I debated whether to make this a two part post, but if you read yesterday’s 12% and are still with me, then here goes! Note: it takes more time not less time to write shorts vs. long. As I’m on vacation I’d rather spend time by the pool, so you’re getting my full thoughts.

Despite the “12%” headlines from the Citigroup report not actually being the artists’ profit margin, but rather the amount of the overall revenue pie they take home, it is still worth talking about the expenses of an artist’s actual business.

Citigroup made an effort to address some of these expenses already by including them in other areas, such as claiming promoters pay for tour production (not always) or by giving team commissions their own slice, despite the fact those expenses actually flow through the artist’s business first. Therefore, one could argue the remaining 12% is already mostly profit, not revenue. 

Regardless on the logistics of what artists actually take home (for a minute), should they focus heavily on increasing their profit margin?

Well, they should defer to their business managers on what a pragmatic margin for their type of business is – even acts of different genres may have different standards or protocols.

It is always a delicate balance between taking home too little vs. taking too much away from team members growing your career with you or choosing not to invest in marketing one self. There is no one size fits all – An artist has to do what they feel is right.

For those that don’t have business managers yet, a book like All You Need to Know About the Music Business can serve as an a guide to making sure one doesn’t overly commit themselves to a third party (label, manager, business partner, etc.) incapable of delivering.

However, I will say this: if artists are solely focused on keeping a high profit margin, they may miss opportunities to bring in valuable partners who can support them in creating hockey stick growth for their business.

In bringing in partners, especially under a term contract of any kind, it’s critical the artist believes the individual(s) (or team) can and will create greatness with them. I encourage both parties to always spell out their expectations as much as possible at to the onset of the relationship and check-in frequently. It’s a two way street because as much as our artists expect of us, we expect a lot of them too.

Regardless whether artists bring in distribution or label partners or do it “on their own”, investment has to be made to grow their  business.

At the absolute most grassroots level (spending almost no money), that investment can come from others donating their services (i.e. getting a video shot for free by a friend). However, growing and operating truly global artist business always requires investment in several key areas. At some point, music videos will no longer be free, artists will also need artwork, radio promotion, publicity, social advertising, tour support, etc… The list goes on and on and on, especially the bigger an artist gets.

While most major label stories are not successful (that’s just the facts), there are many artists whose businesses have benefited significantly from working with labels, even under a standard royalty deal. It’s not often, but it does happen.

In the rare occurrence when all gears are turning in the same direction at a label (almost always under the presence of a “hit”), an artist’s ancillary businesses (touring, sponsorship, etc.) can increase in revenue significantly more via the exposure generated together with the label than they may be have been able to accomplish on their own. In the absence of a hit, labels, especially majors, can at times limit an artist.

The label business thrives on hits and if an artist doesn’t have one, artists and their teams can become more focused on how to get a label’s attention instead of putting the microscope on themselves and what they can do to grow their audience separate from the label’s contribution.

One full proof strategy to win is focusing on creating the largest footprint possible – Artists like Kanye West (who has been on Def Jam since the beginning of his career) prove how valuable an artist’s brand can be and how it can be applied to other business sectors, such as fashion. He, Dr. Dre, and Diddy have transformed “ancillary” businesses into primary revenue streams. Loved Kanye’s Jimmy Kimmel interview if you didn’t see it.

As far as overall profitability, artists need protocols in place with their business managers (and extended team) to watch how money is allocated and saved. They need not spend in areas that do not produce a return either financially or in brand retention. In my experience, business managers are great at analyzing a potential financial return, but often must defer to an artist and their management team when it comes to the individual costs of brand building and the prospect of its long-term return potential.

Artists have to take chances. They have to be willing to fail and allow their teams to fail too. In the process, they create learning experiences which can shape their future. Legendary manager Shep Gordon has always said the most powerful aspect of his relationship with his clients is the tremendous way in which they’ve allowed him to continuously fail.

Artists and their teams can measure the return on certain spends, yet it may difficult to measure ROI in certain areas, such as content creation. After all, music is art, not numbers. 

For example, it may be easy to show how the cost of stage production for a tour is amortized and or recouped across one tour, or even multiple tours, whereas it may be more difficult to show how a music video impacts an artist’s business. How can you really tell (other than feel) if a specific video triggers stream growth, ticket sales, etc.? 

