Citi's Music Industry Report, Dissected: What the Financial Giant Gets Right and (Very) Wrong
For the last two decades, technology executives and investors have predicted the demise of the record label with a consistency that borders on the cliché. Once music is consumed digitally, the thinking goes, who needs the manufacturing and distribution that labels always provided – especially when it comes with contractual terms that always seem to favor them? Since artists make so much more from concerts anyway, can’t they just release music on platforms like TuneCore, do marketing and promotion independently, and keep all of the money they make? Some have – think Prince, Radiohead and Chance the Rapper, not to mention thousands of smaller artists. But 20 years after Napster, going it alone remains the exception among artists who aspire to be major stars.
Citi is still waiting for the revolution, to judge by a report the bank released last week, "Putting the Band Back Together: Remastering the World of Music." Since artists only get 12 percent of music business revenue, it says, most of it from concerts, the industry is ripe for disruption. Concert promoters could merge with online platforms! Those platforms could act as labels -- which some are already starting to do! (Left implied: Citi is available to consult on such deals.) Not only would this disruption and merger activity make financial sense, it could “allow artists to capture more of music’s value.” Corporate consolidation rocks!
Maybe. But Citi’s 88-page report, which explains how money flows through the various parts of the music industry, isn’t very convincing. The bank arrives at its 12 percent number by counting revenue from radio ads as part of the music business, which is unusual. (Oddly, it doesn’t seem to count revenue from merchandise sales.) Some of its other assumptions are questionable: The number for YouTube revenue looks high, the royalty rate looks low, and the fact that one of the charts shows managers earning about three times as much as artists from some revenue streams doesn’t inspire confidence in the bank's methodology. Nor do misstatements like "most publishers are owned by record labels" -- or the report's reliance on "expert views" from a Citi colleague and the co-founder of Choon. (Citi asks the latter to "talk about how Choon potentially disrupts the landscape artists," which sounds like either the company plans to disrupt the gardening sector or Citi needs to hire a copy editor.)
The report also relies on vastly oversimplified generalizations and aggregate statistics -- by necessity, I suppose -- which tend to obscure the way deals actually work for individual artists. Some popular artists have joint ventures with labels, while some lesser known acts make more from an advance than the label itself makes on their album. Saying artists make 12 percent of industry revenue is like saying a bar that Jeff Bezos walks into is full of people with an average net worth of more than a billion dollars -- it’s completely beside the point.
The fact that some artists do make more than their labels, though, is exactly why they sign such deals in the first place – which Citi doesn’t seem to understand. Most of the technology companies that say they’re replacing labels only ever even aspire to replace music distribution. (No one in Silicon Valley ever says they intend to replace the warehousing and trucking business, presumably because it’s not exactly known for cool parties.) Labels also provide marketing and promotion services, which, as the Citi report accurately points out, artists can pay for easily enough, if they have the money to do so. But the real value labels provide is aggregating risk. Weirdly, the part of the music business that’s most like finance is the one that Citi seems completely unable to understand.
At least in the early stages of their careers, individual artists face long odds that they’ll ever make any money at all – as well as a small but distinct chance that they’ll make millions. These odds make it hard for individual acts to borrow money the way other small businesses might. But labels spread out their bets among many artists. Most, unfortunately, don’t go anywhere. But the ones who do make back all of that investment, plus more besides. I’m not writing to defend labels -- many have acted badly in the past, some still do, and the bets they make always favor the house. Some artists do better on their own, and more power to them -- I’m trying to explain how these deals work, not recommend them. But the fact that so many artists still take label deals says something about their value. Plenty of companies now provide distribution -- but few are willing to actually offer artists an investment.
In many cases, that investment fuels an artist’s entire career. Even acts that get dropped by labels reap the benefit of the marketing and promotion they received. (Radiohead likes to insult major labels, which is fair enough, but Capitol Records sent out hundreds of copies of OK Computer on cassettes glued into a Sony Walkman – no small expense in 1997.) Sure, artists make a higher percentage of revenue from performing live. But in many cases a substantial amount of the marketing that helps them draw an audience was done by a label – or, at least, with money it provided. It’s hard for concert promoters to invest as much money in career development as labels do, at least partly because the share of revenue they offer artists doesn’t allow it.
Perhaps most damningly of all, the Citi report doesn’t acknowledge that all revenue isn’t created equal. In most cases, income from royalties is pure profit for artists. That’s not the case with their percentage of ticket grosses, though. As on the label side, every deal is different, but in most cases the money promoters pay acts has to cover costs associated with touring -- whether that’s a small army of backup dancers or just gas for Mike Watt’s Econoline. At best, this revenue isn’t as profitable for individual artists. At worst, it comes with some risk that a tour won’t earn back its expenses. Maybe Citi just assumes every business can count on the government for help?
Citi is definitely right about one thing: The music business is changing, and labels of all sizes will have to compete harder to offer artists the kinds of deals they want. That’s a good thing. I have a much harder time believing that the kind of vertical integration this report predicts would help the music business as a whole – let alone artists. Sure, the prospect of mergers sounds exciting -- especially for bankers. But it also raises difficult questions. As subscription streaming services begin offering label-like deals, will they tilt their playlists to recommend the artists they work with? Would a streaming or satellite service that bought a concert promoter use its leverage to drive down the royalties it pays acts, or even songwriters? Would any of these presumably disruptive companies actually invest in artists? The Citi report says nothing about this -- which makes you wonder if the executives that put it together understand the music business nearly as well as they think.