What "Record Deal Simulator" is really telling us
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View this email in your browser (|ARCHIVE|) http://hotpodnews.com/presents.... The fine print of innovation in the music business. It’s Thursday, October 1, 2020. Editor’s note: How is it October already??
It’s been eye-opening for me to follow all the shifts in the music media landscape over the past few weeks, particularly the consolidation (https://www.rollingstone.com/culture/culture-news/pmc-pmrc-hollywood-reporter-variety-billboard-vibe-and-music-business-worldwide-1065234/) of all the major trade publications under the same company (which, to no one’s surprise, has already led to layoffs (https://deadline.com/2020/10/pmrc-layoffs-50-after-join-venture-pmc-mrc-billboard-the-hollywood-reporter-vibe-1234589350/) ). The public reaction has been a combination of fear about the resulting homogenization of trade reporting, and excitement about the opportunity to build a new kind of trade-leaning editorial brand for the next generation of industry professionals.
This leads me to a major Water & Music update for this week: I’m looking to hire two weekly columnists to join Water & Music, each of whom will own coverage of a specific aspect of how music, business and technology intersect. I’m biased, but if you are a voracious consumer of music-tech news, have a unique perspective on the industry and are eager to help steer the weekly conversation around its future, then I think this would be the perfect opportunity for you.
These are both part-time, remote-friendly roles that pay $500 per week. You can read more details about the role, including full application instructions, by clicking here (https://docs.google.com/document/d/1y1GJ92-cs4fqTARsf7F9f5WuX0350ubj-vuYhCPSrJI/edit?usp=sharing) . I’ll keep applications open until October 15.
Without further ado, let’s move on to today’s essay, which is about the widely-shared Record Deal Simulator tool from CreateSafe and its long-term implications for artists and labels. Hope you enjoy!
- Cherie WHAT “RECORD DEAL SIMULATOR” IS REALLY TELLING US
Story by Cherie Hu 27 years ago, in his classic essay “The Problem with Music (https://thebaffler.com/salvos/the-problem-with-music) ,” Steve Albini compared the experience of trying to get a major-label recording contract to fighting blind in trench warfare:
Whenever I talk to a band who are about to sign with a major label, I always end up thinking of them in a particular context. I imagine a trench, about four feet wide and five feet deep, maybe sixty yards long, filled with runny, decaying shit. I imagine these people, some of them good friends, some of them barely acquaintances, at one end of this trench. I also imagine a faceless industry lackey at the other end, holding a fountain pen and a contract waiting to be signed. Nobody can see what’s printed on the contract. It’s too far away, and besides, the shit stench is making everybody’s eyes water. The lackey shouts to everybody that the first one to swim the trench gets to sign the contract. Everybody dives in the trench and they struggle furiously to get to the other end. Two people arrive simultaneously and begin wrestling furiously, clawing each other and dunking each other under the shit. Eventually, one of them capitulates, and there’s only one contestant left. He reaches for the pen, but the Lackey says, “Actually, I think you need a little more development. Swim it again, please. Backstroke.” And he does, of course.
Fast-forward to today, and the situation is much better — or is it? New lawsuits and complaints around unpaid royalties and unfair recording deals pop up every year, involving Taylor Swift, Kanye West, Megan Thee Stallion (https://www.billboard.com/articles/business/legal-and-management/9326974/megan-thee-stallion-record-label-deal) , JoJo (https://www.buzzfeed.com/azafar/jojo-free-blackground-records-atlantic-records) , Migos (https://www.hollywoodreporter.com/thr-esq/migos-sues-talent-lawyer-excessive-fees-conflicts-interest-1303280) , Gerardo Ortiz (https://www.billboard.com/articles/business/legal-and-management/8506989/gerardo-ortiz-del-records-lawsuit-fraud-breach-contract) , Tiny Engines (https://www.billboard.com/articles/business/record-labels/8549643/tiny-engines-adult-mom-interview-indie-labels) , Ruff Ryders (https://djbooth.net/features/2019-07-25-ruff-ryders-lawsuit-ultimate-lesson-for-producers) and countless other artists and labels that don’t make it to the press. The disruptive impacts of the COVID-19 pandemic have shed an even brighter spotlight on the challenges of building a sustainable and equitable career — of merely surviving — as an artist today, especially in a 100% digital world.
