The Venture Capital Model for Music (Long) (1 Viewer)

[Lee Scoggins]

I think I just brainstormed out a new business model for the music industry.
Imagine this... [cue dream time music from Wayne's World]
In the future there are no major record labels.
[Add doomsday scenario from your favorite science fiction movie]
In the future, artists must attract a new form of backing: venture capitalist that works solely in music.
The "Music VC" looks for new talent and then signs them up by agreeing to pay for the first record album or single. In exchange the Music VC gets a percentage claim on all record royalties.
The Music VC takes the artists over to his office where he has a staff of graphic artists, retired musicians and arrangers, lyricists, recording engineers and creates a master tape and full art work for the initial CD (SACD?).
Recording engineers may even form an artists’ collective as could any other specialty like art designers, lyricists, etc.
The Music VC takes the artist over to the local JVC pressing plant manager who gets paid upfront the cost of replicating the discs.
The Music VC can lower risk by initially releasing single or several songs on MP3 site (low compression please!). Many Music VCs may band together to create highly efficient and legal download sites as agreed to previously by artist – a condition of their funding.
In some as yet undetermined split, the artist collects a portion of the sales revenue minus all production costs put together by Music VC.
Production costs include session fees (engineering, tapes, mics, labor), back office financial keeping, any fan base management, art work generation, modest amount of A&R work, etc.
Music VC essentially owns equity musician’s catalog. Maybe 20-50% of first album and lower percentages of latter releases accrue to Music VC for his willingness to take a risk.
Better Music VCs develop relationships with certain entertainment outlets like Radio, Entertainment Tonight, CNN, Fox News, HBO, etc.
At the end of the day, the musician owns direct equity in his own content.
There are no loans made up front in cash that have to be paid back, so the personal finances of the artists are more conservatively managed.
Really high quality talent can attract more Music VCs so they get better terms and better distribution which may mean more traditional outlets.
Tower and other retailers contract directly with Music VC who manages distribution.
Since entire business model is run as private equity function, Music VCs can attract funds for investment from Wall Street, bypassing current system of shareholders providing capital to highly inefficient entertainment conglomerates that earn low returns.
Music VCs can raise capital on Nasdaq once big enough.
Artists can raise capital on Nasdaq once big enough.
[I also am tempted to say we can short the artists we think are fads or outright suck. ]
SUMMARY OF PROS AND CONS:
Upside
Good talent (and bad) gets rewarded based on subjective merit.
Everyone can get funded.
Lower costs in production system due to specialization.
Movement away from “star system” where only million unit sellers are rewarded.
Ability for the Music VC to take chances that major record labels shy away from.
Music VCs have role of financier and producer. They aggregate all the right people to launch first CD and subsequent releases.
Ability to specialize in genres where expertise can be developed. This should prove better than major labels myriad mix of niche labels and mimic the best of independent producers. Maybe Chad Kassem of Acoustic Sounds is the first Music VC based on his superb work in Blues genre.
Downside
Less synergies with large interests in multiple entertainment media (cross-promotion)
Music VCs may take time to develop their own sources of capital like early technology VCs.
Requires risk-reward mindset not currently ingrained in today’s business.
What do you think?
Isn't this a better world for artist, Music VC (producer), and, most importantly, consumer?

 

[Lee Scoggins]

Wow, I though there would be more interest in this. Maybe we needed a more exciting title.

 

[John Watson]

Its a big subject, and I suppose the term "cultural industry" grates a bit on many. But a few comments.
Where the overall standard of success is money, and no amount of it is enough, then we will support only the big ones. Millions of people have been proud to go home with Michael, Garth, Celine, or Britney albums, and they are even prouder that these performers have made millions, because it authenticates their (the fans) worship. Never underestimate the bad taste of the masses.
But the corporate business model of the last decade - growth, mergers, super-stars (performers and managers), is somewhat in tatters now. Having worked in large organizations for several decades, I have come to assume they are irrational machines, controlled by sociopaths who thrive on chaos. Only occasionally do they efficiently produce something of value to the society they "serve"
In spite of the superstar, and the constant effort to create new ones, the "market" actually seems to accelerate fragmentation of taste. Look at the changes from the days of the Beatles, and a few networks, to the incredible proliferation of performers and outlets or venues today. Narrowcasting for niches...
As far as I can tell, there are many niches where people who work hard enough can make some money and keep their creative urges intact. If anything, technology has made specialization, and modest profit, possible for a few. Hi-quality sound can now be produced from modestly costing machines. I believe that many artists however, lack the business acumen to realize much of that modest profit. They need a manager.
Your Venture Capitalist seems to be a vision of that sympathetic manager. The happy blend of good management and creative talent is probably always scarce. By the time they are raising funds on NASDAQ, the blend has been lost?
PS - you might have called the post Searching for a New Faust...

