Labels are going to become more like VCs than they probably want to be

When you are in the midst of change it can be hard to actually see it. Right now, the music business is undergoing a consumption paradigm shift that is changing the culture and business of music. Streaming may be well established and maturing in many markets but the market impact will continue to accelerate as behaviours continue to evolve and bed in. Whether it is the rise of catalogue or the decline of megahits, everywhere you look, the music landscape is changing. So it is only natural that the role of record labels is going to change too. They have already of course, but shifts like label services deals and JVs are not the destination, instead they are preliminary steps on what is going to be a truly transformational journey for labels. 

Record labels often like to compare themselves to venture capital (VC), taking risks, investing in talent and sharing in the upside of success. While that comparison is flawed, its relevance is going to increase, but not in the way many labels will like. 

Firstly, where the comparison breaks down: VCs invest money early in a company’s life and then earn back if / when a company has a liquidity event (e.g., it sells, it IPOs, a new investor buys out earlier investors). But record labels invest and then take money immediately. As soon as the artist is generating royalties, the label is earning a return, it does not have to wait until some distant time in the future. What is more, even after the label no longer has an active relationship with the artist, it continues to earn. So a record label basically has a perpetual liquidity event. Which means its risk exposure is lower than a VC. Even if the artist flops, it will have recouped at least some of its outlay. VCs can be left with nothing if a start- up fails.

But where the label / VC analogy works best, is when looking at how the role of labels will evolve. VCs are typically earlier-stage investments so start-ups use VCs as launchpads for future success, a means to an end. Labels will likely have to start getting used to the same dynamic. Ever more artists are going their own way, launching their own apps, labels, using D2C sites. But the reason why record labels are around (despite artists being able to create their own virtual label from a vast choice of services – see chart) is that artists still need someone to build their audience (at least in most instances). The investment and A&R support help too, though those services can also be tapped into ad hoc from standalone companies.

This value chain dependency is what has helped labels to stay relevant despite dramatic industry shifts. But the next stage of this evolution will see a cohort of artists viewing labels as accelerators rather than long-term partners. They will use labels to establish their fan bases and then engage with them on their own terms, sometimes with labels, sometimes not. This is of course already beginning to happen, but it will become an established and increasingly standard career path.

Major labels like to think of themselves in the business of creating superstars. But as the very nature of what a superstar is dilutes, more artists will simply see labels as a launch pad. Start-up Platoon positioned itself as an artist accelerator and was bought by Apple. In many respects it was ahead of its time, pioneering a model that labels will increasingly find themselves filling, even if it is not their preferred role. 

Labels as artist accelerators

The repercussions will be massive. Labels, especially majors, will often over invest early to establish an artist. The business model depends on recouping the investment on future earnings. But with ever more artists looking to retain their rights, the labels only have a finite window in which they can monetise those rights, unless they negotiate term extensions. What this means is that labels are becoming a utility for many artists, a stepping stone while their brands are built for them. Like it or loathe it, savvy, empowered artists will increasingly see labels as the launchpad for future independence, and in this respect, labels are becoming more like VCs than ever.

As disruptive as this paradigm shift will be, record labels will find a way to adapt, just as they have to streaming, TikTok, label services, distribution etc. The difference here though is that this may represent a complete recalibration of the role that record labels play in the music industry value chain. This will mean a riskier, more limited role for labels, which in turn will make them more like VCs than they may be comfortable with. Turns out that modelling yourself on VCs can be a risky business in itself.

Why Kanye West is the modern-day Prince

Not ‘prince’ in the Machiavellian sense of the term – though there is an argument for that too – but as in the artist formerly known as. Back in 1992, Prince fought his label Warner Bros to get ownership of his rights and more creative control, struggling to get out of a deal he signed when he was 19 and had since decided was unfair and overly restrictive. He famously started appearing with the word ‘slave’ on his face. The bitter conflict resulted in Prince changing his name to ‘symbol’ and self-releasing via an artist subscription service long before subscriptions were even a thing. He then came back to a label deal on his own terms, later returning to Warner Bros and winning ownership of his masters, and finally signed with Tidal (read this for a succinct history of Prince’s label deals).

Now we have Kanye posting pages of his UMG deal on Twitter and saying it represents slavery. Why, nearly 30 years later, is history repeating itself?

Many artists start naïve and become educated 

Many artist careers follow a similar path: 

  1. Sign a deal as a young, commercially naïve artist 
  2. Become successful
  3. Learn how the business works
  4. Realise that the deal you signed was heavily stacked in favour of the label

In recent years, this path has started to change, with most artists initially spending a few years as independent artists, learning how the business works, before getting a deal. When that deal comes, more of them go into it with eyes (relatively) wide open and negotiate terms that are more equitable for them. Companies like Cooking Vinyl, BMG and Kobalt’s AWAL helped change the market dynamic, pushing a new paradigm in artist deals and, in turn, driving the wider industry in the same direction. Label services, distribution deals and joint ownership deals are now commonplace even among major record labels.

A two-tier system

This dynamic has created a two-tier system. Many of the new generation of younger artists who own their masters have favourable royalty splits and high degrees of creative control. The older, established artists – including many of today’s superstars – are meanwhile still locked into the old way of doing things. These artists are starting to question why, as the artists with most sway, they seem to have less negotiating power than smaller, newer artists, and they don’t like it. Enter stage left, Kanye.

