Yesterday, CitiGroup published an 88 page report on the status of the music industry.
Regardless of whether it was the intention or not, the takeaway was that musicians receive just 12% of the industry’s revenue. This number was up from 7% back in 2000.
While it’s a great sign this number is going up, the response to this number has been “shock” from the media and creative community.
This % is NOT to be confused with an artist’s profit margin.
This is a mistake I was guilty of making when I first read the articles about the report – I quickly began to scan other industries profit margins and learned restaurants operate on average at a 6% margin, hotels at 10% and alcohol at 20%.
After reading the report, I realized the number provided by CitiGroup is solely the percentage of overall revenue the music industry generates that reaches the artist, which is substantially different from an artist’s margin within their own business.
An analogy for CitiGroup’s calculation may be the amount of revenue a head chef walks away with at a top restaurant. I am not saying a head chef is less or more important than a recording artist to their individual industries.
At the end of the day, artists should make as much of the pie as possible in a way which maximizes their long-term earning potential.
What constitutes the best path for long-term earning potential is often not black and white, but rather grey.
Should an artist be with a label? Why or why not? Which label? Would you still make the same decision one year later after a key executive has left? Reversely, how can you account today for a key executive who may be hired by the label and have great impact on the artist’s career?
The answers to these questions don’t depend just on the situation, but also on who you ask.
I believe the music industry at times makes more decisions based on short term cash (advances) than other industries. This is solely based on my experience in our industry and studying of other industries.
In my opinion, these short term based decisions could be for any of the following three reasons –
- The lack stability of any given career – Nothing is for certain in entertainment. The artists and their team want the money now. This is not to be confused with consciously choosing to take a recording advance now to fund another area of the artist’s career, i.e. sustained tour support.
- Uncertainty of how long an advisor will be involved with a career – It’s our jobs as artist representatives to make decisions for the artist long-term. I have always had that perspective for my artists as I recognize it as my moral responsibility to them, but does the entire industry take this approach?
- A short term vision stemming from a lack of actual financial projection models, significant planning or decision process – Financial modeling in music is plagued with uncertainty, which can make models difficult to create, and in turn, can be an excuse for why they may never be created. Many of the best and brightest in the industry spend their time super-serving the top artists. Therefore, the middle-and-lower tier artists and their teams do not always receive the full picture. Therefore, they are not always able to make decisions which incorporate diligent financial analysis.
There is a lot of great information in the CitiGroup report. Hopefully, their extreme dedication compiling the research and writing this report will provide more clarity to both the artist community and their advisors so they can be fully aware of their rights, how revenue is generated, and how it is shared with various stakeholders.
After reading the report, there are a couple points worth raising –
Is the presented “ideal” scenario even a possibility?
The ideal world CitiGroup proposes is one where music is created, reaches the customer directly without any intermediaries and the artist is paid right away. This is more like a utopia than an ideal world.
This would mean NO Spotify or Apple, NO record labels or managers, etc.
Not every middle man passes value on or creates additional revenue for artists, but several do, and nonetheless, the industry could never and will never run without these platforms or personnel sectors.
Advisors, such as managers, lawyers, or business managers, charge for their services (and or share in the revenue) and help artists make the best decisions from their plethora of experiences. If they’re good at their job, they pay for themselves by creating revenue generating opportunities and saving artists from making costly mistakes.
For the most part, artists value these individual roles as much as the rest of the industry relies on them — so is the proposed “ideal” world from this report even ideal? Would artists actually be better off without these intermediaries?
In terms of the full pie, the report says that “concert costs, managers, agents, gross profit margins on music sales – are all relatively small”. It mentions the largest share of the revenue chain is taken up by the cost of running the distribution platforms.
It does not acknowledge the immense capital risk required to grow and sustain these companies.
Streaming companies already send over ~70% of their revenue immediately back to rights holders, and have to operate and generate a profit from the remaining 30%. I am not saying these companies should be entitled to more or less, but the music industry does need their innovation, which requires financing from outside of our industry (venture capital, public markets, etc.).
Fund managers will only push significant capital to opportunities which they believe will create value through profit. Rights holders have these companies in a chokehold, and if they tighten any further, the innovation needed for streaming 2.0 could disappear.
There are already skeptics on whether a solely audio streaming service can be profitable (based on the expensive licensing costs), so regardless of whether these platforms take the largest share of the revenue pie or not, it doesn’t seem like they will be taking less anytime soon.
If they did, how would it even result in more innovation at the service level, better accessibility for the fans, or additional revenue today or tomorrow for artists?
While we’re on the subject of capital, for years, record labels have been compared to venture capitalists for their similar nature of betting on ten to find one winner.
The CitiGroup report aspires to dispel this comparison by displaying the differences in the two business models, specifically how venture entrepreneurial upside is not capped the way it can be for artists in royalty based standard recording contracts.
The report states, “The downside to the VC is capped by the size of the initial investment.”
It does not address the fact record labels often invest significantly more than others (including artists themselves) are willing to invest in marketing artists (or themselves), nor does it compare the profit margins between the two industries.
The recorded music industry is not a one time financial investment like the venture capital industry.
Once a label has made the initial investment to sign an artist, the real investment of creating records and marketing begins. If the artist is successful in any capacity, the investment continues often for many years (I acknowledge sometimes VC’s choose to invest further in subsequent rounds to protect the share of their initial investment at the new valuation or to acquire a larger stake in the company).
Does this continuous investment commitment from the labels warrant the limited upside model for recording artists?
I don’t have an answer to that without diving deeper into the numbers and knowing how much is being invested by these major companies and where. However, if Warner Music Group (one of the best music companies in the world) has publicly posted a 15% profit margin, whereas a decent venture capitalist fund drives back at least a 30% return per year to its investors, then I’m not sure venture deals, which makes a significantly higher margin, should ever be the reason why record label deals could be structured more fairly.
The good thing for artists today is that they are gaining more leverage every day in this equation. As more acts aspire for independence in all of its forms, the majors having been willing to eliminate 360’s, do one off joint ventures or even licensing deals more frequently than ever before to eliminate the competition and get in business with an artist.
As a society, we are significantly more interested in seeing artists thrive.
Nobody is upset the local restaurant or national hotel chain are making a slim margin, but we care deeply about artists.
We value art, and in many ways, it has been undervalued and plagued by stories of financially failing artists who signed terrible deals.
We cling to the starving artist story, even when it’s not true, such as in the case of Michelangelo, who up until recently the world thought was broke his entire life, but in reality was found to be one of the wealthiest individuals of his generation.
When you study Michelangelo, you learn he was maniacal about his long-term strategy.
He sought mentorship early and was a maniacal networker with the most prestigious and royal families.
He continued to develop new skills each decade of his career ranging from painting to sculpting to architecture.
In fact, his ways of being sound similar to the dynamic nature of today’s most successful recording artists.
Artists today may not be catering to the royal family, but they do speak directly to their audience and connect with their fans the same way Michelangelo did with the elite.
Technology (online distribution, social media, and streaming) have made it easier for artists to share their music and art with the world.
The biggest challenge is getting discovered amidst the sea of their peers and the abundance of content coming out every week.
In closing abruptly, the report also mentions that “in most forms of entertainment, the artist captures the lion’s share of the spoils.” Out of curiosity, which form of entertainment is that?
Note: My mission is writing this post is not to defend corporations. I am artist first. With that being said, it is important we look deeper into how each aspect of the industry operates in order to identify slack, both in the pipeline or in an artist’s business directly in order to figure out how to maximize earning potential for artists.