 

[Lee Scoggins]

John,
Thanks for your feedback.

The happy blend of good management and creative talent is probably always scarce.

That's my point: I want to create more opportunity for the type 50s and 60s music producer who was closer to the artist - more of a facilitator of his dreams and journey, than a moneyman feeding a big anonymous entertainment machine.
I would expect in this world that most artists do not reach Nasdaq listed status but maybe the next big artist does grow big enough in multimedia to resemble a small company. It is sort of the difference between a Fortune 100 media company and an emerging small technology company.
I see parallels between older tech companies that stifle innovation and talent through bureaucracy and too much focus on bottom line and large artist contracts (Carey's $28 million) that inevitably take away capital from talented musicians.
Smaller boutique-like firms also seem more able to cater to America's increasingly diverse and eclectic tastes. Everything from grunge to hip-hop to bluegrass to Kasey Chambers to Dolly Parton.
Speaking of Dolly Parton, her new bluegrass/roots label is very successful in finding talent and developing them.
If Vivendi or some other faceless company wants to play they can raise money and invest in the Music VCs. Give them capital to spend to sign up promising artists.
The one thing this model does is it lowers the barrier to success for the artist:
1. They no longer have to be predestined to sell 1 million records. If they sell 50,000 and are in the jazz genre, for instance, they may be fine if they have a local Manhattan following. Maybe word of mouth spreads and they go big later. But the first step is small and cost-efficient.
2. It lowers producing costs, because maybe one just needs to produce a single for thousands of dollars in total studio time instead of tens or hundreds of thousands.
3. It creates "positive portfolio effects" for the Artist and Music VC. By this I mean that a Music VC may really like a new musician but be unsure of their commercial potential. If he has ten musicians, then he can take a flyer on one or two. These might otherwise fall through the cracks at bigger firms.
4. Flexibility. Music VC tastes can evolve and change overnight. Spotting popular trends becomes easier. Creating local sensations that reflect local community tastes become easier.
This model seesm to address your concerns John of bringing the music making process out of the financial engine that major labels are and closer to the artist and their audience.

 

[mike_decock]

I think this model seems workable, as long as the radio conglomeration gets scrapped at the same time. Right now, radio stations are nothing but the marketing tools of the big labels.

I'm a rabid music lover and I can't stand the radio anymore. Do we really need 10 stations in every town playing R&B/Rap/Hip-Hop along with 1 classic rock and MAYBE 1 classical station?

If DJs had full control over their playlists and would take requests from their listeners (sounds like the days of old, huh?), artists would succeed on the popularity of their songs, rather than popularity being created by endless repetition.

I remember hearing a story where the first Elvis Presley single hit the airwaves at a local station. The DJ spun it and got so many calls he played it over and over again. Seems inconceivable in today's world, huh?


-Mike...

 

[Lee Scoggins]

If DJs had full control over their playlists and would take requests from their listeners (sounds like the days of old, huh?), artists would succeed on the popularity of their songs, rather than popularity being created by endless repetition.

Agreed. There was an article in the WSJ about how promotion firms are changing their deals with radio stations. I think I need to work through this promotion business and the radio stations impact a bit more.
The Top 40 format has gotten too stale for me to listen anymore. Even most classic rock stations seem programmed out the wipwad.
If we had Music VCs then maybe there would be micro-promotion deals with radio stations where costs were more effective and deals were more flexible.

 

[mike_decock]

What if the VCs owned the stations but were limited to owning only one station in any market (FCC regulation)?

-Mike...

