Can investors and bands profit share?

May 27, 2017 02:22 PM
Music trade musings & new music reviews

Ashort but hopeful trend in music occurred in 2015 when recorded music revenue grew globally for the first year since the mp3 file came on the scene, albeit by a meager 3.2%, while digital overtook physical sales for the first time. While per capita spending on recorded music fell every year from 2008 to 2014, per capita spending on live music grew from $29 to $48 over the same time. In addition, fans that go to live shows spend nearly 20 times as much on music (tickets, merchandise, recorded music) as peers who do not go to live shows, according to MusicWatch Inc.

So, as a band formed in the post-music buying world, how do you make a living? Sure, there are still some artists like Adele, Taylor Swift, Ed Sheeran and Drake who will sell or stream enough to make them rich, but many working musicians are struggling.

Two models could changes things for musicians and benefits investors willing to take on risk. Launching a band and touring is like launching a start-up. There is a need for up-front capital to cover front-loaded costs like writing and recording music, travel, equipment and supporting a crew. Bands must buy their merchandise up front with no guaranteed sales and are often charged for any publicity/ads to promote the shows.   

Where do revenues come from? Excluding revenue from purchased, streamed and performed music, ticket sales generally contribute between 65% to 85% of revenues, merchandise (15% to 25%) and sponsorships (5% to 10%). Joey Ryan, half of The Milk Carton Kids, quips, “We give away our music to get you to buy T-shirts.”

Jason Narducy, front man of Split Single and bassist for Bob Mould and Superchunk, says, “Musicians will sign up for just about anything.” Band debentures and Mutual Artistic Funds challenge crowd-sourced capital raising methods

Band Debentures: Bands finance their recording/touring costs with convertible debentures. A band would issue debentures to a small investor pool. These funds would cover the band’s costs, and in turn, the investors could either recoup their investment through uncollateralized debt at a fixed percentage rate determined by the risk deemed appropriate or convert their debt to a predetermined piece of equity in the band. A four-member band could offer a debenture equaling 20% of its top-line revenues until the debenture has been repaid plus interest. The band gets 80% of revenues and is responsible for all costs. Debenture holders could forego their payments to hold 20% equity in the band in perpetuity and reap 20% of pre-tax profits.

Mutual Artistic Funds (MAFS): Investors pool funds entrusted to a manager, responsible for selecting and doling out funds to contracted bands. This manager would assume the role of a money manager and/or A&R executive, except the assets in the fund would be bands. The manager would be paid a fair stipend for their work and would get a percentage of earnings (say 5%). They are incented to find bands who can sell albums, tickets, and/or merchandise--bands that could find their audience, hence making money. Investors would have to assume the risk of the relatively illiquid nature of the investment and on each band failing.

The MAF would essentially act like a label without promotion, which can be costly, or distribution, which is essentially free today. The MAF manager could assume the role of band manager for a limited number of bands or hire that person, but that income would be split between income to the MAF and the manager. The trick would be to incent the manager to maximize profits for the MAF, not him/herself. A unique manager with both investment skills and a trained ear would be needed.  

All percentages are merely hypothetical; both structures would require much more thorough vetting, and may vary from band to band or genre to genre.


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