- “I wish there had been a music business 101 course I could have taken.” Kurt Cobain. There are many musicians like Cobain who are thrust into situations without financial help they can trust. Every musician should take a lesson from the comedian and actress Tina Fey: “I came to New York in 1997 to work on Saturday Night Live. I realized I have no head for business. And it would have been very easy for me to let someone take control of my money – for me to say, ‘Here, sign my checks…whatever.’ But… as much as it makes me super sleepy, I have to pay a lot of attention when my business manager talks to me about money. He talks to me about taxes, and I get really, really sleepy. But I listen.” Most people get bored quickly learning about business topics. I’ve thought a lot about how to fix this problem, but I really don’t have a great solution. Warren Buffett tries to make business entertaining in his own way and that helps. But the unfortunate fact is: few people are willing to do the necessary work to learn business concepts. I fear the situation will get worse with time and not better. Once upon a time people learned about business when they joined a big company and went through what was effectively an apprenticeship. Today companies are smaller and fewer people receive that training. I wrote about many of the basic business principles that apply to the entertainment business in my blog post on Louis CK. I supplement what I said in that post in my usual format below.
- “At the end of the day, there’s only a few major stars in the music business, and then there’s all these people that are aspiring to be that.” John Legend. One of my favorite articles on the music business was written by Duncan Watts and is entitled: “Is Justin Timberlake a Product of Cumulative Advantage?” This article by Watts (the link is in the notes) makes important points that must be understood if you want to understand modern economics generally. The key insight is simple: People don’t make decisions independently. Something called “preferential attachment” happens in some situations and this phenomenon produces the “power law distributions that rule everything around the music industry.” This power law phenomenon is not new but as Nassim Taleb points out, it has received an accelerating boost from digitization and the internet. A writer of a story about Nassim Taleb put it this way: “We live in Extremistan, where black swans proliferate, winners tend to take all and the rest get nothing –there’s Domingo and a thousand opera singers working in Starbucks.” In an article entitled The Music Industry’s New Math New York Magazine points out: “Since 2008, there have been 66 No. 1 songs, and six artists are behind almost half of them. (In 1986, there were 31 No. 1 songs by 29 different people).”
The distribution of financial success in the music looks like this:
As an example of a power law distribution in the music business: The share of concert revenue taken home by the top 1% of performers has more than doubled, rising from 26 percent in 1982 to 56 percent in 2003.
As another example, the top 5 percent of musicians take home almost 90 percent of all concert revenues.
- “The TV business is uglier than most things. It is normally perceived as some sort of cruel and shallow money trench through the heart of the journalism industry, a long plastic hallway where thieves and pimps run free and good men die like dogs, for no good reason.” Hunter Thompson. You will see versions of this quotation by Hunter Thompson that substitute the word “music” for “TV.” the reality is that Thompson wasn’t writing about the music business although he could have been since they share attributes. You may also sometimes see the following tag line attached to this quote: “There’s also a negative side.” While it is a clever addition, it is fake. Sorry. But that does not mean that the quote is not directionally correct. And it does make for a good quote (I love a good quote as you probably know). Anyway, “payola” in all its forms has always been a part of the music business. The word is combination of “pay” and “Victrola” (i.e. record player). At first, payola was mostly about cash, which lead to a major scandal in the 50s that lead to a law prohibiting payments for airplay in certain situations where there wasn’t full disclosure. Payola is messy, cruel and shallow money trench, which is a shame since it can block the rise of talented people.
- “[Any money I make] goes straight into my bank account, where it turns all moldy and smelly.” “I didn’t go and buy a Lamborghini because I had a million dollars.” “I drive a family car—not a monster SUV but a family car that fits five people. I’ve got a house that is just big enough, too.” Dave Grohl. This musician’s statement reminds me of something Warren Buffett once said: “There’s nothing material I want very much.” Wanting too much can make you really miserable. This point was made well in a line of dialogue of a fictional character in Charles Dickens’s 1850 novel, David Copperfield: “Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.” While there is no formula to get rich, staying rich is a bit easier if you can get control of your emotions.
