Investing in the Music Business

Posted by Pinky on Jun 21, 2010 in Blog | 10 comments

I am an accidental entrepreneur. When I started my first business at age 20, it was called “Just Kidding Productions,” because it was actually just a scam cooked up by me and Strangewood, the band that brought me into the music industry. You see, we felt that club bookers would be impressed by a band with formal representation. So I pretended to be that, called it JK Productions and boy did we pull one over on those suckers!

It was only in retrospect that I realized that it wasn’t a scam at all. I DID have a company!  I WAS providing booking services and I was legitimately charging a fee for doing so. It was many years into my career before I realized that I had been an “entrepreneur” the whole time. I went on to found Artist Media Group, sold it to echomusic, which sold to Ticketmaster and now I am involved with 7 startups in various other capacities. I am also proud to be a Founding Member of Jumpstart Foundry, Nashville’s first accelerator fund.

I hope to make this post one of a series, wherein I focus on entrepreneurship in the music business. In some ways, it’s the easiest industry to get started in of all because it was built by mavericks and dropouts and artists and freaks. So a misfit that is driven by nothing but his heart and love for music can find a way to get involved and have a legitimate shot at making a career out of it.

The Industry today though is a very grown-up place. Live Nation Entertainment is a $2.07 billion dollar business supported by major media conglomerates, mega-studios and multi-million-dollar budgets making legends out of little boys like Justin Beiber and living Barbie Dolls like Lady Gaga.

This is not, however, another “why the music business sucks” tirade. That’d be a waste of your time and mine. It’s about a few things I’ve learned as an entrepreneur in the music business. If you’re interested, I hope you read on. Otherwise, click here to watch the most depressing music video of all-time!

The Way It Works

For the last 80 years or so, the music business has been powered by record companies. They had three very important roles:

1. Talent Discovery
2. Marketing
3. Funding

Now, when I say “marketing,” I don’t mean they set up a MySpace page and called it a day. I mean they are a machine. Most people have no idea how hard an artist works to get, and maintain, fame. Interviews, private showcases, travel, concerts, meet-and-greets and the list goes on. Sometimes an artist will be on the road for literal months-on-end. As grueling as it is, it takes a whole team of very talented and experienced professionals to get the pieces into place at just the right time for that magic spark to ignite. And when it does, it will make the hair on the back of your neck stand up. It truly is rarified air, and one of the most addictive things about working in the Business.

The trouble is, people purchase half as much music today as they did just 10 years ago, yet they consume more of it. The result has been the bottom dropping out of these record companies because their only sources of revenue have wilted substantially.

Take another look at the list of three things a label does.  It’s the last one on the list that matters to the whole industry.

The Investor

In the technology-startup world it is very common for an entrepreneur to raise money from investors in order to get their business off the ground. It is a celebrated event, very much like getting a record deal. In exchange for money, and sometimes buttloads of it, they will take a piece of your company and place someone on your board of directors in order to keep an eye on things.

They want one thing.  Money.  And the basic expectation is at least 10x their investment within 3 – 5 years.  Just to put that in perspective, an average 30 year mortgage goes for 2X the initial investment over 30 years.  So venture capitalists want a huge return in a very short time.  It’s difficult.  It fails more often than it works, but it often succeeds to such a fantastic extent, it makes up for all of their other losses, and then some.  How would you like to have given Google it’s first $1m dollars?

Even though the expectation is incredibly high, an entrepreneur almost always has a way to buy himself back from his investors under predetermined terms.  And that’s where things are different in the music business.

The Label

In the Record Business, it’s the label that acts as the investor.  They too put in substantial capital for a shot at a big win.  In exchange, the artist gives up almost all rights to their recordings, forever.  They may get a royalty payment, but their art is no longer their property.  It’s a pretty bum deal.

There is a big difference between getting an investor and getting a loan.  And there is an even bigger difference between the investment a record label makes vs. venture capitalists.  For almost the entire history of the recorded music business, this has been acceptable because there was a lot of money being made by artists in other ways.  Touring, merchandise, sponsorships, endorsements, publishing and the list goes on.  Everyone turned a blind eye to the ridiculously unfair terms of a standard record deal because a lot of money was being made in other ways, thanks to that jumpstart.

But things are different today.  Record labels are now requiring additional rights to many, if not all of the other forms of revenue.  It’s the only way they can continue to exist on the level they did, as people pay less and less for recorded music.  In some ways it’s perfectly fair for them to ask for anything they want in exchange for giving an artist money and a well-equipped staff working on their behalf, but there has to be a line, and I would like to help define it.

There is much, MUCH more to discuss but this post is getting fairly long.  Consider this a primer.  Part one is that the labels are the financial engine that discovers, markets and funds the “startup” artist career.  There are some problems with the model because technology has shifted their fortunes and it was never a fair model to begin with, but there is no arguing that they must receive a fair return for their risk in order to keep helping anyone at all.  There are ways to fix this business but a bunch of old dogs are first going to have to learn a few new tricks.

Stay tuned…