Banks are getting increasingly involved in the music industry. Should we be afraid?
A decade ago, Apple took the music industry to Silicon Valley. More recently, bankers have been taking it to Wall Street, and Wall Street is taking the music business for a ride. The fact is, music as an industry is increasingly a creature of the financial markets, with more then $214 million invested in music-related start-ups and established companies as of the middle of 2013, up 128 percent over the same period last year. Aside from the Wall Street-brokered sales of Warner Music, Universal Music and EMI over the last two years, two rounds of massive financing during that same period, led by Goldman Sachs, have given music streaming service Spotify a market valuation in excess of $3 billion. This is for a company for that has so far found profit elusive.
Of course, they're doing better than competitor Pandora, whose founder Tim Westergren publicly pleaded for a lower royalty rate, even though they already pay royalties at a rate that requires an enormous number of zeros after the decimal point. According to the New York Times, one artist reported earnings of $1652 on more than 1.5 million plays on Pandora over six months. On Spotify, 131,000 plays netted just $547, a rate of about $0.004 per stream. Suddenly, the 7 to 10 cents that artists net on average from an iTunes download starts to look rather good.
Westergren himself, however, is having the opposite problem with zeros: his compensation has been reported at over $12 million per annum. That's in addition to the $15 million-plus that SEC filings show he has cashed out in sales of Pandora stock since the company went public in 2011. And that's small fish compared with Michael Rapino, CEO of Live Nation, the world's largest concert promoter, who pulled in over $28 million in compensation at the publicly traded company last year.
The music business's migration to a venture-capital footing, as opposed to the retail model that it operated on for most of its history, puts it into dangerous waters. If you thought record-label execs were rapacious and financially short-sighted, they're nothing compared to a hedge funder in full swing. Conventional label execs at least retained at their core some sentiment about music itself. Doug Morris, the very archetype of a music macher in roles that included being the CEO of both MCA Music Entertainment Group and Sony Music Entertainment, began his career selling LPs out of his car trunk. In the milieu of Wall Street, music becomes at best a trophy: who gets to sit with Jay-Z at a Brooklyn Nets game, or who can crow that he paid Beyoncé the most for a private show (50 Cent and Aerosmith have both played very expensive bar mitzvahs). At worst, it becomes a loss leader, the juice for a classic pump-and-dump scheme that will almost certainly see plays like Pandora flipped for a quick profit and a slow death.
On the other hand, what else could be done with the battered hulk that was the music business as we knew it in the last decade? Digital technology, which, in the form of the CD, had been so good to the industry's bottom line, was stripped down to its elements by downloading, undercutting the fundamental economics of everything from recording music to distributing it.
In the face of a crumbling industry, however, was Wall Street perhaps the only logical choice, rather than the solution of last resort? Bankers are venal but the most successful of them are not stupid — and they're seeing something of value in the wreckage. And look at this graphic comparison of the two domains: bank stocks today are soaring, with valuations better than they were before the recession. By contrast, the RIAA, the legacy music industry's flagship organisation, has slashed about half of its entire staff since 2009, from 107 employees then to about 50 now, and dues have been reduced by more than half in that time, with 2011's membership contributions totalling $24.8 million versus $51.3 million in 2008. Even if, Mitt Romney-style, financiers' intentions are to put some new paint on it and sell it to some rube (or Russian oligarch) down the road, a superficially overhauled record business might still see some real benefit in terms of operational improvement.
This is important because the music business remains the existential basis for the recording industry and much of pro audio. While digital technology has blurred the lines between artist, engineer and producer, they still are their own discrete categories and are still greatly interdependent. That pane of glass between the control room and the studio has as much symbolic importance as it does acoustical purpose. It reminds us that just because we can do it all ourselves doesn't mean we should. Looking back years from now, the notion that most recording artists would be able to successfully manage all of the technical and business aspects of their careers — production, promotion, marketing, distribution — and still keep the creative left sides of their brains from turning into Jell-O may be seen as little more than a conceit. Somewhere in the midst of the music's involvement with the financial industry is the possibility of a new model arising, one that might restore some of the infrastructure that once created music that, amazingly, still endures today. That rickety model of the 1970s and '80s seemed ready to give way to a bright new future of DIY creativity... But that's not working out all that well. Now it seems it's Gordon Gekko's turn to call the music. Let's see what happens.