A crucial step on the path to financial sustainability is financial literacy, and a crucial step on the path to financial literacy is financial modeling (https://www.ey.com/en_nl/finance-navigator/the-ultimate-guide-to-financial-modeling-for-startups) . Chasing the concept of “sustainability” and “freedom” doesn’t get you far without having concrete targets for your revenue, costs and profitability, to understand the kind of growth you need to achieve to be able to support the work you want to make.
Financial modeling is also at the heart of the information asymmetry that so many people complain about in the music business; as Albini suggested with his trench analogy, this discrepancy is no clearer than in record deal negotiations. Especially at the corporate level, labels have entire teams of accountants, attorneys and financial analysts at their disposal to help project their business performance and shape their artist contracts, which can easily be dozens of pages long. For the most part, artists don’t have those same kinds of resources and know-how, and therefore come to the negotiating table with a lot less leverage.
This is what makes a tool like Record Deal Simulator (https://dealsim.createos.app/) so potentially game-changing. Called “Deal Sim” for short, the tool launched on September 24 after over four months in the making, and allows you to model how many streams an artist would need to generate to recoup on costs in various kinds of record deals, including royalty deals, distribution deals and net profit splits, with advances, budgets and revenue splits you can customize yourself.
The company behind the tool is CreateSafe (https://createsafe.io/) , a tech startup dedicated to building what CEO and veteran artist manager Daouda Leonard recently called (https://thehustle.co/daouda-leonard-q-and-a-trung-phan-the-hustle) “an operating system for the music industry” that “combines Asana, Slack, Excel, Tableau, Copper and Upwork — but specifically tailored to music managers and artists.” I first learned about Deal Sim through Applied Science (https://appliedscience.substack.com/) , a newsletter run by artist manager, label exec and CreateSafe team member Jon Tanners. Especially against the backdrop of Kanye West’s 100+ pages of contract leaks, Deal Sim couldn’t have launched at a better time, in terms of helping to visualize and clarify what exactly is at stake in these kinds of deals. For instance, the contract for West’s sixth album with Island Def Jam was a 50/50 net profit split deal that involved an $8 million advance, a $4 million “recording fund” and a 25% “distribution fee” that the label took off the top. Plugging those numbers directly into Deal Sim, we see that if we assume the deal was streaming-only, West would have to generate 3.2 billion streams on the album to recoup his costs and start earning royalties on the backend. I shared Deal Sim on Twitter (https://twitter.com/cheriehu42/status/1309232931974643713) , including this breakdown of West’s contracts alongside a few other hypothetical examples. The tweets not only went viral, but also sparked a polarized debate that, to me, is the real crux of the story as much as the tool itself, and involved something that happens all the time in the music business: People projecting their own opinions onto the supposedly objective playing field of data.
On the one hand, many people expressed their dismay at the inequity in traditional royalty deals (Questlove declared (https://twitter.com/questlove/status/1309248923500978178) that “everything needs to be rebuilt from scratch”), feeling even more convinced that an independent path is the way to go for today’s up-and-coming artists. Deal Sim’s visualizations make clear as day, for instance, the oft-overlooked fact that artists must recoup costs from their own royalty share alone (https://twitter.com/cheriehu42/status/1275963797778423810) in royalty deals — which means that with a successful record, a major label can end up making as much as 3x to 5x the sum of an artist’s advance and recording/marketing costs back in profit before the artist even starts seeing a dollar in royalties. (In the example pictured at the top of this newsletter, the label has already profited by $1.6 million by the time the artist recoups costs.) If you’re deep in the industry weeds, this simple math may already be obvious to you, but the nature of deal negotiations makes this power dynamic opaque to most artists.
On the other hand, a smaller but still substantial group of people defended labels. In short, they argued that labels take on a lot of upfront risk in giving advances to artists and investing in as-yet unreleased music, and because the vast majority of records they sign flop, they rely on outsize profits from a select few hits to make ends meet (similar to venture-capital firms). These people also rightfully pointed out that Deal Sim is missing a lot of key elements of recording contracts like deal lengths, delivery and release commitments, non-recoupable budgets and other overhead costs that may change the calculus around the perceived value of a given deal.
