What we want to learn in Nashville
Music has been on my mind lately. We're getting ready for our Investor Trip to Nashville next month, and I'm excited for it.
Six weeks from now, we'll be sitting at a bar, sipping rare bourbon, enjoying live music with Altea community members, and chatting with some of the smartest, most forward-thinking people in the music industry.
But these trips are more than just fun & social drinking. We're there to learn about investing in music.
Music investing is fascinating for many reasons. It's emotional, it's alternative, and it's completely uncorrelated to other markets.
But to me, one of the most interesting things is the sheer complexity of it all.
Make no mistake: music is a fundamentally bewildering industry. There is so much institutional & legal knowledge baked into this space that it's a miracle it hasn't scared people away.
But here's the thing: The delta between the number of people who want to invest in music, and those who truly understand what they're doing, could fill the Ryman Auditorium thousands of times over.
Most investors seem happy to have a sophomoric understanding of the space forever, but not us. We're looking to become experts, by learning directly from the experts.
Our ultimate goal is to return from Nashville with a music rights investing deal we can offer you. We want this deal to be unique, exclusive to the Alts community, and most importantly, fully diligenced.
To be clear, I don't know the specifics of this deal yet. We've yet to invest in any music rights deals. Good ones are extremely difficult to access, and frankly I don't know exactly how we'll make this happen.
But I do know one thing: If you're planning on investing in this rapidly evolving space, you'd better do a hell of a lot of research first. And one of the best ways to research is by meeting industry connections in the flesh. (It's also the most fun!)
So this two-part series is about how we go from "music investing curious" to "music investing experts." It's about the things want to find out, the things we need to know, and the questions we'll ask along the way.
Here are some of the big Q's on my mind as we gear up for our second investor trip.
Let's go 🤘
How is the pie growing?
At the macro level, the music industry is doing well these days.
After 15 years of decline, the recorded music industry officially bottomed out in 2014. It has since posted nine consecutive years of growth.
Worldwide, recorded music revenues climbed 10% to hit $28.6 billion last year — a new record.
But like with all markets, this success is not spread evenly, and dynamics vary like crazy.
Turn your playlist into your portfolio
Last year, we gave you early access to JKBX, a new music investing platform that was about to launch.
I'm happy to report that SEC approval has been granted, and you can now invest in songs just like they were stocks. ✅
What really sets JKBX apart is their selection, which already boasts some seriously impressive names, and seems to get better each month.
Both accredited and non-accredited investors can invest. Every time you hear a song, somebody’s getting paid. That somebody could be you.
Browse all listings, and get on their email list to get notified on new drops.
Visit www.jkbx.com/legal/offering-circulars for important Reg A disclosures. This content is not investment advice, nor is it an offer of securities. All investments involve risk and may result in loss.
Who's doing well?
The 2020s have been a good decade for both music publishers and record labels.
What's the difference between the two?
Publishers and labels don't directly compete with each other — they eat different parts of the pie.
While record labels handle a song's actual recording, promotion and distribution, publishers handle the critical copyright and licensing.
You may have heard of the "Big Three" music publishers: Sony, Warner, and UMG. Their combined catalog contains 10-15 million songs, and accounts for about 70% of the global music publishing market.
Few people realize how much work publishers do in the background. But they're like the bankers who turn creativity into currency.
What do publishers do?
Streaming revenues are up
Growth in developing countries
One important industry trend is that streaming revenues are trending up. There are several reasons why, but the biggest is simple: more mobile devices are coming online, especially in developing countries.
Ultra high-growth nations like the Philippines and Rwanda continue to add net new mobile device subscriptions — which quickly manifests into streaming.
Put it this way: around the globe, 21,000 new teenagers are minted each day. 60% of them have a smartphone, and basically all 60% want to listen to music.
Streaming payouts vary like crazy between different parts of the world (and are considerably lower in Africa). But make no mistake: more devices means more streaming and, thus more streaming revenue.
Royalty rates are trending up
Another, less discussed reason for improved streaming revenue is the significant upward pressure on streaming royalty rates.
And part of this momentum is thanks to recent legislation.
In Aug 2023, The Copyright Royalty Board (CRB) established substantially higher royalty rates for music streamed between 2021 and 2022.
The CRB found streaming giants had underpaid songwriters and publishers by $419 million.
This battle, which took years, was a monumental win for songwriters. The result is that songwriters and publishers are set to rake in $400 million more in royalty backpay.
What are the impacts for music investing?
This has big implications for music investing going forward — both for existing music assets (older, more valuable catalogs) and future music assets coming onto the market.
