Alternative financing for independent artists: An overview of emerging models in recorded music
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View this email in your browser (|ARCHIVE|) http://hotpodnews.com/presents.... A Newsletter about Big Ideas in Music and Technology, by Cherie Hu This is issue #59, published on August 8, 2019 Happy Happiness Happens Day (https://nationaldaycalendar.com/national-happiness-happens-day-august-8/) !
A bunch of updates before diving into this week’s essay:
👉 I’m on the Creative Jury Board for the upcoming Artist Residency at Factory Berlin (https://factoryberlin.com/artist-residency/) , which is co-sponsored by the Sónar Festival and is open to any artists looking to investigate questions around technology and society in their creative practice. Topics for the residency, which runs from October to December 2019, include computational creativity, human-machine collaboration, new music formats, experiential content and building creative businesses. Applications (https://factoryberlin.com/artist-residency-application-form/) are open until August 23; feel free to email me directly with any questions you have in the meantime!
👉 Soundcharts interviewed me, and many other cool people in music and tech, for their latest blog post (https://soundcharts.com/blog/music-industry-trends) on trends shaping the future of the industry.
👉 The Water & Music podcast (https://waterandmusic.transistor.fm/) officially surpassed 10,000 downloads this week!! Thanks so much to everyone who has taken the time to listen, share and support — it really means the world to me and I’m ecstatic that my full-on nerding out on music/tech topics has resonated with you.
👉 I’ve published three new articles online since the last newsletter installment, including pieces for NPR Music and the Columbia Journalism Review. Scroll down to the section “My writing elsewhere” below to check them out! Alternative financing for independent artists: An overview of emerging models in recorded music
** (And why it’s so difficult to make them work)
Amidst the rocky downfall (https://www.nme.com/news/music/crowd-funding-company-pledgemusic-goes-liquidation-2535436) of direct-to-fan music platform PledgeMusic, which set artists back tens of thousands of dollars (https://www.billboard.com/articles/business/8494827/pledgemusic-crowdfunding-owes-artists-thousands-late-payments) , the phrase “music crowdfunding” understandably leaves a sour aftertaste in some people’s mouths.
But PledgeMusic’s fiasco is arguably a matter of poor management, and isn’t necessarily indicative of the underlying business model itself being faulty. In fact, there are several trends that suggest a crowdfunding model would be more appealing than ever to artists today, not less: * Artists still want more means for fans to support them directly. This is the underlying motivation behind industry insiders advocating for “user-centric licensing models (https://themusicnetwork.com/user-centric-streaming-model-op-ed/) ” on streaming services, as well as direct micropayments (https://www.getrevue.co/profile/cheriehu42/issues/the-music-media-micropayment-map-165271) inspired by Twitch, YouNow and other video platforms. Kickstarter and Patreon also remain popular for rewards-based crowdfunding for creative projects at large, and companies like Bandzoogle have built bespoke solutions for music (https://bandzoogle.com/blog/new-preset-page-template-for-crowdfunding-music) in the wake of PledgeMusic’s decline. * Artists and labels are looking to incentivize consumption, segment superfans and measure deeper emotional engagement around music beyond just a surface-level stream. A growing number of sites like Sweet (https://sweet.io/) and Renaissance (https://get.renaissance.app/) are “gamifying” music discovery and consumption by giving fans tangible rewards such as merch and meet-and-greets in exchange for streaming their favorite artists online. Under this paradigm, consumption is a concrete value exchange between creator and listener, which isn’t without its controversy (https://www.latimes.com/entertainment/music/la-et-ms-ticketmaster-taylor-swift-20170830-story.html) . * Artists still want more regular cash flow, more control over their finances and proper treatment as small businesses. Despite the positive aggregate effects of streaming on the wider music economy, it’s still difficult for the typical independent artist to walk into a bank (https://flypaper.soundfly.com/hustle/loans-for-songwriters/) and ask for a small-business loan, due to deep-set stereotypes around artists’ job security and “employability.” Some music distributors are stepping in by offering cash advances (https://www.getrevue.co/profile/cheriehu42/issues/five-music-startup-trends-you-should-follow-in-2019-156733) to artists based on projections of future streaming revenue, but the market for this kind of alternative financing is still wide open.
