Crowdfunding disrupts record labels & the music industry

Vinyl Record Background by Petr Kratochvil

Vinyl Record Background by Petr Kratochvil

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.

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