Downtown Music Holdings now owns four music distributors. What's next?

Please note: This analysis and market map were updated on January 28, 2020. You can read the update here.

It’s a simultaneously difficult and opportune time to be a music distributor.

I’ve always been a bit skeptical about the digital-distribution business. Through a handful of articles last year (in Billboard and Water & Music), I broke down how differentiation in the sector was becoming increasingly difficult, as its underlying mechanics were becoming more commoditized, allowing practically anyone to enter the market and leaving players with little other choice but to compete on price.

This heated competition and market saturation has prompted some distributors to make dramatic changes in their business models. For instance, Stem kicked off the majority of its customer base to focus on more established artists, while UnitedMasters doubled its commission rate from 5% to 10% (and now charges a 20% commission on royalties from brand placements).

But beyond these business-model changes, there’s been even more momentum around mergers and acquisitions. In 2019 alone, SoundCloud acquired Repost Network to bolster its pivot to artist services; Downtown Music Holdings closed its acquisition of AVL Digital Group, the parent company of CD Baby, DashGo, AdRev and other distribution, marketing and monetization tools for indie artists; and music and audio distributor Zebralution got bought by a German performing rights organization (what?!).

A new announcement yesterday adds to this developing saga: Downtown-owned AVL Digital Group has acquired yet another distribution company named FUGA.

For those who aren’t yet familiar: FUGA is a closed distribution- and marketing-services company that works primarily with labels, artist-management firms and other established music organizations, rather than with individual artists. Some examples of FUGA’s clients include Epitaph, Mom + Pop, Domino, Better Noise and Riot Games (yes, you read that right). The company’s approach is a stark contrast to that of other AVL-owned distributors like CD Baby and Soundrop that are open to anyone who wants to sign up, and that cater more to individual, unsigned artists.

There are multiple potential angles to tease out of this acquisition announcement. One is the full-stack verticalization of publishing companies like Downtown, Kobalt and BMG, as MIDiA Research’s Mark Mulligan has written eloquently about in the past. (Downtown also owns Songtrust, likely the largest self-serve publishing admin and royalty collection platform.)

For this piece, though, I want to focus specifically on the ongoing consolidation of distribution, and of what Downtown’s latest moves could mean for the distro sector as a whole.

Revisiting the market: The segmentation of music distribution

Let’s revisit the chart I made several months ago about the segmentation of the distribution market. Below is an updated version; based on some reader feedback, I added a few companies to the list (e.g. Record Union, Ingrooves and Spinnup), moved some other companies around and renamed the vertical axis to more accurately reflect the organizational schema I had in mind.

Just to review:

• Distributors towards the left of the chart have fewer customers, but higher average revenue per customer — i.e. they’re playing a hands-on services game. In contrast, distributors towards the right have many more customers, but lower average revenue per customer — i.e. they’re playing a high-volume, low-margin game.
• From left to right, the segments pictured are 1) major labels; 2) closed distributors that serve primarily label clients; 3) closed distributors that serve a mix of artist and label clients; 4) hybrid open/closed distributors that offer an open, self-serve platform, but also provide hands-on services to select clients; and 5) primarily open distributors whose core offering is a self-serve platform for indie/DIY artists.
• The two asterisked segments represent distributors that serve the “middle tier” of artists — i.e. neither completely new/DIY artists nor major-label/mainstream artists, but rather those with an already-established income and distinct sets of career goals and business needs that current technology is under-serving. In a previous issue of my newsletter, I argued that while the rightmost segment of distribution has the widest total addressable market, it’s also the most competitive and saturated segment, which will persuade more open distributors to start moving towards the left of the chart and focus more on closed services. (Stem did as such.)

Downtown and AVL’s Wide Distribution Net

Now, let’s highlight the four distribution companies that Downtown Music Holdings now owns — boxed in red below:

A quick summary:

• As previously mentioned, FUGA is a closed service and platform that works primarily with established music organizations, rather than with individual artists.
• CD Baby is an open platform that services mostly DIY and unsigned artists.
• Soundrop is also an open, DIY-focused platform, with a specialization in cover song licensing.
• DashGo is somewhere in between; the company handles distribution for over 10,000 artists, according to their website, but you still have to fill out a Google form to access their services.

To my knowledge, no other music company has as wide of a distribution net as Downtown in this way. Aside from major labels, the only segment that Downtown hasn’t covered yet is that of hybrid open/closed distributors. But I would argue that Downtown doesn’t have to go into that segment at all, but can rather blur some of the offerings from its existing portfolio companies to stay competitive with the likes of Ditto, Amuse and ONErpm. For instance, I don’t think it’s outrageous at all to imagine a future where FUGA and CD Baby’s offerings are combined into one centralized platform that serves the entire spectrum of potential clients in recorded music, from emerging artists to established labels.

What’s next?

Where will music distribution go from here? In my mind, further consolidation in the landscape is inevitable. But one question that I think is still up in the air is who will lead that charge.

For now, there are three possibilities: major labels, streaming services and incumbent distributors.

Major labels have been particularly aggressive in buying up indie distributors for the sake of increasing their market share of recorded music and creating A&R farms for their own rosters. Caroline, The Orchard, Ingrooves, ADA, Level and Spinnup are all owned by majors, and I wouldn’t be surprised if more distros joined that list over the next year.

Importantly, owning indie distributors does have a significant impact on major labels’ reach. For instance, according to Billboard and Nielsen, copyrights owned by Universal Music Group account for a 29% share of the recorded-music market — but if you look at catalog distributed by Universal, that share increases to 38%. On the flip side, copyrights owned by indie labels account for 35% of the market, but copyrights distributed by indies account for only 16%. This implies that many artists and labels who we categorize as “indie” actually rely on distributors owned by major labels to release their music — a nuance that can be complicated to discuss in the open.

For a while, a lot of people in the music industry thought streaming services, not labels, would be the most aggressive players in acquiring music distributors. After all, the likes of Spotify and Apple have to give ~70% of their revenue away to third-party content owners as part of their licensing agreements.

In theory, the best way to eliminate that cost is to become the content owner and/or distributor yourself, which Spotify tried and failed to pull off with its own direct-distribution platform for independent artists. Spotify does still own a stake in DistroKid, but the former’s momentum around owning both distribution and consumption in music has all but worn off — and, instead, has shifted to the podcast side.

Finally, there are the incumbent distributors and their parent companies. This is where Downtown comes in — and with a decidedly different tone.

According to its website, a core tenet of the holding company’s mission is to “support a vision for a more equitable and innovative music ecosystem,” and to “reimagin[e] the way education, access, and ultimately money is distributed to creators around the world.” It’s one thing for a legacy incumbent like a major label to buy up distributors for the sake of increasing market share and mining artist data; it’s another thing entirely for a newcomer to buy up distributors with the aim of advocating for more sustainable music economics as a whole.

It’s not that dissimilar from what Merck Mercuriadis claims to be doing with the Hipgnosis Songs Fund — in which he’s spending billions on acquiring songwriting catalogs, with the ultimate goal of tilting the entire industry landscape more in favor of songwriters as a whole (e.g. by launching “a songwriter’s union … something akin to the Screenwriters Guild, that would give songwriters more leverage to extract better deals from the industry’s power brokers,” as Marker reports).

Regardless of whether the buyers in both of these situations will actually deliver on their promises, you can’t deny that the wide net they’ve built for themselves gives them enormous leverage.