In this newsletter, I’m going to highlight the growing sector of platforms addressing all three of the above needs — i.e. direct artist support, incentivized consumption and alternative financing — by offering fans the opportunity to purchase “shares” or equity stakes in an artist’s future revenue streams.
These companies build on the groundwork that the likes of Royalty Exchange (https://www.royaltyexchange.com/) have already laid out, in terms of opening up recorded-music royalties as an unconventional kind of asset class (https://www.forbes.com/sites/cheriehu/2018/01/04/is-now-really-the-best-time-to-invest-in-music-royalties/) for investors, while giving artists, songwriters and producers a new source of upfront capital.
Stampede Live (https://www.stampedelive.com/) and Vezt (https://www.vezt.co/) take an equity-crowdfunding approach — in which fans can contribute anywhere from $5 to tens of thousands of dollars to an artist’s campaign, in exchange for a proportional percentage of future royalties. Stampede Live is currently hosting its first-ever campaign (https://www.stampedelive.com/offering/littledreams) with independent artist Marie Miller, who is well on her way to raising $30,000 from fans and investors in exchange for a collective 40% of streaming royalties from her upcoming album Little Dreams.
Others like Riteband (https://www.royaltyexchange.com/) take more of a stock-market approach — in which the platform algorithmically calculates the “share price” of a given song based on the artist’s streaming history, and fans can then trade said shares on a secondary market after supporting artists directly as investors. Riteband plans to launch in late 2019 through a partnership with Swedish collecting society STIM (https://www.stim.se/en) , allowing a select group of self-released artists to start selling shares in their future public-performance and publishing royalties.
I’ve put together a spreadsheet (https://docs.google.com/spreadsheets/d/1FJbontExDWiozBGzWaUCt3Sj7ifjcz6w-hXmIzGG4AU/edit#gid=0) where you can compare these platforms’ feature sets, target artist/investor segments, payout schedules and core business models (screenshot pictured below). In this experimental era, there’s no set standard for what models work best, but it’s nonetheless important for artists and investors alike to understand the patterns and gaps that already exist in the market.
For instance, most of these platforms are not open to unestablished artists, but rather want to partner only with those who have a demonstrated streaming history and level of revenue predictability — a big caveat to the mission of opening up capital for the “whole” indie-artist community. In addition, at least two out of the four platforms don’t provide any historical consumption data to help investors make informed decisions, which seems like a red flag from a regulatory standpoint. Excerpt of spreadsheet comparing alternative investment platforms for music; full table available here (https://docs.google.com/spreadsheets/d/1FJbontExDWiozBGzWaUCt3Sj7ifjcz6w-hXmIzGG4AU/edit?usp=sharing) . To understand the potential of equity crowdfunding at large, it might help to look at what tech startups in the music industry have already accomplished in this realm. Back in 2016, I wrote for Forbes (https://www.forbes.com/sites/cheriehu/2016/02/21/music-startups-launch-successful-equity-crowdfunding-campaigns/#4aac3a3e3e3e) about the successful equity-crowdfunding campaigns behind music startups 8tracks (https://8tracks.com/) and Chew.tv (https://chew.tv/) ; since then, several other music brands have jumped on the bandwagon, including but not limited to Worldwide FM (https://www.crowdcube.com/companies/worldwide-fm/pitches/b0En4q) , ElectroSpit (https://app.microventures.com/crowdfunding/electrospit?referral_code=ESEC80219) , Vampr (https://theindustryobserver.thebrag.com/josh-simons-talks-vampr-expansion-crowdfunding/) , VRJam (https://www.crowdfunder.com/virtual-reality-jam) , Osiris Media (https://www.seedinvest.com/osiris.media/seed) and Gimme Radio (https://www.seedinvest.com/gimmeradio/seed/updates) .
