Comparison of Music Funding Platforms
Here is a review of different ways to invest and/or fund music today including a new platform SongVest. We will continue to produce content looking at all types of music investment and funding.
SongVest’s IPOs will allow the fan to be a part of the music-making process. Royalty Flow can’t do that. Crowdfunding can’t do that.
SongVest, a stock market for music investments, is setting out to change how money is raised and invested in music.
A music IPO is a unique kind of public offering that gives investors a pure way to put money into record labels and music publishers. It's pure because it's all about music. Warner Music Group is no longer publicly traded—although it has sold debt—Universal Music Group and Sony Music Entertainment are small parts of diversified companies (Vivendi and Sony Corp., respectively), and BMG is not a publicly traded company. An investor can buy shares of a digital service provider (Pandora) and a concert promoter (Live Nation), but neither changes how money flows into either recording music or writing songs. Besides, fans/investors want to see their funds directly help artists.
Another company, Royalty Flow, has recently received attention for an upcoming IPO of producers’ share of an artist’s royalties. On offer are future royalties of Eminem’s catalog from 1999 to 2014. That is, Royalty Flow shares do not support Eminem, do not provide funds to his record label, and have nothing to do with the success of his music in the future. Think of the 1997 sale of “Bowie bonds” by David Bowie. The rock legend sold 10-year bonds backed by future royalties from his catalog up to 1990, a period that includes 25 albums. Investors knew the bonds were a safe investment because his catalog remained popular and generated a predictable flow of royalties. In effect, Royalty Flow has the lack of excitement of the Bowie Bonds.
SongVest has a different take on the IPO. An IPO, across industries, is a forward-looking investment that provides capital to companies to grow larger and, in many cases, turn a challenging financial situation into a profitable one. IPO investors get in on the bottom floor, as the saying goes, and gain a vested interest in how these companies perform in the following years. Investors are attracted to the upside in stocks—in spite of the downside risk (and SongVest has a way to limit the risk, more on that later).
A SongVest IPO can play a role in providing the funding labels’ need to release new music. A&R, the process of attracting artists and guiding their recording projects, is the lifeblood of any record label. But A&R isn’t cheap. Worldwide, A&R and marketing consume 27 percent of the average record label’s revenue. An artist signed to a worldwide recording contract requires anywhere from $500,000 to $2 million to break in the market. Smaller labels incur lower costs but still need to finance any of their projects. Labels give artists signing bonuses, pay for studio time and production, and assume other expenses ranging from the costs to produce videos to providing financial support to artists while they’re on tour—young bands might require support while building a career, not older ones that have a financially secure touring business. Fans and investors are an essential piece of the operation.
What’s more, an IPO is also a relationship-building event. Labels will be able to grow closer to the people who buy their products and support their artists. Music fans usually purchase music from retailers, or listen to streaming services, while the label stands in the background as the business partner of the creative process. These direct interactions build goodwill for retailers and digital service providers and benefit artists, but rarely do anything for the label. These relationships will extend well beyond the investments. Fans will receive perks for investing that reward their participation. For example, fans might gain access to exclusive events, unique merchandise, or unreleased music. Here the label will participate in creating unique fan/investor experiences that will be unavailable otherwise. Behind everything, the SongVest platform will act as an amplifier, encouraging fans to become an online street team that amplifies the buzz around an IPO.
Let’s return to Royalty Flow and its IPO. Royalty Flow could be a questionable investment. Let’s assume the Royalty Flow IPO raises its stated minimum of $11 million. And let’s assume the company has no expenses. In this scenario, Royalty Flow would disperse $760,000 over trailing 12-month periods where investors would potentially only receive $296,000 because they would own just 39% only of the dividend-paying shares. Buying a catalog for $9.75 million and only getting a $296,000 royalty equates to a 32x multiple. That high a multiple is usually associated with for young companies expected to grow quickly in the coming years. Old sound recordings with predictable payoffs and little growth potential don’t carry a 32x multiple. As a point of comparison, SONGS Music Publishing is for sale at a 12x multiple, according to a Billboard report. An 8x to 12x is typical for music publishing assets. In fact, earlier this year Royalty Exchange called on publishing sale of “a gold mine of assets” would sell at 8x to 12x. The most recent public information indicates some top catalogs are commanding up to a 16x multiple—that is still ½ of the 32x multiple calculated in the Royalty Flow example.
