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Five Trends Revealed By the Music Industry
Today: Universal Music Group just bought Bob Dylan’s back catalog. What it tells about where the economy is heading.
The Agenda 👇
I love the music industry because it bears so many lessons
I was intrigued by the big deal of the week in the music industry
I think that five trends are worth considering in the whole thing
An interesting article about Brexit by George Osborne
I was writing a lot about the music industry earlier this year. I find it interesting because this particular industry is what led me to get interested in technology and its impact on our economy. It’s all the more important that we pay attention because it was one of the first industries to be ‘disrupted’ by the shift to the Entrepreneurial Age. Why was that?
The music industry is all about intangible assets—whether those are musical works written down on sheets of paper or recorded music available in a given format, what determines value is the intangible part: the music itself, and the experience it provides us!
Music is also a lightly regulated industry. That could seem counterintuitive given that we all remember record companies suing Napster for copyright infringement. But compared to other industries such as financial services or healthcare, there’s not much government intervention in music. It’s mostly new entrants fighting against incumbents (or rather, the other way around)!
All in all, the paradigm shift happened in music first because it’s the industry that most easily lends itself to being transformed by technology. There are few compromises that new entrants need to make and not much corporatism to slow down the transition. This is why anything that’s happening in the music industry is worth our attention: if it happens there, it means something much bigger is happening, and so it can inform our understanding of the current global shift in many ways.
I was prompted to come back to this topic by a piece of news shared earlier this week, Universal Music Group’s purchase of Bob Dylan’s back catalog ahead of its IPO, and the commentary shared on Twitter by industry expert Dan Runcie:
Let me echo Dan’s thinking and discuss five trends (several of which he mentioned) that I think explain what’s happening in the music industry and where the whole of the economy might be going next.
1/ The superstar effect
In the presence of the superstar effect, some people make a lot of money while many others don’t make a dime. This phenomenon exists in many parts of the digital economy, but it’s especially true in the music industry. Here’s what the late economist Alan B. Krueger wrote last year in The Economics of Rihanna's Superstardom:
Both scale and uniqueness have to be present to create a superstar market. Mrs. Billington’s voice was unique, but she lacked scale. Scale magnifies the effect of small, often imperceptible differences in talent. With the ability to scale, the rewards at the top can be much greater for someone who is slightly more talented than his or her next-best competitor, because the most talented person’s genius can reach a much greater audience or market, in turn generating much greater revenue and profit.
What changed since Mrs. Billington’s concerts? First, physical records, and the ability to record and replay musical performances, have enabled today’s top artists, those most in demand, to dominate the music business. Album sales and digital streaming clearly reflect the superstar phenomenon. The top 0.1 percent of artists accounted for more than half of all album sales in 2017. Song streams and downloads are similarly lopsided.
Everyone who’s familiar with the Entrepreneurial Age and its features will recognize Fred Wilson’s idea about the winner taking most:
The history of the Internet and mobile is that in many categories the winner takes most of the market... The reasons are many, but at the core are network effects and the fact that the more users and data a service has, the more value it can create for its customers and users.
Are there network effects in music? Indeed there are! When an artist is popular, fans talk about them—they express their passion, they share facts and anecdotes, they contribute with critiques, recommendations, word-of-mouth. In turn, other network effects kick in across various media outlets, from radio stations to TV networks to newspapers and magazines.
If we are to believe the VC firm NFX’s research on network effects, these are only one out of four factors of defensibility for a business (the other three being brand, embedding, and scale). But when it comes to music, we have kind of a perfect square, with every contributor to defensibility being present and reinforcing the others:
Personal brand: think about Rihanna, Bob Dylan, the Beatles, Taylor Swift;
Embedding: an artist does many things these days: selling albums, streaming music, fashion design, touring, etc.;
Network effects (see above).
All in all, music might be an extreme, but the industry clearly illustrates this trend of every digital market being subject to Alan B. Kruger’s “superstar effect”—and the sale of Bob Dylan’s back catalog is no exception. Comparables are the so-called passion or creator economies (see Substack or OnlyFans).