 

[Lee Scoggins]

What if the VCs owned the stations but were limited to owning only one station in any market (FCC regulation)?

That's an interesting idea. Maybe you have one-off radio station owners and some Music VCs who get big maybe buy a few to protect their artists and lower promotion costs.

 

[John Watson]

Radio GaGa, yeah, that's the ticket... Like you Lee, I cannot listen to contemporary commercial radio.
In Canada we have CBC, and there's one weekend program my wife and I enjoy, tends to be roots music, but crosses genres and eras.

Does America's Public Radio offer a channel for exposing new music? Where knowledgeable (sp?) deejays who are not in the big label's pockets can create programs?

College radio used to be good. Mind you my college radio days are a few decades ago, but maybe that is another venue.

Almost sounds like America needs pirate radio (even in the early 60's British pirate radio would bring otherwise inaccessible rock to Brit youth).

PS - by cultural industry I was just highlighting the difference between commerce and art, and commerce wanting to turn EVERYTHING into a commodity

 

[Lee Scoggins]

PS - by cultural industry I was just highlighting the difference between commerce and art, and commerce wanting to turn EVERYTHING into a commodity

Okay, I get it now.
I think the best thing we can do for art is to return control of the catalog back to the artists. They should have equity in everything they do. If an album creates $x of sales then they should get y% of those dollars. Right now, the major labels take the money and pay back a portion but the artist has no creative control of a lot of things.
I can see where Music VCs may be able to manage costs lower while still providing good outlets and promotion for the musicians in their portfolio. By working with the musician, everything is more transparent, out in the open, so a business deal is more readily enforced, unlike today where smaller artists subsidize such monumental bad contracts like Pariah Carey's new $20 million deal.
I guess I am saying shift control back to the musician, the record producer, and the public where there is more appreciation of the artists work and more flexibility to spot emerging talent. Local instead of global. When artists get big enough, then maybe larger, more successful Music VCs step in and fund larger distribution and European tours and the like.
With the Internet we have a wonderful tool to accelerate word of mouth about emerging talent. With downloadable music, we have a very convenient way to sample new music.
It seems to me that the infrastructure is in place to do this already.

 

[mike_decock]

It seems to me that the infrastructure is in place to do this already.

The infrastructure is already there. We even have an example of what to do and even GREATER examples of what NOT to do.

-Mike...

 

[Lee Scoggins]

We even have an example of what to do and even GREATER examples of what NOT to do.

I am not sure I follow you Mike. Can you elaborate?

Thanks!

 

[mike_decock]

I am not sure I follow you Mike. Can you elaborate?

The big record companies have shown us how easy it is to take a less-than-spectacular band/artist and "make" them a superstar. It's just a matter of getting enough spins on the radio and on MTV/VH1. You create a "buzz" around a hit song and build the momentum with video appearances, create some news or scandal... You know all the tricks of the trade.

On the flipside, the big record companies have shown us how they rip off artists, expect instant hits rather than nurturing a new band with long-term potential. Just think of all the "great" bands whose first album or first several albums did poorly: Yes, RUSH, Pink Floyd... I'm sure you could think of a dozen off the top of your head.

The big record companies have gone through all the trial and error to figure out what works to promote an album. They're now suffering the consequences of their greed.

They've shown us how to do it, they've shown us how they've screwed up. It's just a matter of doing the good things they do even better, and avoiding the bad things they do.

A smart man learns from his own successes and mistakes, a genius learns from the mistakes and successes of others all well as his own.


-Mike...

 

[Lee Scoggins]

The big record companies have shown us how easy it is to take a less-than-spectacular band/artist and "make" them a superstar.

The problem is that the buying public is not buying anymore so sales are down. In the short run, they did okay. In the long run, they shot themselves in the foot.

 

[mike_decock]

In the long run, they shot themselves in the foot.

Yup, and instead of learning from their mistakes, they're trying to point the finger at anything that looks like a likely suspect.


-Mike...

 

[Lee Scoggins]

Yup, and instead of learning from their mistakes, they're trying to point the finger at anything that looks like a likely suspect.

Yes, and they are very likely to resist any major changes however beneficial to the industry in the long term.