended up with $44 million in 2011, her label saw only $8 million.  She avoided a 360 deal with the label and therefore did not have to share profits from anything else but record sales. Her tour, meantime, brought in $50 million alone. Her album had five No. 1 singles but the label saw but $8 million.  Although that sum seems great for a label, especially in these tough times,  Capitol did not get to cash-out as much as it could have profited from this artist and that posses great concerns for the business. It’s also true that artists like Perry are rare and exceptional; whatever profits the labels do turn won’t stretch to cover losses incurred in supporting many unsuccessful artists, all in the hopes of finding another money-churning star like Perry.