How to Structure a Company to Succeed in the Current Music Industry

Posted on June 22, 2011

11


Much of the talk about the music industry in recent days focuses on future transformative changes in the way music is consumed. Will it be streaming or downloads. Will we be listening to music files from an app or from a cloud, and if so, who will own that cloud? The possibilities for content in the future are limited only by technology we create, and there will be even more changes down the road that are hard to imagine at this point in time. It is a very interesting discussion.  Lost in this discussion, however, are the possible transformative changes in the companies that develop the artists that will make music in the new system, and how they can be positioned to easily change revenue models as technology changes the way content is presented.

For the past five or six years pretty much all debate about change to those companies has centered around either the 360 deal or inefficiencies in the major label structure.  While true that at its heart the 360 deal is at least innovative, and that it is admirable to try and fix the inefficiencies at large corporations, neither of these things are the true barrier to seamless artist development nor the ability to make deals with emerging platforms. Both of these solutions ignore the white elephant in the room. It is not only the individual companies, but it is the whole music ecosystem.  There are redundancies in the revenue and costs of the system, and there are multiple rights holders and stakeholders with conflicting interests because of these redundancies.

Current Problems

There are three problems that affect the current music ecosystem.

1)   The current ecosystem does not have a fair and equitable allocation of costs and benefits.

2)   The current ecosystem creates conflict and distrust between the entity that markets the music and the artist who creates the music, and the manager who speaks for the artist.

3)   The current ecosystem is a quagmire of rights management that makes it difficult to adapt to the changing content distribution platforms.

A new company structure would have to address these issues, so that it could still operate within the current system while having the ability to pivot as the landscape changes.  This company is not a label. It is not a management company.  It is not a publishing company. It is a music company.

Problem 1 – The current ecosystem does not have a fair and equitable allocation of costs and benefits.

Below is a breakdown of many of the artist income streams. These can be separated into four main areas Publishing, Recordings, Merchandise, and Touring. Traditionally an artist would partner with an entity in one or more of these areas, a Publisher for publishing, a label for master exploitation, a Merchandise company for Merchandise, and an agent for touring and a manager to oversee it all.  There are other income streams, but this covers most of the significant revenue generators.

 

The prevailing belief is that right now labels cannot make enough money to justify the investment in new artists to create music.  This is true. This is because most of the marketing expenditures traditionally fall to the label.  As revenues from master recordings declined it no longer made sense to provide the bulk of marketing and not participate in the benefit of the other artist ventures.  The old 10% of the winners will pay for the 90% of failures model was no longer possible.  This is the crux of the drive for a 360 deal, and something that has been hashed over by many people before me.  It just bears mentioning here.

A 360 deal in any of its current forms will never solve the problem completely though, because of redundancies in the system as a whole.  Many of the costs that the label incurs in many cases are paid to another portion on the artist revenue ecosystem. The most prominent example of this is mechanical royalties (as long as the artist is also the songwriter.)  Others costs are incurred by all facets of the ecosystem in the case of overhead, and management commissions. The graphic above shows the costs deducted from the value of an artists work to promote a musician across all areas that generate income.

Problem 2 – The current ecosystem creates conflict and distrust between the entity that markets the music and the artist who creates the music, and the manager.

The next issue is that because all of these various players are all fighting for the same dollar, there will inevitably be conflicts of interest.

Both of these entities are trying to maximize the revenue of their portion of the artist ecosystem, and decrease their costs. Even the most harmonious of relationships will inevitably have disagreements. If these disagreements are about the best method to promote an artist they can be healthy, as sometimes two heads are better than one. If these disagreements center on the money spent on marketing rather than the marketing strategy itself, then everyone suffers.  As the money to be made in music wanes, and decisions are made on slim profit margins distrust will continue to grow between the entity that makes and markets the music, and the artist and manger.

But even if there is money being made, this process illustrates a redundancy as there are three sides in the current system debating the marketing strategy and budget for the artist.

Problem 3 – The current ecosystem is a quagmire of rights management that makes it difficult to adapt to the changing content distribution platforms.

