Lending Artists Millions of Dollars Is a Terrible Idea
This morning, Peter Kafka posted an article on a new company seeking to make its name in the evolving music industry: Alignment Artist Capital. The company, according to Kafka’s piece, wants to essentially work as a lending institution for artists who need the money. Except instead of doling out a couple hundred bucks here and there, it will have the resources to lend millions at a time.
A Completely Outdated Business Model
This, for anyone who didn’t already think so by this sentence, is a terrible idea. It’s a rehashing of the same dynamic the record labels have had with artists for decades, sans the ownership percentages over artists’ creative material. Kafka is aware of this as well, noting that:
“Alignment isn’t the first entity to advance money to artists…lending money to musicians is one of the core functions of music labels.” 
That’s very true; lending money to musicians is one of the core functions of a music (record) label, and it’s one of the main reasons their obsolete business model is failing them now.
Don’t be discouraged, though. There’s still plenty of money to be made in the music industry. In fact, it’s on an upswing. But not in the major label space, or using any of the traditional business models of those labels. The new upswing is with the independents — that’s where I would lay my chips.
With all the tools now cheaply (or freely) available to budding new artists, the traditional artist/record label model doesn’t apply anymore (something which Kafka notes as well as “harder to justify”). The reality of the situation is that most artists can get the basic things that they need — access to distribution, access to recording equipment and programs, access to merchandising platforms, access to producers/promoters, etc. — without signing away anything. That begs the question of why they would choose to take a monetary loan if they can do most (if not all) of the necessary things themselves.
New Artists Don’t Need Millions (of Dollars)
And there’s something else: funding an artist (band or solo) like a startup is indeed a unique idea — but a misguided one. Artists don’t need millions of dollars out of the gate to be successful in today’s market(s). The sums of money are too large to apply to most of the new artists who might be interested in taking it, precisely because the economics don’t work in their favor; it’s highly unlikely that throwing a million dollars on your fire will create a lasting fanbase for you. Core fanbases are made on the road, sleeping on couches, driving crappy vans, connecting with your real fans — all things that can be done without a multi-million dollar loan on your shoulders.
In the startup world, there’s a delicate balance between taking VC money you know you’ll need to survive (to the next round), and not taking so much that you end up diluting yourself beyond reason. The same principle holds true here: the concept that new artists should take millions at a time is analogous to a startup raising a Series B when they only need a Seed investment of possibly a quarter of that.
Why Incur Debt You Don’t Need?
AAC cofounder James Diener is quoted in the article saying “We’ll give the artist and their entity financing so they can go build a record label.” That’s like giving someone financing so they can go invest in a line of new and improved floppy disks — i.e. obsolete and irrelevant. The fact that this seems to be one of the main drives behind AAC’s plan tells me that they are still mentally tied to the old model of the record label, only now they’ve decided to cut their prospective losses by dealing only with the financial side (and not the creative one).
Like giving someone financing so they can go invest in a line of new and improved floppy disks — i.e. obsolete and irrelevant.
Based on my years in the independent music arena, I see these sorts of monetary entities as having a very difficult time breaking into the independent spheres — essentially where they need to be in order to really thrive. Buying streaming services, record labels, summer homes — these are things most artists don’t care about and don’t think about. I suppose a few do, but the numbers of those people are well below anything you can build a real solid business model on. The Jay Z’s of the world are astronomically outnumbered by the independents who are on the rise, now with distribution at their fingertips.
I wrote last week that artists are becoming savvier business people, and I can see them steering clear of these sorts of institutions at all costs. They understand that injecting millions of dollars into their brand image doesn’t buy them fans — that’s a belief propagated by the major label industry. Rather, they know it has to be done by way of live shows, personal attention, and appreciation of core fans; all things which can be done on their own, and without incurring debt (remember my article on crowdfunding?). I suppose there will be some customers of course, but I don’t see this ever catching fire in the independent industry. And that’s the next growth phase of music.
So why would artists incur massive debt if they do’t have to??
 Notice here that Kafka used the term “music labels.” I have a friend who used to work for Warner Music who explained this phenomenon to me. The reason that the term “music” has replaced the word “record” is because the major labels have become so bloated with an obsolete business model, they need to start making money off of revenue streams that they traditionally never touched: live ticket sales and merchandise sales. Traditionally, their main revenue streams were from record (or CD) sales, hence the term “record label.” Yet in the wake of the massive disruption of their business model, they have taken to calling themselves “music labels” in order to explain their practice of now taking money from revenue streams traditionally left for the artists.
Originally published at adammarxsmind.wordpress.com on April 6, 2015.