2/ The abundance of data
Eight years ago I was very impressed by a post written by two Netflix employees on the company’s technical blog. They essentially explained how the more data you have, the less intelligence you need, because everything is simply revealed, almost in real time. Here’s the relevant excerpt:
Streaming has not only changed the way our members interact with the service, but also the type of data available to use in our algorithms. For DVDs our goal is to help people fill their queue with titles to receive in the mail over the coming days and weeks; selection is distant in time from viewing, people select carefully because exchanging a DVD for another takes more than a day, and we get no feedback during viewing. For streaming members are looking for something great to watch right now; they can sample a few videos before settling on one, they can consume several in one session, and we can observe viewing statistics such as whether a video was watched fully or only partially.
It raises some deep questions, such as what does pricing mean when everything, whether on the demand side or the supply side, can be profiled, quantified, and perfectly matched with the other side? This is what Byrne Hobart calls “Perfect Price Discrimination”, and it has as many consequences in market regulation as it has in business strategy.
As Dan writes in his thread on the Bob Dylan deal, “with streaming data, it's easier to identify the most valuable songs”. But then here’s the real question: why would you pay for an entire catalog when you can single out the elements in it that actually deliver value?
Strategy is creating fit among a company’s activities. The success of a strategy depends on doing many things well — not just a few — and integrating among them. If there is no fit among activities, there is no distinctive strategy and little sustainability. Management reverts to the simpler task of overseeing independent functions, and operational effectiveness determines an organization’s relative performance.
But in other contexts, such as that of the music industry, there’s absolutely no point in making a given Dylan song exclusive to a certain format or channel of distribution. The best approach is to make that song available in every shape and form imaginable so as to maximize the revenue you derive from it. Therefore the song will eventually create more value as a standalone asset rather than as part of a bundle or a specific business model.
With this particular deal, we have a bit of both worlds. One party (Universal) was interested in buying the parts of Bob Dylan’s catalog that generates revenue; the other party (Dylan) demanded that the buyer purchases either the entire catalog or nothing.
Obviously Dylan wasn’t interested in what the data had to say and what it revealed about his catalog (likely that just a few songs such as “Blowing in the Wind” and “Knocking on Heaven’s Door” actually generate revenue worth an acquirer’s attention at that high a price).
Here’s what I predict, however: just like data makes it possible to tailor a price that perfectly matches an individual customer’s propensity to pay, data will eventually make it possible to single out the elements of the large bundle that is a music catalogue that a buyer can actually monetize; the rest will be left behind because nobody will be willing to buy it.
My sense is that while Dylan has bargaining power, many other artists in the future who seek to make money out of some of their songs will only be able to sell a few of those songs as opposed to their entire catalog. It’s a good thing because the part that doesn’t find a buyer might contain a few future hits and become a pleasant surprise for the artist; but it’s a bad thing because it’s more difficult to make money if you sell this catalogue piece by piece rather than as a whole.
3/ Recurring v. non-recurring
Here’s something that changes with the abundance of data: it becomes easier to predict which part of the business contributes to recurring/steady/predictable revenues and which part is subject to the ups and downs that make planning ahead and investing so difficult.
When it comes to the music industry, that’s historically been a key difference between selling records and publishing, as I wrote in Can Legacy Industries Survive? The Case of Music:
Emmanuel de Buretel, a Virgin Records alumnus along with Patrick Zelnik (whom I mentioned in 11 Notes on Warner Music), once told me that he had an early passion for publishing because it made it possible to diversify revenue streams for artists, but that it had always been impossible to educate his colleague Zelnik on the matter. For people like Patrick, producing and selling albums was all that mattered. It made all the more sense because the record business was (seemingly) so entrepreneurial: you had to market the album, you had to sell it. Publishers, on the other hand, were those boring people sitting in their dusty office, counting beans and essentially relying on other people’s efforts. But the BMG business case exemplifies what really happened in the industry: overnight, the Internet transferred all the power and most of the money from record sellers to right managers.
Dan makes exactly the same point in his thread: “Royalties are consistent. People listen to music regardless of economic factors”, which is why it’s so easy to put a price on a music catalog (it’s easy to discount future cash flows), and it explains why everyone is fighting to control them:
Artists see their catalog as a source of recurring revenue at a time when fewer and fewer people buy records, streaming revenues are too small to pay for the high life, and touring is subject to too much uncertainty (as shown by the pandemic).