If the trend is moving towards higher streaming royalty rates (which at this point we can comfortably say it is) then:
Finally, this will no doubt affect the streaming giants' profitability. An increase in royalty rates increases operational costs, and will eat into bottom lines.
Can they afford to take the hit? How's Spotify doing anyways?
How is Spotify doing?
One cannot understand this industry without understanding the dynamics of Spotify, the largest of the “four horsemen” of streaming: (Spotify, Apple Music, YouTube, and Amazon Music).
They're finally hitting profitability
The conventional wisdom over the past few years was that Spotify couldn't afford to pay artists more, because they were still losing money.
Those days seem to be coming to an end.
So far in 2024, Spotify has performed exceptionally well, marking a significant turnaround in its financial health.
At a high level:
Spotify still has a 30% take rate, paying just $0.004 per stream — among the lowest of all music streaming platforms.
Frustration is growing among artists...
Everyone has a different definition of "livable wage," but for the sake of argument let's call it USD $50,000 per year — which is 20% less than the median US wage of $59,000/yr.
In 2023, just 20,000 artist catalogs generated over $50k on Spotify — roughly 1.8% of artists on Spotify.
Now, to be fair, this 20,000 number far exceeds the number of artists who could have made a living from music pre-streaming!
We tend to wax poetically about the pre-Internet music industry. But it's easy to forget what a gated, top-heavy era it was. Back then only a few thousand artists could earn a living.
Labels were essentially music's VCs - either you were in the club, or out. This dynamic was so powerful that, to the amazement of Gen Z, selling out used to be something bands were ashamed of!
Fast-forward to today, and selling out is par for the course. Artists would kill for the opportunity to sell out. You'd be dumb not to!
In the past, it was rather black & white. Fewer artists "made it," but those able to sign with a record label knew the labels had their back. They were pretty taken care of, financially speaking.
Today, artists endlessly promote themselves, hoping they can somehow parlay likes, comments, and attention into a sustainable, livable venture.
Music's "middle class" is larger than ever, but so is the gray area of success. It's an never-ending hustling to get on playlists, sell merch, and play shows.
...and from listeners...
Artists aren't the only ones frustrated with streaming.
In a New Yorker article titled, Why I finally quit Spotify, Kyle Chayka notes:
Music on the app is most easily consumed in a disorganized cascade; every song becomes audio “content” separated from a musician’s larger body of work. In short, Spotify does not seem to care about your relationship to ‘your’ music anymore; for long-term users, this has felt like a slow-motion bait and switch.
...and from labels.
Publishers and labels realize that Spotify is no longer the only game in town.
There has always been a delicate power balance between Spotify and record labels. After all, they both rely each other (even if they wish they didn't).
But record labels are weaning themselves off Spotify, whose contribution to total streaming revenue has been flat or decreasing:
Labels are increasingly partnering with TikTok, gaming platforms like Fortnite, and even ultra-alternative platforms like Peloton in an attempt wean themselves off the addictive Spotify crack pipe.
UMG (which is both a publisher and the world's largest record label) holds significant leverage over Spotify. But tensions have emerged around Spotify's free tier.
The issue is that artists and labels get much lower royalties from the free tier vs Spotify Premium. UMG’s CEO, Sir Lucian Grainge has expressed dissatisfaction about the disparity between free-tier payouts and the value of the music catalog, calling for better compensation for rights holders.
Of course, it's not just Spotify that labels are upset with. You may recall UMG pulled its entire catalog from TikTok for several months. This "TikTok blackout" caused UMG stock to plunge.
After months of negotiations, the two parties reached a new licensing agreement in May 2024, which included provisions for better compensation for UMG’s artists and songwriters, and allowed UMG’s artists, including stars like Taylor Swift and Bad Bunny, to return to TikTok.
It’s also worth noting that YouTube Shorts is growing rapidly, and is now a strong contender against TikTok as the most used short-form video platform.
Investing implications
This all has very big implications for royalty investing.
In addition to the obvious macro implications, remember that each platform has different payout rates, and certain artists tend to have a stronger presence on specific platforms. For example:
Which genres are growing?
A few months ago I was playing around on Google Trends, and noticed some interesting trends:
Someone pointed out that Google isn't the best indicator of music trends, since most genre searches happen on-platform. And they're partially correct: Searches made via TikTok or Apple Music wouldn't show up here (although YouTube searches would..)
Regardless, I dug in deeper and found a few interesting things:
What's the real impact of the retro revival?
As you may know, I'm a fairly big vinyl record collector/investor.
