3 ways to get an edge in a hypercompetitive music industry

Follow the Leader: A Trip Down Memory Lane
Follow the Leader: A Trip Down Memory Lane

Longtime music label executive Lyor Cohen has co-founded an independent record label called 300 Entertainment that's competing with the wealthier and more established big shots of the music industry — some of the same companies he used to lead.

While skepticism surrounds him, he believes he's crafted an untapped formula to be the best at finding, grooming and monetizing artists in the 21st century.

Cohen made a name for himself running Def Jam Records in the 1990's and later heading the Warner Music Group. He's worked with artists ranging from Run-DMC to LL Cool J and the Beastie Boys.

Lyor Cohen, CEO of Warner Music Group

For three days, CNBC's "Follow the Leader" had the chance to accompany Cohen around New York City as he went from his office to a recording studio to meetings with Spotify and YouTube. What allows him to have a leg up in an incredibly competitive industry? Here's what I discovered.

Ditch the bureaucracy

As a fledgling artist, the opportunity to sign with a major record label is enticing. A company like Sony has deep pockets and unlimited resources that can help groom an artist's talent and gain an incredible level of exposure. But as a big company, there are many people involved in all its decisions, as a result, things can move slow.

That's where Cohen believes 300 Entertainment has a competitive advantage. The company prides itself on its ability to act much faster, especially when it comes to procuring new artists. In the amount of time that one of the big labels signs one new artist, I can sign five, Cohen tells me.

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Moving fast is essential, he says, otherwise 300 could find itself in bidding wars with bigger labels to sign artists — and in those events, 300 would likely lose.

Pay attention to the data … but be careful

Just like data has influenced industries ranging from retail to sports, music executives can more successfully scout tomorrow's top talent from their computers. 300 Entertainment uses a unique (and undisclosed) algorithm based on various online stats to discover the next big artist. I'm guessing variables they consider include an artist's YouTube streams, Twitter followers and Facebook fans, among many others.

Data is an integral part of 300's business model, but it's not something the bigger labels are yet paying as much attention to which helps, Cohen tells me.

Follow the Leader: Meet Farnoosh Torabi
Follow the Leader: Meet Farnoosh Torabi

At the same time, data can only reveal so much. And sometimes data points are bogus. An unknown artist with a somewhat popular song on YouTube who claims 100,000 Twitter followers could have easily forged those numbers by paying for those "views" or "follows" or creating them him or herself in some way. While Cohen's algorithm may suggest a hot young artist, examining the data is just a first step.

Cohen insists his team conduct further research (including speaking with the artist on the phone and meeting with him or her in person quickly) to get the full picture.

'Get your reps in'

Cohen makes money when his artists make money. To that end, he's constantly coaching them to engage with fans in a variety of ways so that they may grow awareness of their music. Writing a great song is not the only thing that matters, he explains. That's not enough to shoot to the top of the charts and cash in. You must also excel at speaking to the media, performing live on stage and engaging with fans on and offline.

One of his artists, Young Thug, is a phenomenal songwriter. He's written thousands of tunes, in fact. But what he lacks is media interviews. If he wants to become wildly successful, he needs to become a master at conducting interviews, Cohen explained to him.

"You have to get your reps in," he says often, referencing Malcolm Gladwell's book Outliers, which discusses how there are 10,000 hours to mastery. Practice can help an artist become pitch-perfect.

Farnoosh Torabi is the host of CNBC's "Follow the Leader," which airs Wednesdays at 10 p.m. ET/PT. You can follow her on Twitter @Farnoosh.