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Will Tech Startups Finally Make Record Labels Obsolete? Not So Fast

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Stop me if you’ve heard this one before: Record labels are irrelevant because they’ve been disrupted by a venture-funded technology start-up. The major labels exploit artists, who can now distribute their music directly to consumers online, plus get the data they need to make money playing concerts, selling merch or doing sponsorships. Sound familiar?

It’s an old joke -- on creators.

The latest telling involves UnitedMasters, a startup run by Steve Stoute, CEO of the marketing company Translation, and funded with $70 million by Google parent company Alphabet, venture capital firm Andreessen Horowitz and 21st Century Fox. UnitedMasters will distribute artists’ music online, apparently without requiring them to sign over copyright. It will use the data it gathers to better target consumers with ads, while artists can use it to better target fans with offers for tickets or t-shirts.

It’s a great story. An old business gets disrupted, a new company is built and artists grow more empowered. Andreessen Horowitz co-founder Ben Horowitz told the Journal that the idea came together at a “Google Camp” event in Italy. And why not? Google co-founder Larry Page “has a deep sensitivity for the artist,” as Stoute told TechCrunch. Artists worried about how little YouTube pays will be happy to hear this.

It’s hard to tell what, exactly, is new here. TuneCore handled online distribution for artists more than a decade ago, and Topspin Media began helping artists reach out to fans directly in 2008. As far as giving creators access to data, both Pandora and Spotify have been doing it since 2015. (The usefulness of the data varies; knowing you have fans in Boston, Chicago and San Francisco doesn’t make it that much easier to route a tour.) UnitedMasters didn’t respond to questions about how the company will operate and what would set it apart from similar ventures.

So far, startups haven’t really replaced record labels because none of them really do what labels do. Almost two decades ago, Napster said that it would replace labels by distributing music, but labels aren’t exactly in the distribution business -- truck drivers are. (No one gets invited to cool parties by disrupting long-haul trucking.) Several startups help artists market directly to fans, which is becoming an important part of the music business, but labels never really did that -- they’ve always sold music to retailers. From a business perspective, labels invest in artists -- which very few technology companies have shown any interest in doing. Because it’s a risky business.

And that’s what labels really do for artists -- they amortize risk. (They don’t talk about it in those terms because no one gets invited to cool parties by amortizing risk.) The odds of any particular act becoming successful are very low, but those that are can make an enormous amount of money. By signing to a label, artists get money and investment up front -- they sacrifice the possibility of profits for the certainty of getting an advance now. This isn’t for everyone, but it seems to have a great deal of value for some.

The reason recording contracts tend to favor labels is because the odds of any given project earning back its investment are fairly low. Venture capitalists ought to understand this, because their business works the same way -- which is why they offer entrepreneurs deals that favor them. Realistically, if your business is based on making enormous gains from one out of every 10 investments while the rest lose money, you have to structure deals that minimize risk on projects that don’t succeed and maximize gains on ones that do.

Everything else labels do can be replaced. It’s easier than ever to hire talented publicists or promotions or marketing executives -- partly because, over the past two decades, labels have laid off plenty of them. It’s much harder for artists to find a company willing to back them financially. (Many of the acts that now make so much money playing concerts began their live careers with tour support from their labels.) Banks aren’t exactly lining up to give small business loans to rock bands. UnitedMasters doesn’t appear to be in that business, anyway. Like other startups, it’s in the artist services business, which can be a great model, both for companies and creators. But usually -- and there are exceptions, but not many -- it takes at least some investment for artists to develop a career. That’s why TuneCore and Topspin, for all the good they did, didn’t break many important acts.

UnitedMasters, like other artist-services startups, represents another career development option to artists who don’t want a typical label deal. But Alphabet’s investment in the company suggests creators should look at the fine print.

A UnitedMasters blog post about the “music data chasm” makes the case that free streaming, which reaches many more consumers than paid services, can help artists by drawing in fans that they can monetize in other ways. Which, coincidentally or not, is exactly the point that Google has been making for years! There’s certainly some truth to this: Exposure helps artists sell concert tickets. But can’t most potential concertgoers afford a $10/month streaming subscription? And what’s wrong with making money on recorded music and tickets?

If UnitedMasters will determine the payouts its artists receive from streaming services, will it negotiate in their best interests or those of its investor Alphabet? Will Alphabet use YouTube to steer consumers to UnitedMasters artists -- and, if so, does that represent unfair competition? (Legally, probably not in the U.S.) For all its innovations, UnitedMasters isn’t likely change one of the biggest problems in the music business -- the fact that the best side of a deal to be on is still often both of them.