The fan-artist relationship sits at the core of SongVest’s IPOs. When fans invest in a share of future royalties through SongVest, they will be helping the label with upfront costs of creating and getting albums off the ground and running. After an album recoups, the investor will receive a share of royalties received by labels (for sales of CDs, LPs, and digital downloads) as well as streaming activities and synchronization licenses (for use in audio-visual works such as television shows, motion pictures, and advertisements). Fans will be highly motivated to promote artists they love. History shows an engaged fan with a social media account can do great things.
In contrast, Royalty Flow’s IPO will benefit the producers who signed Eminem to a recording contract in 1995 and transferred the rights to his recordings to Aftermath Recordings, the label of hip-hop legend Dr. Dre, in exchange for future royalties of his recordings. A fan’s investment in Royalty Flow has nothing to do with the success of Eminem’s recordings. Any money a fan invests isn't going help further Eminem’s career—the IPO covers recordings from 1999 to 2014. Nor is it going to help his label, Shady Records, break any new acts. What’s more, a fan investing in Royalty Flow’s Eminem offering will not receive perks nor acknowledgment from the record label or Eminem. That’s not fan-friendly by any definition.
Although SongVest is also more investor-friendly when it comes to dividends, it is more speculative because no one can predict new album sales. SongVest will pay investors 80 percent of future royalties. Because Royalty Flow’s IPO will sell only 39 percent of the available shares, it will keep 61 percent of its dividends. In contrast, whether or not Royalty Flow investors receive a royalty is based on the company’s decision to pay, not the company’s obligation to pay.
A SongVest IPO is fundamentally different than other types of fundraising available to record labels and artists. Following are descriptions of companies known for fundraising but don’t provide investment vehicles.
Key difference: this is crowdfunding rather than investing.
Kickstarter kicked off the crowdfunding craze not long after launching in 2009. As a testimony to its place in culture, the word “kickstarter” is practically synonymous with raising money from fans. The business model is simple: the seller creates a campaign to fund a project—it could be music, tours, videos, film, books, games, artwork, or any number of other items. Ultimately, Kickstarter is a facilitating platform that helps connect creators with potential funders and acts as a messaging service to help creators provide updates to their funders. Because Kickstarter collects funds upfront, the company enjoys a float but doesn’t share earned interest with creators. And because funders give money in return for only goods (downloads, CDs, vinyl LPs, credits in album liner notes) and services (e.g. a house concert, a Skype chat), they are not given a share of the project’s profits or future royalties.
Key difference: supporters typically give money with no expectation for something in return.
GoFundMe is a variation on crowdfunding that’s most often used to raise money for good causes. For example, schools and teachers use the platform to raise money for goods and equipment for classrooms. Music represents a small portion of GoFundMe’s campaigns. Money is raised for artists to replace stolen equipment, for venues to stay open in the face of rising rent, and for artists to record an album. Often the recipient of the funds is not the person who started the campaign. People with sudden health problems used GoFundMe for large medical bills. Charities also use the platform for fundraising. GoFundMe claims it has raised $4 billion from more than 40 million donors.
Key difference: fans pre-order goods, not invest in future earnings.
PledgeMusic calls itself “a marketplace where fans and artists connect,” a fair description for the eight-year-old, New York-based company. Artists use PledgeMusic to drum up pre-sales for their projects, a term that covers recorded music, sometimes merchandise like T-shirts, and on occasion unique items like a signed drum head. Many projects give buyers what’s called an “AccessPass,” the ability to receive exclusive messages from the artist (usually during the recording process). PledgeMusic’s original business model was similar to that of Kickstarter: bands set a funding goal, fans buy various packages of digital and physical goods. But PledgeMusic used to be more of a fundraising platform. Unlike Kickstarter, the PledgeMusic of old set funding goals rather than thresholds that must be surpassed to receive funding. Over time PledgeMusic marketed itself as a tool for connecting fans and artists. The business model contains an element of risk-reduction: PledgeMusic is effectively a platform for taking pre-orders for goods so that production can better match demand. But the key difference between SongVest and PledgeMusic is clear: PledgeMusic is a goods marketplace, not a financial marketplace. Once the artist releases an album, funders receive ordered goods or services, but they do not own rights to any economic success.