Music and the Digital Ouroboros

Obvious artist advocate is obvious: There are more entertainment offerings today than at any other time in history, with an explosion in access across devices. And yet a small percentage of content generates the overwhelming amount of revenue in pretty much any media/entertainment category. According to emtertainment markets researcher Anita Elberse, long tail releases comprise some 60 percent of digital music offerings, with an average of 10 purchases made per unit. (Thanks, mom!) Granted, the period in which these data were gathered also coincided with a monumental shift in digital distribution from ownership to access. Still, Mark Mulligan of MIDIA Research more recently confirmed that this trend extends to the streaming music marketplace.

Taken alongside reports of back catalog outpacing new releases even in streaming, we see a certain conservatism emerging with the traditional investors in musician careers: record labels (at least the majors). With just three companies controlling the vast majority of recorded music copyrights, it is easy to comprehend the logic of monetizing those enormous back catalogs via “always on” streaming, while being very strategic about what new artists to invest in. And, as labels are increasingly partnered with services in the form of equity ownership, they have access to an incredible amount of data to guide their decisions around investment and positioning.

Historically, big record labels were risk aggregators, meaning they spread the expenses of producing, distributing and marketing music across a great many releases and made their money back (and then some) from the few that did very well. They also functioned as a bank for the musicians (with worse terms than most financial institutions), offering advances and tour support with contractual ninjutsu to ensure non-recoupment. Historic label deals were often onerous, but when things worked, artists had able partners in generating value. Of course, generating value is not the same thing as capturing value. In the old system, major labels captured most of the value. Depending on an artist’s stature, their leverage and the terms of their contract, today may not be all that much different.

A core challenge faced by artists and labels big and small is cutting through a noisy marketplace. Beyond the serendipitous (like Spotify staff adding a strummy crooner to their “sophisticated coffeeshop grooves” playlist or an unforeseen YouTube spike), marshaling attention costs gobs and gobs of money. And who has this kind of money to throw around? Major labels. And what does a risk-averse, 21st century imprint look for? Globally bankable superstars.

Of course, consolidated multinational music conglomerates aren’t the only ones with deep pockets and a will to dominate. Technology companies that have already achieved scale are in a position to directly invest in creative content. We see this clearly with original video programming from Netflix and Amazon. Often, this content isn’t actually produced by the services themselves, but rather licensed exclusively from production partners, some of whom may be based abroad. Large datasets and global reach helps a company evaluate how well an existing film or series is performing in non-US markets; when bringing this programming stateside, the choice is either to remake the source material or reintroduce it with clear branding and the powerful positioning that only those who own a consumer-facing distribution platform can muster. This is how we got an American remake of the U.K. series “House of Cards,” as well as a post-BBC season of “Black Mirror.” The point is, the tech and digital infrastructure folks know that people go online for content, not an efficient global system for exchanging binary information packets. Why do you think Comcast bought a massive motion picture and television studio?

With the exception of Jay-Z’s partnership with Samsung, a couple of exclusive releases on TIDAL (including a new Rihanna album that has been awarded a dubious platinum distinction) and an Apple-only Taylor Swift concert video, there has thus far been little direct investment in music brands by large digital service providers. To be sure, select artists are still able to score lucrative endorsement deals. But that’s not the same as direct investment (and reinvestment) in recorded music product.

I do expect this will change, possibly soon. It seems obvious that digital services are in the best position to crunch data and make bets on talent acquisition/development based on predictive analysis. (Whether the actual contract terms are predicated on a 35-year transfer of rights is an open question.) Consumers are already trained to expect the commercial positioning of music brands, even as they sail endless seas of user-generated content. Having more control over positioning makes things a lot easier. Frankly, I think that consumers would welcome platforms taking on a bigger curatorial role, so long as back catalog remains readily accessible. And digital services may want to do just that, because they know that option paralysis diminishes the value of the platform in the eyes of the user. Unless the major music companies are able to re-assert themselves as curators of content, they will lose this ground to those best positioned to direct traffic and generate interest. And in many cases that’s the service, or the even the users themselves.

It’s not enough for Big Music to scream about how tech is ripping artists off in the hopes that artists will fight their battles for them. Because what happens when tech invests in music IP and brands under potentially more favorable terms (let’s start with no transfer of rights)? one imagines that artists and managers will go where the money is. Not that tech will necessarily offer better deals, though if the rise of the ’tuberstars tells us anything, platforms may write bigger checks simply to retain talent and differentiate themselves in a crowded service environment.

It’s not about heroes and villains. There are often different needs and incentives between talent and talent backer. The old label investment model is basically a fee-based arrangement with a kind of “step” configuration. An advance is the upfront fee paid to the talent; the “step” is royalties paid to the artist post-recoupment of the initial investment, which can be periodically renegotiated based on leverage. What we haven’t really seen is a “share” model, besides the net deals Live Nation makes with certain big draw acts. It would be interesting for, say, an artist of Taylor Swift’s stature (are there any others?) to enter an equity deal without a transfer of copyrights.

So why would a non-music company do a deal like that, when the talent cycle is so brutal? Because it’s actually low-risk compared to the old label model where the only revenue generating activity is selling petrochemical discs. Contemporary label deals under the 360-degree model allow for greater integration with an artist’s entire brand, but it’s not like the artist gets a slice of Universal Music’s other investments. If an artist had equity in a service, that would mean that they have an incentive to direct their fanbase to the service. This is, in theory, what Jay-Z is attempting with TIDAL. But it’s no “I Want My MTV,” at least not at this point.

The long tail gets wafer-thin until it wraps back around to the head, which is forever famished. Platforms are able to monetize backwaters of creative content, and music companies still trawl the UGC oceans looking for that prize catch. Today’s media platforms are inherently blended, with DIY content sharing digital infinity with blockbusters. However, the real money still favors the head. And an ongoing vertical integration of pipe, content and interface will mean that the companies who control (or can muscle) all layers in the stack will seek to maximize revenue with the most desirable content—and they have all the data on that. The “license everything” approach will probably still be the norm with music rights, but I’m betting that we’ll see an increased service-side focus on the acts that generate huge playcounts and are in a position to be monetized beyond an audio or video file. So not that much different than the old days, then. Except there will be fewer superstars, and those stars will be truly global.

Anyone working in creative content needs to think hard about what “winner-takes-all on steroids” means for cultural diversity and independent enterprise. If you’ve got ideas or strong feelings about any of this, let us know; chances are we can direct you to impact.