In a recent speech Eric Schmidt the then CEO of Google stated “we create more content every 48 hours now than the whole of human history up until 2003.”

The sheer volume of content is staggering and much of it is music or uses music to create either another piece of content or a service. There are so many companies out there that want to and do license music.  Small companies that want to give away a song on a sampler CD, TV shows and movies that want to use music synched with their creation, Terrestrial radio that wants to play music over airwaves, and large online and mobile companies that want the ability to offer their customers the ability to find every song ever recorded.

Currently to achieve any of these things there are a number of types of companies that have to be negotiated with. There are efforts right now to create an international licensing database right now because in many cases it is difficult to find all the rights holders.  This doesn’t even take into account that many of these ignore whether the artist would like to participate in the venture at all. It simply doesn’t matter in many contracts.

Because of this quagmire, it is challenging for any company to get all the rights they need to launch a service or for an individual to use a song in their youtube video. Everyone suffers.

New company’s structure

Now it is impossible to have someone come down and change the whole industry ecosystem hand of god style like in The Stand.  Despite all these inefficiencies and redundancies, it is just not going to happen. There are too many contracts and rights holders, and laws. I’m not even sure where someone would begin.

Change has to happen from the bottom. The solution is to create a company that addresses these problems, and is not structured as current companies, but can operate in the current landscape. If this company is successful, others will follow the model. This is what occurred with upstreaming (Los Lonely Boys), the current version of 360 deals (Paramore), consolidation (Universal/MCA/Polygram), direct to consumer (Trent Reznor) and every other industry trend.

There are four main goals that this ideal music company’s structure needs to achieve.

1)   Consolidate the income streams for the artist so that expenses are shared and income is maximized, and that there are fewest possible redundancies.

2)   Create a true partnership between the artist and the company so that conflicts of interest are eliminated and all marketing efforts are directly beneficial to all parties.

3)   Streamline rights so that individual marketing efforts are not hampered, and that the company can pivot and adapt as technology and the industry landscape changes.

4)   Be scalable.

Basic structure – A Cocktail Napkin Sketch

There are many possible variations of the structure, but at its but at its heart its (a joint venture) split ownership and split revenue. In every music venture there are two things to own, the master side and the pub side, there is also logo, artwork and the videos. All of these assets are given to the joint venture.

The company acts as both a manager and a facilitator for the all revenue streams of the artist’s career.

The artist is the creator of the music content and vision.

All revenue is split at an agreed upon percentage after recording, marketing and touring expenses between both the artist and the company.  If one side of the joint venture were putting up the marketing money (which would be the case in most instances) then 50% of the other side’s split would go to recouping that money.

This allows for an income stream for the artist, and eliminates the need for constant advances that beholden them to all current companies.

There are no advances.  There are no management commissions.

Overhead is the responsibility of the company from their percentage of the joint venture.

The artists living expenses are still the responsibility of the artist from their percentage of the joint venture.

There is a buyout clause for the IP if artists want to leave the company, or if the company wants to drop the artist. There will be no split ownership after termination of the agreement. One side will own it so they can continue to make deals.

The contract is structured in years not album cycles.

The end result is one company that aggregates all the income streams for an artist and is positioned to build marketing ideas around them without any barriers or conflicts.  The percentages can be adjusted for a baby band or superstar, but the basic concept is split ownership, split revenue – No management, no label, no publisher – Just a music company.

Assessment of laid out goals

Does this structure accomplish all of the goals for a successful music company laid out above?

Fair allocation of cost and benefits: – Looking at the cost associated with the new structure, the revenue stays the same, but duplicate costs are eliminated.

There are no longer mechanical fees separated from the revenue.

There are no longer management commissions taken away from the income streams

All of the overhead costs are merged.

The entity that pays for the marketing is the entity that benefits from the revenue.

Partnership between business entity and artist:  By eliminating the redundancy of both the label and artist manager offering marketing strategy the possibility for a true partnership is formed. There will still be disagreements but the conflict of interests has been eliminated. All revenue streams now point back to both parties. A rising tide lifts all boats.