The reasons why artists did, and still do, sign traditional deals are simple: 

  1. They are often what is first offered to them by many labels
  2. They reduce the artist’s exposure to risk by putting more of the risk on the label
  3. They give them the best chance of getting the full marketing heft of the label to make them into superstars
  4. They get a big advance

Kanye signed the deal he signed

Kanye’s Twitter posts indicate that he was given millions of dollars in advance payments. Now, however, with his ‘nemesis’ Taylor Swift enjoying the benefits of a new(ish) deal that gives her ownership of her rights, Kanye wants the same treatment. (Kanye’s advisor couldn’t avoid having a little dig suggesting that Kanye’s masters are worth more than Swifts’). I am not a music lawyer so I am not going to get into the details of whether Kanye’s deal is fair or legally watertight, but it is nonetheless the deal that he signed. And it was long after Prince’s campaign to get ownership of his masters. Kanye, knowingly or otherwise, signed the deal that he signed despite other deal types being available. It is a deal that may now look outmoded and out of pace with today’s marketplace, but he remains tied to its terms – for now at least.

From indentured labour to agency-client

Kanye and Prince’s use of the word ‘slavery’ is emotive and has extra connotations for black artists – and there is some logic to the argument. In a worst-case scenario, traditional label deals can resemble indentured labour, with the artist permanently in debt to the label, having no ownership of their work and unable to take their labour elsewhere. Modern day label deals are able to reframe the relationship to one of an agency-client model.

When Prince took on the music industry, he was a lone voice trying to bring a new way of doing things (though others such as the Beatles had previously fought the battle for their masters too). Prince’s actions helped pave the foundation for today’s better-balanced music business, and many superstars have taken advantage of his pioneering efforts, with Rihanna and Jay-Z just a couple of those that now own their masters. Nor is this the first time Kanye has been angling for ownership of his masters.

So, to answer the opening question, why is history repeating itself? Simply put, many young artists new to the profession will take the big cheque and the promise of being made into a superstar over getting a better deal. Many of the newer generation of music companies will note that it is no longer a binary choice if an artist signs a deal with them; nevertheless, the case of Kanye West shows us that for many artists it still is. 

What has changed is that a new artist today has more opportunity to educate and empower themselves – to get a deal that will enable them to build an equitable, sustainable career. For that, they owe a debt of gratitude to Prince.

Welcome to the Age of the Artist

As it enters the third decade of the millennium, the recorded music business is in rude health. Revenues are about to enter the second half of a decade of annual growth, streaming is booming and investment is pouring in. Simultaneously, the fundamentals of the business are changing – from artist and songwriter careers, through music company business models to audience behaviour. The coming decade will underpin a story of old versus new, of insurgents and incumbents. There will be winners and losers on both sides. We are entering the music business’ next era, one that will be defined by factors such as artist empowerment, fandom, global culture, independence, amplification, creation, fragmentation and agility. One of the driving forces in this period will be the continued rise of the independent artist. In fact, we expect the role of the artist to be so impactful that we are calling this next era The Age of the Artist. age of the artistEach of the previous music business eras have been defined by and named after the dominant formats of the time. Industry business models were transformed by these technology shifts and the resulting changes in consumer behaviour. Nevertheless, the underlying relationship between artists and labels remained relatively unchanged, with the label very clearly the senior partner. Now that is beginning to shift. Artists are more empowered and informed than ever because of:
  • Access to audiences: The combination of streaming, social media and artist distributors mean that artists can find global audiences without the need for a label. Of course, a label, or some other entity providing label-like services such as a distributor, can usually amplify this many times over – but artists can now either make a start for themselves or even never rely on a label’s marketing muscle at all.
  • Alternative models: Signing rights away in perpetuity with a traditional record label deal is no longer the only option on the table. In fact, just 8% of independent artists interviewed by MIDiA said that they want to sign a traditional label deal, with more than half wanting to sign a label services deal instead. Of course, many artists might change their minds when a nice fat advance is waved under their noses – but the intent is there. This new generation of artists have a strong sense of independence and they and their managers are helping forge a reshaped industry built upon new, more-equitably balanced contracts and deal structures.
  • Labels as a service: Because streaming is essentially the only consumer music proposition in town, early stage investors have to put their money in B2B services if they want a part of the music business action. As a consequence, we now have a vibrant marketplace of artist tools and services. So much so that an artist could build their own virtual label if they wanted to. Of course, these tools can lack the personal touch of a label, but the potential is there nonetheless.
Creator tools – the new top of funnel It is the tools covered in that last bullet that look set to drive the music industry’s next growth curve. Artist tools – encapsulating everything from collaboration, through production to marketing, are growing fast and will grow even faster still. For a number of years now, larger record labels have been actively building their artist and label distribution capabilities. This ‘top of funnel’ strategy is well established, and enables them to fish upstream for talent early on as it appears. However, the real top of the funnel is one step earlier: the creation of music itself. The companies that establish relationships with artists and songwriters as they are creating music have the first connection, a platform for bigger, longer-term relationships. In fact, this may be the starting point for the label of the future. It might sound crazy, but so did the concept of major record labels distributing unsigned artists. And Spotify doesn’t think it sounds crazy – the likes of SoundBetter and Soundtrap in its two-sided marketplace look like bets on the future of artists and whatever labels look like five years from now. But it doesn’t matter who ‘wins’ on the supply side (not that there will be any clear winner). The more entities competing for artists’ business, the more choices artists have. Welcome to the Age of the Artist. The concepts in this blog are just a few of those explored in much more depth in the MIDiA report: Insurgents and Incumbents | How the 2020s Will Remake the Music Business. If you are not yet a client and would like to learn more about how to access MIDiA’s insight platform then please email [email protected]