Monday, August 9, 2021

(Markets then players) Music: Why Labels could be dead by 2030 (possibly)

 



The death of Record labels has long been forecast and much ink has been donated to its apparent demise but labels have managed to survive during the painful moves from the cd, download and streaming eras and the new ways to earn that came with them.  


However, going forward, labels are going to have a hard time justifying their existence as the value proposition of labels are slowly being eaten away by other players and artist over time increasingly either turn away from the label system and go independent with the growing number of services allowing artists to create, distribute, market and even finance their work without the help labels. 


The truth is the bleak future for record labels are already here as the tools for artists to exist outside the label system are here with a growing ecosystem of products and services that allow artists to create, distribute, marketing and sell their work at scale but what record labels still have in their arsenal is their willingness to back artists despite the high risk associated with financing them. It's common knowledge that 90% of artists fail or don’t recoup their advances and end up in debt to their labels which leads to Labels offering lopsided deals to artists. While much of that debt is owed to labels financing artists in exchange for their IP add to that extremely favorable royalty splits in their favor, much of this can be explained by Labels trying to limit their downside. 


Labels of late have been remiss to take on this high risk and have been targeting artists with some degree of traction before investing in an artist which makes sense but now that artists have the means to exist outside the label system, artists with a certain degree of traction are in a position to say no or even better, negotiate way better terms than their predecessors. This is bad news for labels long term as More and more artists are able to build a brand and a loyal fanbase to the point they can make a living off their music or even build a 6-7 figure business based on their talent. 


Labels today are a shell of what they were even in the 90’s and increasingly rely on their status as rightsholders which long term is a problem as artists are able to go indie and hold onto their IP. This phenomenon over time will relegate Labels to glorified VC’s who may face a bevy of competitors (not just other labels) when looking to invest in the next best thing.  


Artists who figured out how to build their fanbase and distribute their work profitably will pretty much use Labels as a springboard to make their brand global and when the deal ends leverage the exposure into lucrative sponsorships, endorsements, deals, and investments down the line. However, if Labels adapt, this might suit them as they would be financing a more proven entity instead of backing artists and building them from the ground up. It may also help clean up the music industry’s bad reputation for exploiting artists as they’ll be backing proven operators for a maybe a share of IP, revenue share or even an equity stake rather than investing in some random kid’s IP who don’t know no better who couldn’t tell you what a mechanical royalty is. 


Labels aren’t stupid and will adapt and already have when they invented the 360 deal which gets a bad rap but it’s really a way where labels become more invested in their artist success as an entity. It’s no surprise since the onset of 360 deals there’s been a growing number of artists becoming multimillion and even billion-dollar entities in their own right with Jay-Z, Kanye and now RnB star Rihanna reaching the 1bn mark recently.      


While much of the each of these artists made much of their wealth outside the music business, it would be remiss to ignore label investment and their growing interest and involvement in their artists non music endeavors as a strong factor as to why artists are becoming wealthy.  While there are more 360 deal horror stories pointing to the downside of signing them, signing a 360 deal isn’t the worst deal you can sign depending on what the artist is looking to achieve signing one. However, why an artist would sign one especially new relatively new artist who’s figured out how to make a dime on there is beyond us as Labels even today are little more than VC’s with the worst term sheets ever and will look more like them in the future.    


But the what downsides of 360 deals is that once the deal is over, Label have to renegotiate with an artist who may no longer need the machine as they’ve become their own multimillion entity that could stand on its own. The biggest real-life example is Drake currently under Universal Music Group (UMG) who when comes time to negotiate a new deal UMG, the largest and most powerful label in the industry, may have to pay through the nose to keep him and offer him everything from a split or all his masters to other artists masters to keep him invested in the label. 


Should Drake become independent, the only real downside would be all or most his catalog will still be owned by the label and would have to release new material and hope it pops but given that Drake is highly popular and is proven in the marketplace, he’ll have no problem attracting suitors willing back his indie ambitions. While it seems like much of his value would be wrapped up in music and much it owned by UMG, Drake as an independent can create and release music when he feels like it, secure major sponsorships, endorsements, business ventures and keep the lion's share of the profits from his endeavors. It’s widely reported that Drake is worth $150m ($180m in latest estimates) which to us sounds incredibly low for an act who is largely responsible for UMG’s success and is worth 3 billion to Toronto’s economy. It‘s clear to us that Drake could easily be worth in excess of a billion dollars within 5-10 years either with a major or independent and that’s not a good spot for a label to be. 


However, with how the economics of the music are and where they’re going (in our eyes at least) Labels are going to focus their efforts on artists they think they can make the most money which will largely be artists that like Drake, could exist at a major level without label backing. 


Because of the emergence of artists who are able to monetize their IP as well as earn outside of music. It won’t be long (already happening really) until Labels look like movie studios and only back artists with mainstream appeal and some traction and leave more niche artists to fend for themselves. However, repurposing is not nearly as valuable as repurposing film, the upside for investing artist entities might be lucrative but for most labels and artists, not so much. What's really keeping labels relevant and afloat is their status as rightsholders by leveraging their large catalogues to extract royalties from music streaming services so large Spotify, the largest music streaming service by paid subscribers, pays out over 70% of its revenues to labels. Labels have long exited their equity interest in Spotify but thanks largely to the music streamer and the space as a whole, Labels revenues are on the up with Vivendi’s UMG set to IPO this year. 


But given how we see things moving in the future, we’re not sure this recent renaissance will last for long. 


In sum, labels maybe high on the hog with the surge of music streaming, Labels even if they adapt maybe gone by the end of decade as artists become more independent and eventually become viable entities even if they’re created and backed by them. Labels have been able to adapt through the 100-plus year history of the business but the onset of DIY artists and artist entities could be one bridge too far. 

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