Rights management: – As this entity controls all aspects of an artist’s intellectual property they have the ability to make deals with small companies and large companies alike. This does not solve the current issues, but if all music companies were eventually structured this way, they could make deals for their artists and not for only a portion of their rights.

Scalability – This structure works just as well for a one-person business shop, as it does for a large corporation, and everything in-between. A small company would farm out many of the marketing functions to the same independents that serve that purpose today. A medium size company would be structured like the current management label hybrids, but eliminate all economic divisions and all duplicate functions. It must function as one company. A large company would expand that same structure.  I believe this structure could work in the merger of a major label, Major publisher and a large management company, but only if the combined company shed any of the artists it did not have a deal with on all sides. It would also be necessary to negotiate new contracts with each of them. That isn’t going to happen in reality, so it only works in theory for now.  If down the road, the companies that adopted this structure were merging to form larger entities, I believe then you could have a powerhouse company.

Why is this structure is different from the current 360 deals and management label hybrids?

The management-label hybrids are the closest thing to what I propose, but they do not go far enough.  They are still divided within their own system. There is not double dipping, but there are separate deals between the artist and the management company/the label /the publishing company, and sometimes the merchandise company. This structure still has redundancies and conflicts of interest; only it is within its own walls. By separating the revenue streams that are paid out, and creating company value with the artist’s intellectual property, they will by necessity still have redundancy in their overhead, and conflicts of interest when making marketing budget decisions.  David Geffen was one of the best examples of this with Asylum in the 70’s. He owned the copyrights of the artist he managed, and made more than any of them when it came time to cash out.  This led to a long standing belief that you need to have separate management and label, until 25 years later when the management label hybrids popped up claiming a new business model. Unfortunately this business model still operates under the old rules.

Most of the major label 360 deals were accomplished by buying up merchandise companies, and using the overall revenue from those companies on their books, coupled with taking percentages of other revenue streams (touring, sponsorship etc.). The major publishing companies are also separate divisions and the benefit is looked at a macro level. Everything is still separate. In fact one of the big negotiating points on any 360 deal is cross collateralization of the different revenue streams. This adds more revenue to the company responsible for most of the marketing outlay, but it still allows for conflicts of interest and redundancies throughout the artist ecosystem. It is not optimal for marketing or for revenue.

How this company would operate within the current ecosystem.

Publishers – The company would make an admin deal with the current publishing companies. They would not hold the rights, but the administration of publishing is still a valuable service.

Distributors – Distribution is still necessary, and the company could decide between any number of physical and digital distributors based on the needs of the artist. Each deal would be separate, and no longer would the marketing entity (previously label) have a deal for all of their artists.

Songwriters – The structure works best for an artist that writes their own music. If a co writer is desired, there could be a deal where a percentage of the revenue pie goes to the songwriter. This would allow the songwriter to participate in all the ancillary benefits of their music as well.

Conclusion and other benefits.

The proposed structure streamlines overhead, encourages more cooperation and allows for easier licensing of rights.  All of these things create other benefits. It allows for greater flexibility in the development and marketing of an artist. The artist is no longer held to the album cycle because that is not necessary to prop up a label’s P&L. The artist can give away their music, because they are no longer beholden to a publishing companies advance. They can release a song a month, a song a week or a song a day, they are free to try anything. The artist can give away their music if they so desire, because they are no longer beholden to a publishing company’s advance. Artists will have the ability to decide which listening platforms they would like to be involved with as they emerge. The revenue from these deals will no longer be once removed from the artist. Perhaps the biggest benefit will be that the royalty system, in all its antiquated, obtuse, opaque, accounting glory will be a thing of the past.

That is not to say this is a utopia, there will always be problems, but I believe that this is a structure that lets the musicians and the executives deal with those problems without conflicts of interest and with maximum efficiency. If everyone is working for the greater good, then the outcome will hopefully be great music delivered in innovative ways, and true artist development.

-Frank Woodworth

Advertisements
Posted in: Uncategorized