In any case, I think the real takeaway isn’t just the tool itself, nor the extent of its [in]accuracy. It’s the fact that so many people with years of experience creating or marketing music are seeing even the most simple financial modeling tools around recording deals for the first time — which goes to show the long road we still have ahead of us in the industry-wide quest for “transparency.”
** The main critiques
The public critique that I’ve seen around Deal Sim so far can be broken down into the following three buckets, which are good to keep in mind as you play around with the tool. Many of these critiques were informative for me in terms of unveiling more nuanced mechanics of recording contracts that I didn’t know about previously; again, these kinds of conversations would likely not have happened at this level of depth if Deal Sim did not exist.
- Specific deal points. Deal Sim only takes streaming income into account, when in reality many deals incorporate physical sales (i.e. vinyls, CDs, cassettes), sync deals, touring participation, brand partnerships and other kinds of revenue streams. As the artist and writer Damon Krukowski argued (https://twitter.com/dada_drummer/status/1309467291717980163) , to keep Deal Sim limited to streaming-only analysis may end up making a statement that’s less about whether label deals are valuable, and more about whether streaming alone is enough to sustain an artist’s career. The same deals reworked with physical-only sales require several orders of magnitude fewer “units” to be sold to recoup costs.
Speaking of which, Deal Sim also assumes that 100% of all recording and marketing costs in a given deal are recoupable. While this is usually true for net profit deals, some royalty deals do not require artists to recoup their marketing budgets.
The CreateSafe team is well aware of these gaps, and tells me in a statement that “all of this feedback is going to inform future product updates, so we are hoping that people keep using it as well and sending us their questions, comments, concerns and ideas on how to improve it.” Future versions of the tool will also “give greater detail to the kinds of spends that fall under marketing and recording so that artists can tailor deals to the nature of their specific needs.”
- Advances and artist “profit.” To critics, one of Deal Sim’s most controversial design choices is the decision not to recognize an artist’s advance as revenue or profit. Instead, it’s relegated to the left sidebar with recording and marketing costs; the artist’s displayed profit remains at zero until only after the advance and costs are recouped.
This framing makes sense if you view a recording advance as a loan with unusually high interest, or as compensation for buying out a majority share in an artist’s given IP. But many people think the advance should be recognized as revenue upfront — especially because the artist gets to keep that money even if the record flops, which they can then invest into other aspects of their business such as touring, merchandise and other creative projects.
Further complicating this picture is that some deals divide up advances into multiple parts (e.g. the artist gets one advance upfront upon signing the deal, and another upon delivering a commercially satisfactory record to the label), which may be helpful to map out on a timeline in the context of artists’ long-term financial planning.
- Label expenses and the portfolio strategy. Because Deal Sim is just a simple financial model for now, the way it calculates a label’s profit assumes that the label has no other costs aside from funding the creation and marketing of a given project. In reality, labels end up incurring many other kinds of expenses, including staff overhead, in order to ensure the project’s success.
Moreover, this more siloed approach of looking at the performance of just one album deal does not take into account that, by the latest estimates, major labels are signing around 700 hundred artists every year (https://www.rollingstone.com/pro/features/are-the-major-record-companies-signing-too-many-artists-847697/) . In pursuit of the most market share, these labels sign several acts with the assumption that most of them will flop, with a small percentage of acts delivering outsized returns that cover the losses for the rest of their roster.
To some people, this portfolio approach, and the inherent risk that labels take on as a result, justify the skewed profits labels keep for themselves in the event a record is successful. But just because this is standard practice for a label doesn’t mean it’s fair to the artist. Most artists aren’t able to hedge their bets across multiple signings in this way — they have literally only their own career to support themselves — and are often unaware of the implications of the financial incentives of the other party going in.
** The bigger picture
So, what is Deal Sim, and its subsequent virality, really trying to tell us?