What's interesting is that the retro revival is not just continuing, but expanding beyond vinyl into other technologies. That's right, CDs and even cassette tapes are coming back into fashion (Gen Z in particular apparently loves cassettes) 🤷
But beyond the clickbait headlines (not to mention confused looks from frustrated boomers who sold all their records decades ago), I want to know what effect is the retro revival having on the industry?
The answer is a small one. But it's not insignificant either.
According to the RIAA, in 2023, LPs and CDs accounted for 11% of all recorded music revenues — which is nonetheless rather astounding. (Sorry, cassettes are still essentially a non-factor.)
It speaks to the power of the retro revival, and the fundamentally high-margin nature of these legacy formats.
There are some nuances worth paying attention to. For example, K-pop fans are more likely to purchase physical media than any other genre of fans. And jazz is the genre that gets the most revenue from physical media sales.
Physical media supports high-margin super fans
What the retro revival really does is give artists is more optionality. It's a high margin way to earn money from fans — particularly through D2C sales.
D2C may be dead in VC, but it's alive & well in music, where the concept of super fans is more important than ever.
Remember, artists today don't make much money from streams!
Social media gives impressions, which feels good, but is ultimately an under-monetized vanity metric. Spotify listeners may be fans, but they don't bring in enough revenue.
Super fans
The goal is to create super fans, who are highly monetized.
Super fans don't just stream your music; they buy your physical records & merch — to collect, to listen to, and to directly support you as an artist.
Take Dua Lipa, for instance. Despite heavy marketing from Warner Records, her latest album Radical Optimism has accrued about 1.4 billion streams.
For a normal artist, that would be a lot! But it's actually under-performing compared to her previous album Future Nostalgia, which is sitting at 12.7 billion streams.
Considering a max payout of $0.004 per stream, Radical Optimism has brought in roughly $5.6m in revenue. Depending on her contract, Dua might receive around 25% of this, or $1.4m.
That's...not actually all that much money for someone at her level! But it doesn't matter anyways.
Why? Because Dua Lipa tours like crazy, and fans turn out in droves.
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Nobody has mastered the super fan dynamic more than Taylor Swift, who in addition to dominating streaming, and affecting the economy of entire cities on her Eras tour, was responsible for an astounding 7% of all vinyl sales in 2023!
Nothing brings out the true fans (and raises the "average revenue per fan") like live music...
Has live music rebounded?
Unlike the film industry, which has proven it can still thrive without theaters, live music is absolutely critical to the music industry.
Why?
Because artists barely make money without it!
As I mentioned last week, streaming doesn't bring home the bacon. For most artists, it barely pays the bills. Labels love streaming, but artists love live music.
It doesn't matter if you're a small artist or a megastar; touring has become more important than ever. That's where the money is.
Andrew Hall is seeing this dynamic play out first-hand:
Everyone seems to think artists can no longer become overnight success, but that's not true. You can be an overnight success, but that success is going to come from touring.
- Andrew Hall, Nashville talent buyer
The supply of artists eager to play live shows is up. Venues have their pick of the litter these days (and are thus paying artists a bit less than they were before Covid.)
But it still pays much better than streaming!
Covid was obviously a disaster for the live music industry, with devastating consequences across multiple dimensions. Concerts were cancelled with no insurance payouts (as it was an "act of God"), venues shut down, touring revenue went to zero, and job losses piled up.
Restrictions eased, and the return to live performances was expectedly slow. After all, people were still weary of large crowds.
But then live music came roaring back, which actually created new problems. With supply AND demand way up, ticket prices are now higher than ever, and Ticketmaster's "dynamic pricing" is pissing off artists.
Yet large festivals are struggling — and high prices may be one reason why. In this thought-provoking piece, Planet Money has called 2024 the beginning of a festival recession:
So, why are people paying up the nose for megastar concerts, but not for festivals?
That's a big unanswered question right now.
AI lawsuits: Who's suing who?
The intersection of music and AI is such a rapidly evolving field, that the only way to understand it is through lawsuits.
There are new lawsuits, federal indictments, and rulings all over the place right now. It feels like a precedent arms race, where AI has stirred up what were already choppy seas, leaving both cruise liners and dinghies scrambling to make sense of it.
They’re all part of a growing effort to rein in the “Wild West” of AI development, before it devalues – and potentially replaces – the copyrighted works that countless creators have spent lifetimes building up.
Let's find who's suing who, and what's at stake.
Publishers vs Suno & Udio ⚖️
Who's suing who?
Remember last week when I said publishers were the industry's cops? This case is the perfect example.