Record companies see catalogs and royalties as the steady revenue stream they need to compensate for the collapse in revenue derived from actually selling records. Hence the infamous 360 deals I wrote about in the Spring.
Music publishers and rights holders in general see the current trend of revenue being displaced from selling records to cashing in on royalties as long-awaited revenge against those arrogant pricks in the actual “record” division of record companies.
The separation between recurring and non-recurring revenues is not new: for instance, it happened in the past with real estate and it was also accelerated by financial firms getting more and more specialized in either taking risks (even betting on uncertainty) or relying on steady, predictable revenues. It’s not a surprise that private equity firms are attracted to the music industry these days:
There was KKR partnering with Bertelsmann to build a rights management platform, as I explained in Can Legacy Industries Survive? The Case of Music.
There were private equity firms famously buying Taylor Swift’s back catalog and paying a high price for it from a PR perspective.
And now Universal is buying Bob Dylan’s back catalog because potential investors in the IPO need to see some recurring revenue streams in the business model.
But again, the abundance of data tends to make it clearer, for any business, which part of the business contributes to steady revenue and which part is ridden with uncertainty. I see it happening in many other areas, notably SaaS—which is giving birth to the idea of revenue-based securities for funding tech companies, not to mention the fact that it’s attracting private equity investors interested in revenue that’s both recurring and very high from a debt seniority standpoint.
4/ Everyone has a shot
I’ll make this one shorter, but it’s a very important feature of the music industry: you don’t need a lot of money to get your shot at becoming a respected music artist. Famous artists such as Charlie Puth or Owl City first put their music on YouTube for free, it was so good that it attracted a fan base, and that then raised the interest of record labels.
Nothing of the sort is possible (yet) in other industries such as the movies or many others—either because you need to invest in costly assets before you start doing business or because backward-looking regulations prevent you from entering the market and proving to everyone, starting with customers, that you’re good at it.
Think about those long, difficult, expensive, and ultimately pointless exams that aspiring Uber drivers need to pass in London or Paris before they can drive their first customers. How many people have renounced entering the industry, not because they were bad drivers, but because they were repelled by the exam?
Nothing like that happens in music. This is one reason why the best musicians often come from disadvantaged backgrounds: they didn’t need a lot of money to buy (or build) their first instrument and start jamming on stage. Here’s an example—Cameroon-born, superstar bassist Richard Bona:
5/ The data-to-revenue stack
Where does tech make a difference? Clearly, in facilitating the journey from being Richard Bona playing on a guitar made of cords strung over an old motorcycle tank in Cameroon to becoming the superstar he is today. It not only means facilitating discovery, it also means facilitating monetization at an early stage, which is clearly a fifth trend worth noting.
There are the superstars, indeed, and not every artist is able to sell their entire back catalog to Universal for hundreds of millions. But there are also all those that can make money as they go, eventually reinvesting part of it into scaling up.
Being a heavy user of Substack on both sides of their business (as a writer AND as a reader), I’m amused when I hear people who, like Can Duruk of The Margins, write that it’s an easy product to develop.
To be fair, Can is semi-joking here, and is himself an avid user of Substack. But my reply to him was that Substack’s competitive advantage is not in any killer feature or advanced technology. Rather, it’s in the fact that the Substack product team has solved every problem and focused on every detail so as to make it possible for the writer to focus on one thing only: writing inspiring content, sharing it over the Internet, and cashing in as a reward.
There are controversies indeed, as in this piece by Clio Chang. Just as in music, it’s difficult for most people to make a living off Substack. But here’s a trend that’s worth considering: the more time goes by, the easier it gets to turn your talent and grit into actual money, and then to grow from there—potentially all the way up to Alan B. Krueger’s superstardom.
So watch these five trends revealed to us by an ever-changing music industry. And while you’re doing that, please send me your thoughts: do you see the same trends? Did I miss some of them? What do you think will happen in the music industry and beyond?
🇬🇧 A few days ago I wrote about Brexit in the context of Britain’s history and economic specialization. This morning I was impressed by this article by former Chancellor George Osborne, who once advocated remaining in the European Union—and lost. This is a lucid, compelling, and well-written assessment of the current situation: The Brexit frog has been truly boiled... but we’re too exhausted to notice.
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From Munich, Germany 🇩🇪