The generation that holds the keys to the future loves music more than its parents did, $ 3.9 Billion more. Goldman Sachs published a report in 2017 using this data to predict 3X growth in the music industry. Shortly after, Kanye’s record Label UMG announced that a portion of their company is going public. This music behemoth owns 31% of the world’s master recordings. If Goldman Sachs predictions are correct, their masters mean money in the world of streaming. Lots of it.
Goldman Sachs believes that streaming services’ ability to seamlessly connect users to an endless list of tracks and suggestions will grow the industry exponentially as more people get smartphones in their pockets, and Millennials and Gen Z get older and wealthier. Whoever owns the rights to these tracks will receive the majority of that growth. 57% of that revenue, to be exact.
The war between Kanye and UMG over the rights to master recordings demonstrates just how big they think the music industry will get. Corporate investors salivate at the Goldman Sachs streaming data projections but miss this industry’s core value: the art. Kanye argues that artists are the equity. These projections fail if the artists producing good new music aren’t valued. If artists don’t get their fair share of the music boom, it may not boom. In order for the industry to thrive, artists and investors need a transparent business model that frames the artist as the major share holder of their art.
Rights to Masters isn’t Enough
The last two articles in this series explain how intellectual property rights determine royalty rates and how the artist’s business model has evolved to the point where artists don’t see the full value of their royalties until the end of their career. Since artists are making less and record labels provide less value in the distribution and record sales, artists should see a higher share in master recording royalties.
Even though artists are only seeing an average of 20% of their revenue in royalties now, if Goldman Sachs predictions are correct, owning the master recording rights will mean a lot of money in the future. Negotiating better intellectual property agreements with record labels is a critical investment, but it’s not enough.
The way we consume music is still evolving. Since record sales continue to decline and streaming payouts are unsustainable, artists were finding opportunity in a growing live performance market. A look at Live Nation’s revenue growth from 2008 to 2019 shows this increase:
We believe that as streaming creates an endless supply of music to users, this paradoxically creates a need for scarcity in the music consuming experience. The market met this need by building a robust and advanced live performance industry. Emerging artists found more sustainable revenue streams through capitalizing on a growing desire for interactive music experience.
Then COVID happened.
The pandemic didn’t just throw a wrench in the artist’s revenue model; it threw the revenue engine off a cliff. Artists have lost 80% of income due to the global shutdowns, and Spotify’s valuation has almost doubled.
Owning the rights to master recordings does not account for a loss of 80% in live performance revenue. For the music industry to survive, we need a solution that compensates for this loss. Owning equity shares could be a start.
Artists as Equity
“UMG now has a 2.2 billion shareholding stake in Spotify. These are the artists. The system as to how we get share balances on our royalty statement needs to be created and a system on when Artists can cash in.” -Kanye West
Thanks to Taylor Swift, all artists signed with UMG will receive a share of their stake if UMG sells. Kanye wants to take this a step further by integrating Spotify share equity into royalty payments.
Spotify is currently valued at $46 billion, with a total of 184,000,000 shares. The share price went from $151 at the beginning of 2020 to a year high of $291. If the company were to issue a single share to all 50 million artists on their platform, the stock price at the current valuation would be worth $196. This price is still more than it was worth before the pandemic. Unfortunately, $196 is still not enough to offset the loss of 80% in revenue. There may be a way to distribute shares to artists that better reflects their contribution to the platform, but it is questionable if they can do it equitably and sustainably.
The fundamental problem with the current streaming model is that most of its value for both shareholders and artists lies in the future. Spotify and other streaming services cannot raise enough capital to distribute that future value more sustainably. If they tried, shareholders would most likely lose faith in the company.
Solutions in Innovation
Better terms with record Labels and streaming shares are great places to start, but lasting market solutions need to come from human innovation. Kanye is right in saying that artists are equity. Artists are what make the entire industry valuable. If the music industry isn’t creating new music in 10 years, it isn’t making money. It is in everyone’s interests — label execs, shareholders, and artists — to innovate a more sustainable solution.
Before the pandemic, the market was providing more sustainability to artists through live performances. Now that live shows are not an option for the foreseeable future, we need a new and unique way for consumers to spend their money saved for live shows.
The right solution doesn’t have to be in virtually replicating the live show experience, though. The brilliance of the streaming innovation was that it didn’t set out to make music consumption look like it did before the piracy problem. It set out to make the way people consume music even better. This is how creative entrepreneurs need to address this problem.
We don’t know what that innovation is, but we know what the right question is:
How do we make raw unique music experiences better in 2021 than it was in 2020?
We want to help creative entrepreneurs disrupt the industry with solutions that benefit everyone, especially the artist. Creating an open dialog is the first step to crowdsourcing a solution. It is about connecting the right idea to the resources and partners needed to make it a reality. A better future for artists is one that is created by artists, and one made collaboratively. Reach out to us over Instagram or directly to connect and contribute.
Originally published at https://look.law on October 19, 2020.
