How Will Finance’s Interest in Music Impact the Industry Compared to Big Tech?
With Hipgnosis continuing to acquire copyright, coupled with Warner Music Group and Providence Equity’s announcement of Tempo Music Investments, the finance industry’s interest in the recorded music business continues to gather momentum. At this moment it is worth reflecting on how this emerging trend in music compares to the last great big upheaval from an outside industry: that of the tech industry from the early 2000s onward.
Silicon Valley entered the music space at a very different moment in time. Apple was able to negotiate favourable terms with the music industry because the peer-to-peer (P2P)-induced decline meant labels were receptive to a solution that would stem the digital tide. Comparisons can be made with the live industry, which grew exponentially throughout the decade partly owing to the pressure on acts to tour in order to make up for revenue now lost on the recorded side of the business. The narrative is of course now very different; rightsholder revenues are continuing to grow, and the fact that there is no winner in music streaming services means as a supplier with a finite resource they maintain considerable leverage.
Introducing market principles to music assets means transferring risk that has previously been exclusively borne by music companies. Imagining second-order effects is always difficult, but here are a few ways this may transpire:
Finance enters the music space: Technologies enabling the tokenisation of assets means previously illiquid assets such as copyright (and therefore music), in the wake of the transition to incremental streaming revenues, have become intriguing investment propositions. While the market has felt somewhat bubbly over the past few months, there is a logic to the enthusiasm given that emerging technologies are making the administration of rights far cheaper than before, as well as previously more costly endeavours such as marketing. The marginal costs of administering a rights portfolio do not scale linearly with the growth of the portfolio itself. Rather, these costs can now be auctioned off to smaller, more agile marketing agencies who with this financial innovation can strike deals with the rightsholders to promote an asset across a social channel and share profit once the publisher and the artist have recouped their agreed share. The economics of this favour the holder of the copyright, because there is an increasing volume of these next-gen marketing agencies and yet only a limited number of truly valuable copyright. Couple this with an increased number of participants in the space, and a prisoner’s dilemma scenario emerges for rightsholders that fear exiting the marketplace out of concern that core valuation fundamentals being abandoned would benefit their rivals for market share and thus not be in the interest of the company or its shareholders.
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Finance and catalogue: Catalogue underpinned the CD boom, convincing music fans to re-purchase old albums they already owned on other formats. Then, through the emergence of the digital economy, it provided a stable respite from the volatility of declining overall revenues in the wake of P2P file sharing. With high margins (recording costs etc. already covered, many re-issues being premium products) and low marketing costs (with fan audiences already established), catalogue has become the investment fund that labels use to turn artists into superstars. Streaming threatens this through upending the business model that made catalogue so successful. As the business shifts to the lower margins of streaming and a model based on engagement, the early warning signs are there that catalogue will struggle to remain an influential component of labels’ revenue mix.
'The most difficult task in speculation is not prediction but self-control.' – Linda Raschke