- “I just don’t agree with perpetuating the perception that music has no value and should be free.” Taylor Swift. Music is a public good, which can be a danger zone for profitability. What is a public good? Well, public goods are both non-rival and non-excludable. If I make a digital copy of your digital music, you still have your music (the music is non-rival). If I steal your phone you will no longer have a phone (a phone is rival). Music becomes “excludable” if you move the musician’s performance into a theater, since you can exclude people from hearing the performance who do not pay. Lots of important industries like journalism have this public good problem. It is not a new problem and applies to things like lighthouses and national defense.
| Excludable | Non-excludable | |
| Rivalrous | Private goods food, clothing, cars, parking spaces |
Common-pool resources fish stocks, timber, coal |
| Non-rivalrous | Club goods cinemas, private parks, satellite television |
Public goods free-to-air television, air, national defense |
The music business has responded to this public problem by shifting to complementary products that are excludable like concerts and merchandise sales. This works for musicians but is not enough to save the newspaper business since people will attend only so many conferences.
This public goods problem combined with other points that I have described above above place real and uncomfortable pressure on some people who trying to earn a living from music and similar professions. Neil Howe writes:
http://i.forbesimg.com/forbes/scripts/fb471d66.ie_scripts.js
http://i.forbesimg.com/forbes/scripts/21ef3912.ie_vendor.js
- “When the Rolling Stones started out they didn’t make any money out of records because record companies didn’t pay you. Nobody got paid. I always wonder if Frank Sinatra got paid. Your royalty was so low. If you sold a million records you got a million pennies. It was all very nice, but not what you imagined you were going to get.” “There was a small period from 1970 to 1997, where people did get paid, and they got paid very handsomely and everyone made money. But now that period has gone. So if you look at the history of recorded music from 1900 to now, there was a 25 year period where artists did very well, but the rest of the time they didn’t.” Mick Jagger. That the economics of the music business are worse than they have been at some times in the past in not controversial. This unfortunate reality means that people need to be more creative in finding solutions. My blog post on Rza of Wu-Tang clan is about a musician who figured out how to change the rules so his share of the business is better. Just selling digital music is no longer enough.
- “People who cost too much: manager, lawyer, publicist, label, music publisher.” Roger McNamee. Every business has a “value chain.” Some portions of that value chain is not necessary and yet they may take a big a slice of the profits. What is going on in the value chain today is a battle over “wholesale transfer pricing” between the layers. Set out below is one depiction of some of the different types of people who are trying to get a slice of the profit from the music industry.
- “I’m not a businessman, I’m a business, man.” Jay-Z. In the modern world of the music business much of the profit must come from complementary goods. That means concerts and merchandise and other services. The entertainer is a business. If they are not thinking about different kinds of revenues related to the business they may not make enough money to stay in the business. One interesting thing Hip-Hop did was make it OK for a musician to sponsor goods again without being a sellout. That helps musicians work around the “public good” problem. This writer raises the idea of complementary goods as a partial solution:
“One interesting thing about this market is there are two major sets of players: Those who make their money solely from these music services and those who make the vast majority of their money elsewhere. Spotify and Pandora can’t afford to keep losing money in this business because it’s the only business they have. Amazon, Apple, Google and others, however, can afford to subsidize these offerings or run them at low margins because they feed the other parts of their businesses and generate additional revenue indirectly. Apple may be in the strongest position of all here, because it has a user base willing to pay for content and it can afford to run the music business at a relatively low margin, while Amazon’s customer base is highly driven by saving money, and Google’s true customer base is its advertisers, not its users. Much has been made of Spotify’s lead over Apple in on-demand streaming, but Apple offers the flavor of streaming the labels like and has already signed up half as many paid subs as Spotify.”
