Risk vs. Reward: Investing in the Music Business Part II

Posted by Pinky on Jun 22, 2010 in Blog | 4 comments

I began a blog series yesterday with a primer on the role of record labels in an artist’s career.  In a nutshell, they provide three basic services:

Talent Discovery
Marketing
Funding

Just like a venture capitalist, they provide a great deal of money and expertise in exchange for a portion of the “startup” artist’s business.  Unlike a venture capitalist however, they have only traditionally taken a portion of the total business (recorded music sales), leaving cash-cows like ticket sales, merchandise, publishing, sponsorships and endorsement deals to the artist.  With the decline of CD sales however, this model is changing.  Labels are now requiring at least partial rights to some, if not all of those additional sources of revenue.  It’s considered “fair practice” because the artist probably wouldn’t have a chance at stardom whatsoever without the backing of a major record company, but it’s controversial because labels have always used that reasoning to make otherwise very unfair deals, and now they are extending their reach.

Today, I want to focus on one of the major differences between a recording artist and an entrepreneur.  They both have a need for capital, the support of well-entrenched experts in their respective fields and at least a little political muscle to help shore up those all-important first customers.  But here’s the rub:

Artists only get one shot.

Entrepreneurs are often celebrated for their past failures.  We’ve all heard that you learn more from your mistakes than your successes, so logic tells us that someone who has failed a lot is all the more primed to win.  (This is debatable, but work with me here.)  Whether or not that’s true, there is no question that anyone with the energy and intent can start as many new businesses as they like.  In the end, it’s the product that matters to the consumer, not the people bringing it to them.  BP is still worth more than $92 billion dollars after destroying the Gulf of Mexico and the lives of a generation of those dependent on its waters.

But maybe that’s an unfair example.  How about these?

• R. H. Macy failed seven times before his NYC store became a hit.
• Walt Disney went bankrupt four times before finally succeeding.
• F.W. Woolworth failed five times before starting his successful 5 and Dime stores.
• Milton Hershey’s chocolate enterprise was his third business after failing twice.
• Henry Ford was a failure at three businesses he attempted before finally succeeding with Ford Motor Company at age 53.

If customers were buying their product because they were all “nice guys,” they wouldn’t have failed in the first place.  The product has to be there, and if it’s valuable enough, we’ll buy it from anyone regardless of the ethics behind it.  (Ask any crack addict how he feels about his dealer.  ;-)

But you know what you don’t hear very often?

• An artist that is a failure on one major label signs with another and becomes a household name.

What we hear instead is that the Beatles were turned down by Decca Records, that Garth Brooks was turned down by every label in the business and Alan Jackson was just “too country” to get a deal when Young Country was all the rage.

Oh boy, did they show us!  But they didn’t show us before they failed with the public.  They failed behind the scenes, anonymously.  Once they landed that all-important funding, their faces hit billboards, their songs hit the air and their bands hit the road to begin the epic saga that brought each of them into our lives.  When an artist gets their “big break” and fails however, they’re pretty much done.  Damaged goods.  Hope you enjoyed the ride.

I promised that this series was not going to be about label-bashing, and I mean it.  The model was fully-entrenched when most of today’s label exec’s were born.  But here’s the disconnect:

1. Failure in the business world develops experience and character
2. Failure as an artist is all she wrote, so you better get it right the first time

So here is what we learned today:

The risk is GREATER in funding an artist than an entrepreneur because the chances of ultimate success are much lower.  And in the financial world, risk = return.  So you win this round, record labels.  But what I’ll illustrate tomorrow is the difference between an investor funding a self-sufficient business vs. the plug-and-play model offered by labels.  We’ll look at how labels ARE the business and artists are just the products they sell.  I hope you’ll find it to be an interesting read.  See you then.