Sony, Universal, and Warner Records are taking legal action against Suno AI and Udio AI, two AI platforms that have generated music using AI models trained on copyrighted songs.
Remember that AI-generated Drake song that went viral last year? It was created by a user known as "Ghostwriter," which kicked off the carnage. After mounting pressure, the song was pulled from streaming services.
(Ironically, Drake had a voice cloning controversy of his own when he used a Tupac voice clone on his Kendrick Lamar diss track. Tupac’s estate sent a cease-and-desist, and the song was taken down.)
Suno isn't a small fry startup — they're a huge player in AI music, on track to generate $120 billion per year. Microsoft is already using them.
Latest developments
AI voice clones have become the most controversial and well-known use of AI in the music business.
Interestingly, the labels don't allege that the AI songs violate copyrights — that's a tougher battle to win.
Rather, they're focusing on the training process behind them, accusing the companies of scraping copyrighted songs to train their AI models without proper licensing.
In a recent court filing, Suno admits that its training data includes essentially all music files of reasonable quality that are accessible on the open internet.
They argue they are free to use copyrighted songs to train their models and claim the music industry is abusing intellectual property to crush competition.
Implications
The implications of this case are huge. It's the single most important case around unauthorized AI-generated music.
The suit seeks damages of $150,000 per infringing work, which could bankrupt the two companies.
More importantly, if the publishers win, it could set a precedent that AI companies need to pay licensing fees to train models with copyrighted works.
Losing these suits could be catastrophic for the entire AI industry.
A loss for the publishers could weaken copyright protections, and open the floodgates to more AI-generated content without artist compensation.
US Dept of Justice vs North Carolina Man ⚖️
Who's suing who?
The US Dept. of Justice (DOJ) has arrested and charged a North Carolina-based musician, along with several accomplices, for running a massive streaming fraud scheme.
The musician, whose identity remains anonymous in initial reports, allegedly used a bot network and thousands of AI-generated songs to inflate play counts, fraudulently earning $10 million in streaming royalties.
Recent developments
The case isn't underway yet, but this illuminates the larger issue of "fake bands."
Fraudsters have figured out they can use AI to create fake cover versions of popular songs that closely mimic well-known artists. These songs are often low-quality knock-offs, but are close enough in title and sound to trick listeners into streaming them.
Once the fake songs are on Spotify, bot farms come into play. Thousands of automated devices then repeatedly stream the tracks, boosting the song’s play count and royalty revenue.
What's at stake?
If convicted, the defendants could face lengthy prison sentences and substantial fines.
This case also has broader implications for the integrity of digital music platforms, which are under increasing pressure to address and prevent manipulation of their systems.
A win for the DOJ (which is likely) could lead to stricter regulations of streaming platforms, while a loss would certainly embolden others to exploit royalty loopholes like this.
Artists vs Politicians ⚖️
Who's suing who?
While there isn’t an active lawsuit, Jack White, along with many other musicians, has publicly criticized Donald Trump and his campaign for unauthorized use of his music during political events.
White condemned Trump for playing the White Stripes' hit "Seven Nation Army" at rallies, which the band had not approved.
Recent developments
This is just the latest in a broader trend of artists objecting to the use of their work at political rallies without consent. Springsteen, Neil Young, Rihanna, and Aerosmith have also complained about Trump using their music in his campaigns, sometimes taking legal action.
And of course there's Taylor Swift, who is considering a lawsuit after Donald Trump posted (obviously) AI-generated images to social media falsely suggesting she endorsed him,
What's at stake?
The key issue here is the unauthorized use of copyrighted music in political campaigns, which involves intellectual property rights.
If artists like Jack White were to pursue legal action and win, it could strengthen protections for musicians against political campaigns using their work without permission.
Labels aren't "anti-AI" — they want to own it
Given all the AI lawsuits, you might assume that publishers & labels are anti-AI.
But that's not quite accurate.
Rick Beato is an Atlanta-based musician, producer, and popular YouTuber known for his takes & breakdowns. (I'm a big fan of his "What Makes This Song Great?" breakdowns).
He points out that the labels aren't suing for copyright infringement to protect the artists; they're suing because they want to own the AI songs themselves!
And he may have a point. In June 2024, UMG announced a deal with AI startup SoundLabs, which will allow UMG's artists to make their own AI voice clones.
The voice clones will not be made accessible to the general public. Artists will have full control over the ownership and use of the voice models. (Of course, since the AI songs are on UMG's label, they'll get their cut.)
All these labels want to own the AI versions of these songs - whether you create or they create it, they want to own it.