- “Grateful Dead Fans are like people who like licorice. Not everyone likes licorice, but the people who like licorice REALLY like licorice.” Jerry Garcia. I was never a Dead Head. But I know people who are. And I know people who love to hate Dead Heads. Frankly people who spend their lives talking about what “real music is” bores me. But I like a lot of things other people find boring so I should not complain. In any event, music is not an exception to the rule that there can be significant be benefits when a business differentiates. Being unique can create a moat. Professor Michael Porter writes: “It’s incredibly arrogant for a company to believe that it can deliver the same sort of product that its rivals do and actually do better for very long.” If you deliver the same product or service as your competitor you by definition don’t have a moat. Competition will be based on price and price-based competition inevitably degrades to a point where profit disappears. Porter teaches: “if customers have all the power, and if rivalry is based on price… you won’t be very profitable.” He adds: “Producing]the highest-quality products at the lowest cost or consolidating their industry is trying to improve on best practices. That’s not a strategy.”
- “I don’t waste my time thinking about how I could make more when I already got enough. I’m not a banker, I’m a musician.” “[Money] buys me freedom. It allows me to do what I want to do and not have to worry about anything at all.” Dave Grohl. This famous musician seems to have a very firm grasp on the “circle of competence” idea. Grohl seems to recognize that risk comes from not knowing what you are doing. If you do not understand much about investing and finance, it is very wise to keep your approaches simple. Know your limitations. Be smart, by not being stupid.
- “To me, music was an escape from working in a furniture warehouse.” “I was a manual-labor worker, doing masonry and working at a furniture warehouse. I worked at a nursery breaking fucking rocks. There were not a lot of career opportunities for me. At one point, I thought, ‘I know how to play drums. I’ll learn to read music, become a session drummer and from that money, I’ll put myself back through school.” “I wanted to have a kickass job downtown, in Washington, D.C. But that wasn’t going to happen. In Washington, D.C., you’re either in the Army or the government. I was too skinny to be in the Army and too stupid to be in the government – or too smart.” Dave Grohl. Many musicians are one hit wonders who therefore have short careers. They may need to live for a lifetime mostly based on the income from that one hit. Sports stars are similar. Yes, they can get another job after the music career ends but it may not pay nearly what they generated from a brief period of time creating music. Since income can be very lumpy it pays to save. Grohl is far from a one hit wonder, but he is financially careful nevertheless.
- “The reward of playing music should be playing music.” Dave Grohl. Enjoy what you do and you will not only be happier, but will be much more likely to be successful since you can adopt the attitude of a missionary not a mercenary. Missionaries survive through the tough times, which is usually what success in the music business requires. Many people work for many years in order to become an overnight sensation. It is important to note that what you love will likely change substantially over your lifetime. This is natural. Tastes and desires evolve over the years, which is a good thing, since otherwise life can get boring.
Notes:
Duncan Watts: http://www.nytimes.com/2007/04/15/magazine/15wwlnidealab.t.html
Generation of Swine: https://books.google.com/books?id=hysRM1imbJ0C&lpg=PA43&pg=PA43#v=onepage&q&f=false
BBC: http://www.bbc.com/news/10581280
The Music Business: https://www.budivoogt.com/understanding-music-industry-record-labels-ars-distribution-pluggers-pr/
Quartz: http://qz.com/383109/the-music-industry-has-hit-its-rock-bottom/
Nesta: http://www.nesta.org.uk/blog/artistic-inequality-industry-or-human-nature
Recode: http://www.recode.net/2016/8/26/12645066/music-streaming-services-pandora-spotify-amazon-pandora
John Bersin: http://www.forbes.com/sites/joshbersin/2014/02/19/the-myth-of-the-bell-curve-look-for-the-hyper-performers/#7ae8019d13fc
Neil Howe: http://www.forbes.com/sites/neilhowe/2016/08/31/the-new-rules-of-the-creative-economy/#695d7cc259f0
Pollstar: http://www.pollstarpro.com/files/charts2015/2015YearEndBusinessAnalysis.pdf
New Math: http://nymag.com/arts/popmusic/features/grizzly-bear-2012-10/