The primary “return” for both companies and investors in these crowdfunding campaigns often ends up being more emotional than financial. Nearly every music startup above targeted their existing user community first, rather than traditional firms, to join as investors in their campaign. The leadership team behind Chew, a live-streaming platform for DJs, told me in 2016 that upwards of 90% of their investors were “users, family, friends and peers, rather than accredited investors.” Vampr co-founder Josh Simons took that framing one step further, telling The Industry Observer (https://theindustryobserver.thebrag.com/josh-simons-talks-vampr-expansion-crowdfunding/) that “our ‘lead investor’ is in fact the Vampr user base … If we ever need to raise VC funds in [the] future there could be no better recommendation.”
The big lesson for artists: equity crowdfunding is arguably more about deepening engagement with an already-existing fanbase than it is about making a quick buck on your songs. “We like to think of what we’re doing as building a political campaign, but for an artist — allowing fans to engage from the start of the funding process, all the way to the album’s release,” Spencer Ho, co-founder/CEO of Stampede Live, tells me. Cool. But will these models actually work?
Attempts to build stock-market and equity-crowdfunding models around music date back at least seven years — and, at least in the recorded-music sector, none of them have succeeded so far.
TastemakerX (https://techcrunch.com/2012/04/13/stock-market-for-music-hipsters-tastemakerx-hits-beta-in-time-for-coachella/) and Tradiio (https://tradiio.com/) — founded in 2012 and 2015, respectively — both implemented stock-market experiences around recorded music that lasted no more than a few years (TastemakerX was acquired (https://www.theguardian.com/technology/2014/jul/01/rdio-tastemakerx-app-streaming-music) by the now-defunct streaming service Rdio in 2014). TapTape, an equity-crowdfunding music platform that worked with a handful of artists like K Theory, shut down in 2016 (the company’s founder Christopher Nolte (https://www.linkedin.com/in/noltechristopher/) is now VP of partnerships at Tidal).
Even for the platforms that managed to survive, it’s an uphill battle to generate enough money to sustain themselves in the long term. Vezt, which raised much of its initial capital thanks to cryptocurrency (more on that later), held its first “Initial Song Offering” in November 2017, but didn’t make its first payouts to investors until Q1 2019. That’s a wait time of over 15 months — and total investor payouts in Q1 2019 amounted to just $6,000, according to a company blog post (https://medium.com/@vezt/vezt-2019-q1-in-review-3978c13684b7) . In my mind, that’s not nearly enough to keep a company afloat, let alone present a compelling proposition to a potential investor (unless, as previously discussed, their motivations are more emotional than financial).
There are three main reasons why I think these kinds of crowdsourced investment models are so difficult to pull off for music — many of which point to endemic inefficiencies in the industry at large:
** 1. For independent and emerging artists — the segment that needs this technology most — profits in recorded music are usually low and unpredictable.
It’s nothing new that predicting success remains a crapshoot in any cultural industry, including music. Major labels are now signing hundreds of acts a year (https://www.rollingstone.com/music/music-features/are-the-major-record-companies-signing-too-many-artists-847697/) , largely off of surface-level streaming and social-media metrics, in order to hedge their bets.
How do you mitigate that risk as a brand-new investment platform trying to support indie artists without a history — arguably among the riskiest assets on the planet? Because this market is so new, there’s no neat answer to that question. Platforms like Royalty Exchange that target high-net-worth investors have mostly avoided this concern by auctioning only proven back catalog (https://us20.campaign-archive.com/?u=3d1b6946215346237ceeb999b&id=8d882cf1e4) , and including in-depth financial disclosures and revenue histories with every listing on its site.
In contrast, Stampede Live’s campaign with Miller — while certainly successful so far from a fundraising perspective — offers a prime example of the tension between the life of an independent artist and the demands of running a sustainable investment platform. On one hand, Stampede claims to be choosing its first artist partners with the appropriate due diligence. “Part of our regulations is that all artists who set up campaigns are required to have a business plan with a clear path to profit,” says Ho. “Specifically with Marie’s offering, she has a strong team around her helping with management, distribution and accounting, and we thought $30,000 was the right amount to raise based on her previous streaming activity.”