I don’t think CreateSafe’s ultimate goal is to automate away an artist’s legal advisor, auditor or business manager. And if that is their goal, they will likely fail: Recent attempts to reduce complicated legal services and hundreds of pages of contracts into a single piece of software have died out (https://techcrunch.com/2020/03/03/atrium-shuts-down/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAD_qDfzVYgR6XCn5LeP-XCF0YHt1O3XCW5oDr-tGdP49WNke7zhsfBuCgyE8gttJMbQywS2SBMiJ5d9o0FXZ9PErjGxFLrDCVGwj4s-QVw0XXTFlA-rqTf33TBZx0CVaHXNL6P9NwPTS-7UfVekpJGUPO7CBYXjkeq7n9szDYyDS) after just a few years. And while there’s been ample discussion in the past years about the potential of A.I. to automate lawyers out of their jobs, it hasn’t even come close to happening yet; by some measures (https://www.nytimes.com/2017/03/19/technology/lawyers-artificial-intelligence.html) , automation will only reduce lawyers’ working hours by around 2.5% annually over the next five years.
Instead, I think there are two other main points. One, we really can’t expect artists to act like entrepreneurs if they don’t have access to the data and tools that enable them to run their careers like proper small (or large) businesses.
This gap in information takes many forms — for instance, the fact that there’s anywhere from a two- to 15-month delay in royalty payouts and reporting (https://www.patreon.com/posts/42108049) from some streaming services and distributors, and in this case the fact that most artists aren’t able to quantify the scale of the tradeoffs they’re making with standard label and publishing deals. In contrast, as Stem CEO Milana Lewis pointed out (https://www.rollingstone.com/pro/features/kanye-west-record-deal-music-industry-1061774/) to Rolling Stone, tech startup founders seldom walk into investor meetings without being “armed with a pro-forma (https://www.investopedia.com/terms/p/proforma.asp) [document] that lets us understand how much we’re taking on and see exactly how the numbers work out.” Because it’s missing so many kinds of deal terms, Deal Sim isn’t even close to a functioning pro forma for artists — yet the vast level of information asymmetry in the industry means that the tool’s ea se of use still feels new and refreshing to most people.
“Deal Sim is a step towards evening that playing field by equipping artists with a means to actually understand the math being presented to them,” the CreateSafe team tells me in a statement. “[It] could help lead to more informed negotiations, where artists and their teams negotiate smart deals that don’t leave them saddled with unnecessary debt or pushed into taking lower royalty rates because they wanted more upfront cash.” To be sure, this scrutiny should not just be limited to label deals; it should also be applied to independent distributors, especially as more of them start to offer a wider suite of financial and lending services (https://www.patreon.com/posts/35258514) .
The second point involves having a more quantifiable understanding of what a label is “worth” — not just in terms of revenue, but also in terms of the marketing and promotional services the label provides.
In his newsletter announcing the tool, Tanners outlined three main pillars that artists and their teams should be looking out for in modern recording contracts: * Control (“the ability to determine what you want to do with your art and how you want to do it”) * Support (“the services, budgets, and team members to execute an artist’s vision”) * Profit (“the ability to make money off of your art (or, at very least, to clearly understand the road to profitability) and levers for constant, efficient reinvestment”)
While Tanners says Deal Sim was designed primarily to address the issues of control and profit, I think it can also change the conversation around support. For instance, with the screenshot pictured at the top of this article, an artist can now ask themselves: “Is a major label’s services really worth the $1.5 million that they make in profit before I see anything on the backend, even with the advance?” I predict that labels will need to make much clearer and more convincing arguments for the kind of value and “artist services” they provide once artists can paint a clearer picture of the financial tradeoffs they’re making in the process, even in this relatively simplistic way.
Ultimately, the value of a label deal comes down to an artist’s individual goals and preferences, without which there’s no clear idea of what success and sustainability mean. This is why Deal Sim is both necessary and, for now, insufficient: It’s so important in the planning and negotiation process to have access to more customizable financial modeling resources like this, and at the same time Deal Sim is just only one piece of the wider conversation around whether an artist should sign a given contract.
