Why Sharing Equity Is A Big Deal

The announcement last week that Warner Music will share the proceeds of its equity stakes in digital music services with its artists, quickly followed by a similar announcement from Sony Music is hugely significant. The artist community has been in the dark about these equity positions for years and it has taken a great deal of persistence to reach this point. Universal Music is the only major not to formally state its position on equity but one would hope it is only a matter of time before it does so.

A number of commentators most notably Mark Mulligan and Tim Ingham have made the point that the net value of these equity stakes to the artist may not be that significant and that the real battle lies elsewhere. Mark suggests that streaming is not a license or a sale and that the correct remuneration for artists’ lies somewhere between the 50% rate for a license and the (roughly) 15% an artist might receive for a sale. The midway point between those two figures is roughly double what most artists currently get paid on streaming income. His point is this argument is worth more than the fight over equity.

 

EQUITY – THE BACKSTORY

Coming back to equity, it is worth remembering the reason major labels took equity in start-up music services in the first place. During the first dot.com boom, founders were exiting at huge valuations either by sale or IPO, very often without generating any revenue. It made sense to grab as much equity as possible as part of the music licensing negotiation and Jay Samit and other label digital executives at the time quickly set a precedent that has continued to this day.

In the case of Spotify, it was reported at the time by Techcrunch that the majors and Merlin collectively received a 17.3% shareholding on the Series A funding round and paid an aggregate €8,808 for that shareholding. It is worth pointing out that Techcrunch questioned this number at the time believing the amount paid was ten times that amount had the music companies matched what other Series A investors actually paid for their shareholdings. Clearly the majors did not do that and these were peppercorn payments as part of a broader licensing negotiation.

What also needs to be understood is the extent to which those original shareholdings have been diluted through subsequent funding rounds, of which there have been eleven. Further clarity is needed on this.

Where equity is a more valuable element for artists are companies such as Soundcloud in its present circumstances. Soundcloud is striking deals with music companies, but it has a long way to go to generate the sort of revenue numbers Spotify is already achieving. Accordingly, if Soundcloud is acquired, which is a strong possibility, then equity will form a greater part of the total value accounted back to the artist relative to advances and earnings.

 

ALIGNMENT OF INTERESTS – is what it is about

Equity is still hugely important for artists. Start-ups will come and go and each takes their own path. In certain circumstances, the equity piece will derive the greatest value, in other cases not. What is most important – and which Stephen Cooper of Warner Music stresses – is that the interests of the label and the artist are aligned whatever the outcome. This is an important step in the right direction and is greatly welcomed.

Transparently Obvious

TRANSPARENTLY OBVIOUS: THE MUSIC BUSINESS HAS TO CHANGE

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The following MBW blog comes from Andy Edwards (pictured), Board Director of the UK’s Music Managers Forum (MMF)

Rethink Music, the report published by the Berklee College of Music and which puts the spotlight on transparency, has provoked a great deal of comment over the past few weeks.

I contributed to the report and have observed it all with interest.

Much attention surrounded the major label artist who only received their royalty statement in paper form. The example is a little extreme, but not uncommon.

One major label told me I could not have an Excel version of a PDF statement “as a matter of policy” and that I had to buy converter software and do it myself: not so simple as the PDF was not formatted correctly and it took forever.

In contrast, another major label emailed me an Excel within twenty minutes. It is a small thing, but some organizations seem to go out of their way to be unhelpful.

Responding to Rethink Music, the IFPI makes some valid points about investment and return.

Yes, many artists make a better margin on digital compared to physical, but so do labels.

One quibble: the IFPI’s “artist payments” figure includes advances (which are now also recouped against a share of ancillary income), but the IFPI compares it to “sales revenue” which according to their own figures does not include ancillaries; only digital, physical, performance rights and sync.

If this is so, I would question whether this is a like-for-like comparison?

“THE MUSIC INDUSTRY’S BUSINESS PRACTICES ARE OUTDATED, DISJOINTED AND UNALIGNED.”

The IFPI response completely avoids the matter of transparency, the most crucial matter of all and one that we must resolve.

We must have full transparency on all deals and calculations. Of course confidentiality is to be respected; but managers, lawyers and accountants also have an additional fiduciary duty of care to their artists, so they must act properly and that includes confidentiality.

Rights owners have no such responsibility and perhaps they should. Bottom line: there are no excuses for non-disclosure.

No matter what happens in the UK and Europe however, the balance of power within major labels and publishers lies in the USA.

It was, therefore, disappointing to read in the New York Post that: “Some music label executives [said] they are now questioning their support for Berklee’s internship program”.

Old school threats and bullying instead of addressing the matter at hand, this is not a good look. If anyone feels left out or disagrees, they should engage openly with the Berklee team.

Those interviewed by The Post also attempted to rubbish Rethink Music as a ‘“long advertisement for music publisher Kobalt,” which recently took in Google Ventures as a shareholder’, but the Berklee team clearly discloses Kobalt’s support.

As for Google Ventures, well it makes for a good story but anyone with any sophistication will understand the VCs who invested in Kobalt will have little, if any, regard for the position of YouTube, etc.

They just want to make good investments that create value for their fund. It is worth noting the comments of Bill Maris, who led the investment:

I discovered how messed up the music business is. Is it even a business? In what other industry can you provide a product, get no information on who bought it, how many times it sold, and then a year later get a cheque with no explanation?”

Maris has invested $2 billion into 300 companies from tech to life sciences.

“WE MUST HAVE FULL TRANSPARENCY ON ALL DEALS AND CALCULATIONS.”

This is not about bashing major labels for the hell of it.

On a day-to-day level, many of us in the management world like and respect the individual label executives with whom we work; but a substantial overhaul of business practices at a corporate level is essential and not just in labels; PROs and publishers also need to change.

The music business is no longer a self-contained cottage industry; it is deeply intertwined in a much bigger and more complex world where the consumer is the real power player.

Yet the music business is failing to achieve its full potential because it is tied up in knots: its business practices are outdated, disjointed and unaligned.

The Taylor Swift/ indie label/ Apple Music showdown illustrates what can be achieved when we unite as an industry with the artist front and centre.

If we continue to dodge transparency then the lack of trust between creators, their representatives and the major music corporations will continue to erode the opportunity that digital technology provides us.

It is that simple.

 

This article first appeared on Music Business Worldwide.