Yet, the business plan (https://www.sec.gov/Archives/edgar/data/1782819/000178281919000001/document_c.pdf) that Miller submitted along with her campaign is somewhat vague, with no numbers or quantitative revenue predictions attached. Another SEC filing (https://www.sec.gov/Archives/edgar/data/1782819/000178281919000002/documentformc.pdf) reads that Miller’s company Little Dreams LLC, formed recently in June 2019, “has $0 cash in hand, averaged $0/month revenue, averaged $0/month in cost of goods sold, and averaged $0/month in operational expenses, for a $0/month in average burn rate.” The same statement claims that “our intent is to be profitable in 3 years from when the Album is released,” but does not provide any information about historical streaming performance to validate those predictions. In this situation, investors are practically forced to make their decision based on gut and emotion, because there is no data.
For Riteband, one of their most important value propositions may not be generating profits for investors, but rather helping artists figure out how much their catalog is even worth in the first place. This is a demand among the indie-artist community that many other companies have already built for — including Royalty Exchange’s Know Your Worth (https://www.royaltyexchange.com/instant-offers) feature and Songtrust’s estimation tool (https://www.songtrust.com/estimate-your-streaming-royalties) for publishing royalties.
“Music is such a valuable asset, so it should be the artist who profits the most from it,” Linda Portnoff, founder/CEO of Riteband and former CEO of Music Sweden (Musik Sverige (https://www.musiksverige.org/) ), tells me. “That’s not how it is today. Because of uneven power positions, artists often have to sell off their rights at a value that’s too low. If we invite everyone to have a say in the matter and create a marketplace where we can have a more objective and transparent sense of that value, an artist can take that information to a bank or publisher and argue more effectively for the value of their music.”
** 2. Payments for music royalties are still slow — and there’s nothing these newer platforms can do about it, for now.
As I mentioned earlier in this newsletter, one of the upsides of embracing crowdfunded investment in your work as an artist is the potential to get paid in a more frequent, more efficient and higher-margin manner, instead of having to wait months or years to start earning royalties through a label. Yet the equity-crowdfunding platforms that exist in music are actually far from making payments more efficient, because they’re forced to work within the confines of the complex rights ecosystem that already exists.
If you look at the spreadsheet I included above, it’s rare for investor payments on these platforms to occur more than twice a year. This is a problem endemic to the way royalty collection works in the music industry in general — which runs on several different types of accounting standards, leading to elongated and irregular payment cycles, particularly for the most bureaucratic labels and collecting societies. (This makes recent headlines declaring labels and distributors generate $1 million “every day (https://www.musicbusinessworldwide.com/tunecore-is-collecting-nearly-1m-a-day-for-its-independent-artists-who-just-earned-over-500m-within-a-year-and-a-half/) ” or “every hour (https://www.musicbusinessworldwide.com/the-major-labels-are-now-close-to-generating-1m-from-streaming-every-hour-but-global-growth-is-actually-slowing-down/) ” somewhat misleading.)
Moreover, at least to my knowledge, music distributors aren’t paying royalties directly to investors alongside artists under the existing models. Instead, the crowdfunding and investment platforms still need to use third-party escrow and banking services like North Capital (https://www.northcapital.com/escrow-services/) and Mangopay (https://www.mangopay.com/) to handle investor payments separately from distributors. For the artist, aside from the upfront cash they might get from investors purchasing shares, this just creates yet another intermediary in the already-fragmented world (https://www.theverge.com/2019/5/29/18531476/music-industry-song-royalties-metadata-credit-problems) of payments, metadata and rights.
Many entrepreneurs in music used to tout blockchain as a catch-all solution for transparent, real-time payments (and startups like Revelator (https://revelator.com/) and Paperchain (https://paperchain.io/) are still working on this), but the hype around the tech has largely died out. In fact, Vezt used to position itself explicitly as a blockchain startup — having launched an initial coin offering (ICO) with the token VZT to help fund the company — but now the word “blockchain” is nowhere to be found on its website, and VZT is currently trading (https://coinmarketcap.com/currencies/vezt/historical-data/?start=20130428&end=20181109&_ga=2.30536959.1919221351.1565206773-416974304.1565206773) at only 0.2% of its peak price. While the token capability is still there, investors can also simply integrate their existing PayPal or credit-card accounts to buy shares and receive royalty payments.
