Posted on: April 19, 2007 in Technology, Music
Record labels as VC firms
Interesting story in Fortune magazine that describes how labels could act more like VC firms, taking a cut of artists touring, and merchandise - rather then just a portion of their record sales. This is the model Nettwerk Records has been using successfully for years. Label as VC firm - Artists as brand.
Instead of running a business that revolves around contracting with an artist to distribute recorded music in its various forms — CDs, digital files, whatever it may be — what if labels behaved as though they were venture capital firms, in which entrepreneurs, or artists, in this case, tap in to their patron’s deep pockets and expertise to exploit all areas of the business? That’s the idea behind merging record companies with artist management firms — and it looks like the theory will be soon put into practice on a very large scale.
The most interesting ramifications about this tweak to the business model is the alignment of common goals between artist and label. Tour revenue is up over 16 percent last year (to a record $3.6 billion), and I think this is a result of our unprecedented access to inexpensive (or free) music. If labels were to get a piece of touring revenue, they would surely complain less about file sharing, and we might start seeing more innovative music services take hold.
April 19th, 2007 at 12:24 pm
Hey Colin, great post. Sorry for the long comment. This is something I’m interested in.
I wonder how Nettwerk stays in close enough contact with the band to know what’s happening with their investments? Maybe the alignment of incentives gives Netwwerk the freedom to worry less, manage less, and focus more on developing talent. That would be great.
Otherwise I can see how a label would prefer to skew their investment toward the recording. Despite changes in distribution, the recording is less perishable than the tour. It’s seems theoretically easier to predict album sales than tour revenues; plus the product has a much longer shelf life. I’d imagine tour returns are a substantially higher risk category of investment.
VC’s are great at modeling risk and cash flow. Some labels must be too.
I’m not arguing against the main idea of your post. I am willing to give the industry financiers credit for having previously considered and perhaps even experimented (unsuccessfully) with this scenario. Maybe Nettwerk’s experience is illustrating unanticipated gains from improved collaboration? If so, other industry financiers should tune up their models.
April 20th, 2007 at 11:01 am
I like the model, but I think the term VC is being used a bit too loosely here. VC’s rarely if ever are looking for a stream of income. They are looking for an exit.
What Nettwerk is doing is really a partnership relationship in my opinion. They provide the management you provide the talent. The VC idea I guess stems from the fact that Nettwerk is going to make an upfront investment in the development of a performer, but initial investments by one party are not uncommon in standard JV or partnership deals.
The only reason I am harping on the term is that “VC” denotes a different type of business relationship in my opinion. But as I said, I think Nettwerk’s approach is appropriate for the times. But the times are changing rapidly.
April 24th, 2007 at 11:41 am
It’s true. ‘VC’ might be a bit of a misnomer, as the “build to flip” mentality doesn’t really apply here.
You’re right David, that the basic idea is actually closer to a JV.
I just love the idea of a ‘labels’ economic model not being tied solely to the revenue of shiny plastic disks. This new mentality seems more healthy and a better alignment of interests between business folk and artists.
August 8th, 2007 at 9:49 am
scary thought, but interesting at the same time. scary, because immediately when i think “VC” i think “someone who will heavily influence how you do things”–and there’s enough of that in the studio, let along during the touring process.
i don’t know if all labels do this, but at least one i know of, and our label, provides “tour support” (ours on a much smaller scale, as we’re basically broke :), although we don’t take a cut from the artist from the resulting benefit. We use it as a perk, given we don’t have as much upfront to give to the artist (in fact, we don’t have any–we do 50/50, primarily take completed records and do mastering distribution & other stuff stated in our contract :)
oh! i guess this is what david is referring to as a partnership. :)
but yeah, for sure, record sales as a sole source of income for a label has been dated for a while, and it sure is taking many labels too long to realize it.