The largest providers of capital in the music business, the major record labels, have been devastated over the last decade by the disruption of their core competency: selling recorded music and investing profits into the development of new talent. Global music sales have been contracting for over a decade, falling from $27.8b in 2000 to $16.5b in 2012. 1 It doesn’t take an economist to explain the effect: there is less cash available to fund artists. Furthermore, talent development is a high-risk business. Traditionally, nine out of ten artists who are signed do not generate a positive return-on-investment, though some labels report the fail-rate has improved to eight out of ten.2
With the advent of the 360-deal, the labels are implying that their role in the new music economy is that of an investment bank. Basically, labels provide financing in exchange for active and/or passive rights in all the revenue streams an artist generates. However, unlike a true investment bank, the operations of a major label include product development, distribution, and marketing services for their clients—activities that artists can increasingly perform themselves with competent management and a good strategic plan, due to the technological disintermediation of those label functions. The variable costs of financing talent plus the fixed costs of maintaining diverse, heavily-staffed operations, pitted against a 80% chance of capital loss and decreasing returns on the 20% of investments in the green, does not bode well. Especially given that, on average, spend per artist developed is $700,000 to $1.4 million.3
Given that their traditional model is ailing, labels might increase their profit margins by eliminating all operations except for financing talent—using a combination of analytics and golden-eared A&R to determine expected returns. Or, they could hold on to their current operations and defer a percentage of artist development risk to retail investors by taking advantage of the soon-to-be released crowdfunding provision in the JOBS Act. This second scenario would hopefully result in a higher volume of new artists being brought to market by a more efficient music company—focused on developing and selling talent. Let’s examine this possibility by investigating the JOBS Act and how its integration into the music industry might play out.