In the words of Rick Sanchez: “Don’t hate the player, hate the game, son. (https://www.youtube.com/watch?v=yDkiqbjtijk) ”
** 3. Most artists aren’t familiar with the concept of “investor relations.”
For any company that chooses to engage in equity crowdfunding, a key challenge is “forming relationships with potential investors,” as Chew co-founder Wil Benton told me (https://www.forbes.com/sites/cheriehu/2016/02/21/music-startups-launch-successful-equity-crowdfunding-campaigns/) in 2016. “We have really good relationships with our current angel investors — but those relationships took many months to build, as any good connections do.”
This challenge of maintaining relationships with a large number of micro-investors is exacerbated for musicians, in part given the relatively sporadic release schedule for recorded music; it might take months to put out a single or album versus, say, just a few weeks for a new feature in a mobile app.
“I don’t think we want to burden the artist with having to hire a ‘head of investor relations,’” says Portnoff. “[Platforms] can provide links to all the best reports and datasets about recording and publishing revenue, and how similar stocks have traded in the past. There’s also a regulatory demand for us to provide this market info, and private and institutional investors will most definitely seek that kind of info themselves as well.”
If fans comprise the majority of investors in a music crowdfunding campaign, however, “investor relations” would simply be a matter of updating fans with content the same way artists already do regularly on social media. Miller is releasing several singles throughout the fall (sometimes called a “waterfall” release strategy (https://www.billboard.com/articles/business/8257719/inside-the-chainsmokers-plan-rethink-album-cycle) ) leading up to the full album, and Ho tells me that Stampede will also be helping her film promotional videos to keep fans updated long after the campaign concludes. Current Stampede members can also get $10 worth of free investment credits (https://www.instagram.com/p/B0om2JYhGBQ/) by sharing screenshots of the current campaign page on their Instagram Stories.
“There’s definitely an active element, in that investors are strategic partners in helping to spread the news about an artist,” says Ho. “As we bring on more investors, we can also effectively help our artists achieve goals like getting onto larger Spotify playlists by incentivizing investors to do certain things.” (This will likely throw into question the very nature of what it means for fan engagement to be “organic” … that’s a whole other newsletter topic entirely.) No, equity crowdfunding won’t replace labels — but it can be a powerful stepping stone
Given all of these challenges, I think we are far from a time where crowdfunded investment will comprise a viable alternative to the incumbent artist-funding models that already exist — i.e. advances from record labels.
Labels still get a lot of justified flack for luring artists into unfavorable contracts, and self-run crowdfunding campaigns have the potential to give artists more ownership over the terms of their royalty splits. But the fact is that if you want to substantially increase the valuation of your copyrights, it arguably helps to have a shareholder with a combination of market control and domain-specific expertise. The biggest labels have both; everyday fans probably have neither.
Of course, fans can contribute value to the larger music ecosystem by playing an early A&R role — providing preliminary validation of emerging artists who could then funnel into larger, more formal deals with labels, publishers and distributors. But once campaigns exceed a certain dollar or investor amount (e.g. over a million dollars, or tens of thousands of investors), it could become a technical and logistical nightmare to manage through crowdfunding alone.
A powerful example of investment plus market expertise at a larger scale is the Hipgnosis Songs Fund (https://www.hipgnosissongs.com/) , which is listed on the London Stock Exchange and has already invested over £241 million acquiring nearly 6,000 songs from 22 songwriters (including, most recently, Benny Blanco (https://www.musicbusinessworldwide.com/benny-blanco-catalog-acquired-by-hipgnosis-songs-fund/) ). Founded by veteran artist-manager Merck Mercuriadis, Hipgnosis is an active asset manager in that the board regularly seeks new revenue opportunities, including high-profile placements in films and TV shows, instead of just letting the catalog sit and marinate idly. According to its latest annual report (https://static1.squarespace.com/static/5937f2f1bebafb1297678ff8/t/5d108b13a6630100018e7852/1561365275291/FINAL+Hipgnosis+Annual+Report+31.03.19.pdf) , the fund turned a net profit last year.