“We believe the future of music creation is decidedly human. Artificial intelligence, when used ethically and trained consensually, has the Promethean ability to unlock unimaginable new creative insights, diminish friction in the creative process and democratize creativity for artists, fans, and creators of all stripes."
- Brian Transeau (better known as BT), the electronic artist who got started in the 90s and later founded SoundLabs
Is now a good time to be an artist?
Indie distribution is growing
As I mentioned last week, more artists are succeeding today than ever before. There is a growing "middle class" of artists — just under 30,000 of them — who clocked between 1m and 10m streams in 2023.
But what's interesting is this middle class is skewed towards artists with indie distribution.
This hasn't gone unnoticed by the industry. Warner Music CEO Robert Kyncl, has indicated he’s looking to grow Warner's presence among this tier of artists.
Even more interesting, the share of artists with indie distribution is increasing across the entire range. It's up 5.1% YoY.
Cultural impact vs revenue
"One-hit wonders" don't pay off like they used to. Artists now find that the short-term cultural influence they wielded doesn't necessarily translate into financial success.
Remember the Macarena? Of course you do! The Spanish dance track by Los Del Rio sold 11 million copies. The group probably earned around ~$60 million from the song.
(Compare that to a song with 11 million Spotify streams, which would generate, at most, around $40,000)
Conversely, many commercially successful artists may have a surprisingly limited cultural footprint. Billie Eilish may be a great example of this. I'm not sure how impactful she has been on mainstream culture compared to other female pop stars, but one thing's for sure: Her fans love her to death, and she earns bucketloads of cash from physical sales, touring, and merch.
This illustrates a growing disconnect between labels and artists. Remember, labels generate a majority of their income from streams, but artists make most of their money from touring.
Labels are into scaling audiences. Artists are focusing on what’s best for them.
The divergence has never been bigger.
Are bands disappearing?
Back in the 90s, roughly a third of all top 10 hits were from groups.
Rock bands and R&B groups (TLC, Boyz II Men, etc) used to absolutely dominate the Hot 100. Now they've become an endangered species.
There are a few reasons for this.
Technology
First, technology has empowered everyone to recreate the sound of any instrument they want.
You don't need to find a human bandmate or beatmaker anymore — just go to a marketplace like Anno Domini Nation and buy or rent completed instrumental tracks.
This is illustrated by the rise of electronic music, which is mostly a solo endeavor. Heck, you can do it all from your phone.
Fewer cooks in the kitchen
Second, when you're a solo artist, fewer people need to agree with you.
Aspiring artists understand that groups need to split profits across all members. The Spice Girls had to split the money five ways, Chappell Roan doesn't. Artists essentially have to be 2-5x more successful than if they did it alone.
It's like the shift in software companies towards smaller, more efficient teams. Less bureaucracy makes artists’ lives easier, because they don’t have to spend time persuading/arguing with other group members.
It also makes catalog sales/buyout decisions easier. If the band founder wants to sell to private equity, they can sell. Period.
"It’s just much easier to have your own say than to have group members opining on what they want"
- Bill Diggins, longtime manager of TLC.
Labels have turned into Series A VCs
Finally, record labels (in the US, at least) typically aren't as supportive of artists in the early stages of their careers.
Instead, record companies often show up after an artist has already proven their ability to attract an audience of superfans (through social media and touring)
To use a venture capital analogy, it's as if the "VCs" (record labels) are moving from funding pre-seed and seed stage (where product traction is often unproven), to Series A and B rounds (which is about pouring fuel on a fire.)
Closing thoughts
The more I learn about the music industry, the more I realize it’s not one industry; it’s half a dozen micro-industries, each massively complex and idiosyncratic.
The big three publishers are probably the closest thing this industry has to a "glue," but even their grip is slipping a bit, as more artists realize they can go independent and build their own base of superfans.
There is so much left to explore in this world... Performance Rights Organizations (BMI, ASCAP, SESAC) are another batch of gatekeepers holding considerable power, and are starting to get investigated.
NFTs and Web3 music startups are another area. These companies raised a bunch of money from VCs, and basically went nowhere. The intentions are good, but forcing themselves into this world is proving much harder than they expected. (Just look at Royal's big pivot)
But for me, the biggest unanswered questions still lie in royalty investing.
How do you really properly value a catalog? What do you absolutely need to know? What do investors overvalue & undervalue in this world? What do you need to consider that other investors have literally no clue about?
Nashville is just the beginning of our journey to uncover the answers. 🤘
That's it for today.
There may be one spot left on the Nashville trip. Apply here if you want to grab it.
Reply to this email with comments. We read everything.
See you next time, Stefan
Disclosures