Could an options market make artists more money?

Soon after I moved to LA, I was fortunate to stumble into living with a number of great musicians and entrepreneurs at the Winston House. There are a lot of musicians who come through to hang out or perform that have rapidly growing social media audiences and buzz in the music industry, but not a corresponding improvement in their financial situation. Entertainment is a hits business — generally you make almost nothing, until you strike it big and suddenly make hundreds of thousands or millions. The cohort of people making money in a comfortable middle ground is very small.

A thought experiment about business solutions to rectify this problem led me to the idea of an options market that enables talent to get cash now in exchange for the guarantee that they will do something in the future. It’s been a fun concept to discuss with friends in entertainment and finance so I thought I’d share it online for others to pull it apart in more detail.

“An ‘option’ is a contract which gives the buyer (the owner or holder) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date.” — Wikipedia definition

Say you have a musician or Youtuber who is building a rapidly growing fan base and shows potential to become huge. Maybe they even have a notable manager or recent record deal and it’s clear that are big plans to launch them over the next 18 months. What are things they do that will have a dramatically higher monetary value in the 1–3 years ahead if indeed they find success?

Having them perform a show could be free or a few hundred dollars now but worth tens or hundreds of thousands in the future. A product placement or brand collaboration on their social media might be worth $200–1,000 now but tens or hundreds of thousands in the future.

So what if you created an option with them — a legal agreement that you will pay them $3,000 today in exchange for the right to have them perform a show or feature a product anytime in the next 3 years? That’s good hard cash to the artist now when they need it. If they take off later then you possess the ability to book them having paid far below the going rate at that time. The immense savings is extra profit for the show organizer or budget savings for a brand.

Of course, the person creating the option is unlikely to also be the concert organizer or brand rep down the line. So once an option is created, it could be put into a marketplace where it can be bought and sold. You can sell the option to the event organizer or brand that wants to use it (they pay only a little less than the going rate at that time, and you pocket the difference). Most likely, there would be multiple trades of the option as the artist becomes more famous before someone buys it to actually exercise it.

Other thoughts:

• There would need to be some restrictions around what an option could be applied to. Artists’ personal brand is everything so it’d be bad news if they had no ability to avoid the option for a product placement going to company selling a product they are fiercely opposed to. Perhaps the artist has a price at which they are guaranteed the choice to buy the option back as well.
• This is high-risk. Like with tech startups, most promising artists do not ultimately take off. Finding promising artists on the path toward success isn’t a crap shoot either however. If you follow a given vertical within entertainment, you can get a much stronger sense of who is well positioned for success. There are lots of signals about who is in the pipeline to ‘break out’ in the year ahead. Very few artists are overnight successes (although it may appear so on the outside) — there is a lot of methodological planning by them and their team along the way. You can also build predictive models based on all the analytics available (see: Next Big Sound) about the size and engagement of their online fan base. An investor should have portfolio of these options to diversify.
• The ability to get cash now gives artists the capital to invest in their success so they don’t have to be as reliant on others. If they’ve cash to produce an EP themselves or go on tour independently for a bit, that gives them more leverage in negotiating a record deal, etc. to get better terms as a more developed brand.