Equity crowdfunding is a compelling and innovative channel for fans to take part in the growth of their favorite artists; for artists to gain more clarity into the valuation of their past and future catalog; and for otherwise excluded investors to participate in the growth of a streaming economy that is still in its early stages. But for music projects that are much larger and more ambitious in terms of scale and resources, and require a lot more technical and creative heavy-lifting, it’s still business as usual. 🌊
Thanks to Yash Bagal (https://www.linkedin.com/in/yashbagal/) for providing research assistance on this piece! ✨ If you’d like to support even more thoughts and conversations on music and tech, I encourage you to become a paying member of the Water & Music ecosystem on Patreon (http://patreon.com/cheriehu?utm_campaign=Water%20%26%20Music&utm_medium=email&utm_source=Revue%20newsletter) . For as little as $1/month or as much as $40+/month, you can access a wide range of perks including: * A closed, members-only Discord server * Exclusive essays * Previews and bonus material for my freelance articles * Monthly video hangouts with me * Live meetups and events (forthcoming!!)
…and much more! Thanks so much for reading! ✨ My writing elsewhere
I wrote a wacky longform feature (https://www.npr.org/2019/07/26/745361267/hello-brave-new-world) for NPR’s excellent series (https://www.npr.org/2019/07/22/743973811/a-borrowed-world-streaming-as-the-new-reality) on the future of music streaming. I essentially got paid to exchange letters with my 2040 self in order to understand how the growing influence of biometrics and psychometrics will transform music consumption — for better and for worse. The outcome is a combination of speculative fiction and original reporting, drawing from academic research in “embodied music interaction (https://www.routledge.com/The-Routledge-Companion-to-Embodied-Music-Interaction-1st-Edition/Lesaffre-Maes-Leman/p/book/9781138657403) ” and digital therapeutics as well as real-time startup development of consumer offerings. * If you’re interested in seeing a full list of the active (and inactive) startups that inspired this piece, I listed them with some additional context on my Patreon page (https://www.patreon.com/posts/bonus-why-my-npr-28948287) .
I also wrote a shorter piece (https://www.cjr.org/special_report/classical-music-media-critics.php) for the Columbia Journalism Review’s new issue (https://www.cjr.org/critical-condition) on the future of arts and culture criticism — diving into the evolution of criticism in classical music, which is increasingly focusing on issues of diversity, politics and workplace culture instead of prioritizing only musicality and technique. I got to talk with the editors behind many classical-music magazines I’ve admired for a while, including NewMusicBox and VAN Magazine. What I’m listening to
Peggy Gou (https://www.youtube.com/watch?v=gLeb7L2x7Pk) , Park Hye Jin (https://www.youtube.com/watch?v=KJ8ysMzL2BE) , Yaeji (https://www.youtube.com/watch?v=_3T8KznhThQ) — give me alllll the K-house.
The YouTube channel COLORS has been publishing a vital series of performances by and interviews with Sudanese artists — including Gaidaa (https://www.youtube.com/watch?v=o_HLA6MY4JQ) , Flippter (https://www.youtube.com/watch?v=ZJ-Q3P21QNo) and Sammany (https://www.youtube.com/watch?v=2tbGVZ_BlUo) — to shed light on the ongoing political crisis in Sudan, and the role music can play in global humanitarian movements. Epilogue
Spotify began testing podcast playlists (https://www.theverge.com/2019/6/4/18651576/spotify-podcast-playlist-curated-recommendations-episode) in June 2019, and they finally started showing up in my mobile app this week. I’m personally not sold on the user experience yet, but it could potentially transform the way discovery and cross-promotion works in the podcast industry. I would love to hear your thoughts on the feature — simply reply to this email and it’ll go straight to me!
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