After all, a crucial element that software will never replace is the people who will be offering the aforementioned support to the artist. As the CreateSafe team puts it to me: “What can’t ever be modeled with a tool is a team’s understanding of a creative or promotional vision. If you don’t have champions at a label who understand your plan and can help execute it, even the best deal on paper is irrelevant.” ✯ MORE DEEP-DIVES The problem with play-count purgatory (https://www.patreon.com/posts/42108049) Last month, the artist Lyrah found a major oddity in her distributor reports: Tidal was taking 14 to 15 months to report play counts and pay royalties for her music. Through the lens of Lyrah’s predicament, Tyler Hayes investigates the major discrepancies in payout times across streaming services and distributors (especially Tidal), and the lack of clear information on how you can inquire about lost or missing plays as an independent artist.
ICYMI: Meet the architects of music’s new avatar economy (https://www.patreon.com/posts/37033275) The concept of artist avatars has been getting a lot more coverage recently, with a feature in The Ringer (https://www.theringer.com/2020/9/15/21433159/digital-avatars-celebrities-the-weekend-tiktok) and a podcast from the New York Times (https://podcasts.apple.com/gb/podcast/will-pop-music-future-rely-on-actual-musicians-or-avatars/id120315823?i=1000492832117) . Read Cherie’s early analysis on the topic from five months ago about the key players in the new music avatar economy (including Strangeloop, Jadu, Genies and Wave), and the cultural and financial incentives driving its growth.
Upcoming for members (https://patreon.com/waterandmusic) : An exclusive, two-part report exploring the various forms of music media consolidation taking place in 2020. GOOD FINDS FROM THE WEB
On artists, labels and scenes: * The Tale of Cactus Jack (https://2pml.com/2020/09/18/cactus-jack/) (Web Smith, 2PM) * 19 things I’d tell people contemplating starting a record label (after running one for 19 years) (https://thecreativeindependent.com/people/things-id-tell-people-contemplating-starting-a-record-label/) (Alec Hanley Bemis, The Creative Independent) * What It’s Like to Be Black in Indie Music (https://pitchfork.com/features/article/what-its-like-to-be-black-in-indie-music/) (Matthew James-Wilson, Pitchfork) * How we used data to design modern record certification plaques (https://medium.com/sony-music-data-insights/how-we-used-data-to-design-modern-record-certification-plaques-bc2c575a9fa3) (Bo Plantinga, Sony Music Data and Insights | Benelux) * [podcast] The Music Modernization Act and the Powers That Be (https://podcasts.apple.com/us/podcast/the-music-modernization-act-and-the-powers-that-be/id1514180523?i=1000492549972) (Sam Backer and Saxon Baird, Money 4 Nothing) * Building an interdependent music scene: A list of resources by Mat Dryhurst (https://crackmagazine.net/article/lists/mat-dryhurst-interdependent-music/) (Crack Magazine)
On the big tech and media picture: * SignalFire’s Creator Economy Market Map (https://www.signalfire.com/blog/creator-economy/) (Yuanling Yuan, SignalFire) * [webcomic] The Psychology Behind TikTok’s Addictive Feed (https://growth.design/case-studies/tiktok-feed-psychology/) (Growth.Design) * Don’t Blame Spotify. Blame the Internet. (https://medium.com/@justinwdemarco/part-1-dont-blame-spotify-blame-the-internet-6cb8ff007d0a) (Justin De Marco) * Algorithms Can’t Automate Beauty (https://www.artnews.com/art-in-america/aia-reviews/trevor-paglen-bloom-algorithms-beauty-1234571299/) (Kyle Chayka, ARTnews) * Substack Rhymes With Medium (https://napkinmath.substack.com/p/substack-rhymes-with-medium) (Adam Keesling, Napkin Math) * Virtual Audiences Ranked By The Dystopian Energy They Emit (https://influence.co/nofilter/tv-virtual-audience-kelly-clarkson-ranked) (Kate Lindsay, nofilter) * Changing Tides: The Evolution of Women Musicians in Mainstream Coverage (https://sheshreds.com/changing-tides-the-evolution-of-women-musicians-in-mainstream-coverage/) (Natalie Baker, She Shreds)
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