From my experience, on a tour, a solo artist is typically in a competitive and healthy place if they’re walking away with ~35% of the revenue that comes in (after promoters, venue, etc. have been paid). Managers, agents, business management, legal, and in some cases the label typically take approximately 30-40% and the rest will be needed to put on a great show and take it across the country (and hopefully the world). I believe an artist’s team should never make more than the artist across their entire business – Many artists will request their teams do not take more than them in any given business dealing.

For an artist, finding the right balance of how much to pay their team and how much to invest in marketing their career will help optimize their business, but in most cases it will not change the supposed 12% top line figure that comes to their bank account from the “music business” as a whole.

After all, any given artist has slim-to-no power in controlling what a streaming company takes per stream… And they will most likely need a promoter (all the best acts do), have to use their corresponding ticketing company (one of the biggest profit centers in the business), etc. However, artists can decide to take home more on each dollar collected from streams by choosing not to partner with a major label.

Indies are on the rise, but still have a lot to figure out at the recorded music level… How many independent acts are in the Top 100 most streamed artists in the world? 0? 1? 2? How many are in the top 100 that have solely distribution and or indie label deals?

Even the notoriously independent blockbuster example Chance the Rapper currently stands at 179 on Spotify, and he just released four songs a couple weeks ago. I believe this will change, but it’s going to take time and more smart artists like Chance choosing to continue to reinvest in themselves at all costs. And yes, it will cost everything.

A couple other quick things from the CitiGroup report based on others’ responses –

Many are confused how the report allocates or credits advances to the artists in its calculations of the revenue received from music by major label artists as it doesn’t appear to be addressed.

While WMG made 15% profit margin according to their own reports, it would be difficult to determine what their potential profits could be if the company chose not to reinvest so heavily into their own future.

For example, could the company make more of a profit margin by choosing to not invest so significantly in the continual pursuit of acquiring assets? If they weren’t betting so hard on their future catalog and corresponding marketshare, could those profits be shared more liberally with artists? Is their continued increasing commitment to licensing and purchasing copyrights to the artist community’s benefit or detriment?

I believe it’s a good thing – The way I see it the money going toward artist development the better, but some argue it only continues the hamster wheel of labels controlling the destiny of artists and their music. Once again, any specific deal comes down to the artist’s leverage. In my opinion, the outdated structure of record deals are not necessarily the label’s problem. It’s only business to get what you can negotiate.

Artists and their internal teams have the power to change the status quo. By successfully releasing records independently and building their own following online, they can begin to build their business and create competition amongst those who desire to be in business with them. From there, they can decide the terms of the deal they aspire to do vs. the heavy handed one sent to their lawyers. As long as they remain hot, they will always get the service from the label. However, if they don’t, they run the risk the label will support the next hot act (especially if it has better terms).

In my experience, most labels make marketing decisions around creating hits (or for marketshare purposes) NOT the type of deal they have with the artist, but I believe with more licensing and non-360 deals, this perspective may change. On one side of the coin, it could be seen as in a label’s best interest to push any song that could be a hit to its full potential. On the other side of the same coin, if a label has two songs with hypothetically equal potential, why would they market the one they knowingly make significantly less when they can market an artist whose rights they own in perpetuity and are commissioning on the ancillary? There will always be an artist prepared to do the latter deal, but there will also be the desire to super-serve the superstars. Whether those two factors competing for label attention will cross each out or not is to be determined.

While it is difficult to create art of a living (the same it is for an entrepreneur), the accessibility provided by technology is a chance to change the narrative from “artists starve” to: it’s okay for you to be an artist… as a career! And you can make a decent living doing so, regardless of whether corporate America believes in you or not.

If that isn’t music 2.0 power, then I don’t know what is!

I’ll leave you with a perspective I received from a multi-platinum producer friend who is quite savvy when it comes to business as well – He wishes to remain anonymous:

Jake, this is just the beginning.

The shakeup coming from the egregious greed here will be historical.

The majors self congratulation is equivocal to the tallest skyscraper syndrome.

What your newsletter failed to point out is the asset valuations are controlled by the corporations and not the creators.

When every dollar made today throws off 5 more (based on the multiple of financial valuation), your profit margins can be as tight as 15 percent.

It also allows the major to cry poor to the creative community, but it’s utterly hysterical, the truth is,, the less business my company does with the majors, the more money we make.

And while we are a leader in the independent space we are certainly not the only ones.  Citigroup, Wall Street, and Silicon Valley are preparing for a real revolution. One that empowers creators.   

A Utopia, no, but a model more in line with other industries, Absolutely !!!!

Over the next 3 years… Watch what happens LIVE!!!!

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