The democratization of record label advances

By: Cherie Hu

Published: 2020-03-25

the following members-only database revolves around a topic I’d started researching far before the COVID-19 outbreak, but is now more relevant than ever as artists and music companies try to recover hundreds of millions of dollars in touring losses from event cancellations: the democratization of record-label advances.

Over the past few years, a growing number of music distributors — and other companies targeting “creators” and small businesses at large, including ecommerce and payment providers like Shopify, Square and Stripe — have launched their own cash-advance features, which give a select number of high-performing customers an advance on future revenue in exchange for a flat, predetermined fee.

To my knowledge, this database marks one of the first attempts in the music industry to compile these kinds of initiatives into one central location. There’s also a fuller piece on the topic coming out next week, but you all can get access to the underlying research first.

So far, I’ve found 14 music- and creator-centric companies offering cash advances to artists. For each of these companies, I compiled the following information, wherever available:

I’ve also included a separate tab featuring some companies outside of music that also offer their own advance and microloan services to individual creators and small businesses, to offer more context on working-capital options available in the wider economy.

You can either view the database here right away, or read on for more context and my initial takeaways from this trend.

Context

There are two different perspectives to consider here:

1. The artist

If you ask a qualifying artist today why they think they should sign with a major label, they’ll probably point to two primary reasons: the marketing and promotional support, and the advance.

The upfront advance, which can reach six or seven figures for some artists, remains a powerful shiny object in major-label deals, even if the deals underneath them aren’t working at all in the artist’s favor.

In general, cash flow from recorded music remains a consistent problem for artists of all career stages — especially in the current climate, where the slow drip of streaming income is far from enough to make up for the much more dire immediacy of touring losses.

One way artists can potentially make do in the meantime is by investing more in digital content on social-media or livestreaming platforms. But that also requires having enough cash on hand for creative and marketing expenses, which said artists might not get for a few months from streaming or recorded music alone.

That’s why these more open advance programs from distributors and other tech companies are potentially so revolutionary for artists: It puts working capital into their hands that they previously didn’t have access to. Technically for an artist, if they qualify, it’s possible to get advances from Stem, PayPal, Patreon and Shopify, all within the span of a week.

This potentially allows artists to take bigger risks and make bigger investments into themselves and their careers at the right time, in a way that would have previously been impossible without some sort of cash infusion from a label.

2. The distributor

As I’ve written a lot about in the past, music distribution is a crowded, low-margin and overall cutthroat business. To survive, distributors need to diversify their services, and in many cases start to look more like labels, selling services like digital marketing, playlist pitching and sync licensing.

Cash advances are another way that distributors can not only make a higher margin on high-performing artists, but also retain those artists long-term instead of losing them to a traditional label deal. This is especially important for distributors in the “middle tier” of the landscape, between the major labels and totally open/DIY tools, where market share is still anyone’s game right now.

It’s also super low-risk for the distributor if they can pick the right artists who have predictable revenue coming in; they can make as much as a 25% margin off of just giving that revenue to artists earlier.

Disclaimers

I’m still missing a bunch of data around some of the non-music companies, particularly around advance fees, minimum qualifying annual revenue and minimum/maximum advance offers. Working on it!

I’ll also admit that the database could do a better job of distinguishing among different financial instruments — e.g. revolving credit lines, microloans and merchant cash advances, all of which have subtle differences from each other. As of now, that distinction is especially blurry in the non-music company tab. Will also work on making that clearer.

(Interestingly, Stem has referred to its advance feature, Scale, as a “revolving credit line” in the press, but it’s really just a merchant cash advance. Might elaborate more on that in the final piece…)

Initial takeaways

1. Most of the distributor advances are structured in a friendlier way than traditional label deals — but the fees could be better.

Since they’re structured as advances, none of these distributor-led programs require credit history or collateral (i.e. no copyright co-ownership), nor do they charge any penalty if artists can’t pay off their advance in the allotted time — making them friendlier than most traditional loans and label deals.

That said, the fees that independent distributors charge on their advances can go as low as 5%, or as high as 25.5%. The longer an artist takes to pay off their advance, the higher the fee.

For instance, in this below screenshot from Stem’s site, they charge a 25.5% fee on a $11,000 advance that will take 18 months to pay off, based on monthly streaming income of $1,000.

To put this in context of COVID-19 losses: As I discussed in one of my NPR pieces today, the U.S. Small Business Administration (SBA) has made coronavirus-related Economic Injury Disaster Loans (EIDLs) of up to $2 million available to small businesses in 36 states and Washington, D.C. The interest rates on those loans are just 3.75% (and 2.75% for private nonprofits).

While it may take longer to get these loans, they’re ultimately friendlier than some of the above cash-advance deals from distributors. That said, I imagine the distributors fees will go down over time as more players inevitably enter the space.

2. Distributors own this space much more than streaming services (for now).

I remember reading a few stories in 2018 (e.g. from Billboard and the New York Times) about how Spotify was giving cash advances to artists and managers in exchange for direct licenses to their platform. Even though the deals weren’t exclusive, the rhetoric around them was that Spotify wanted to compete more directly with labels by giving artists a bigger financial cut while allowing them to retain ownership of their catalogs.

Yet, no streaming service is included in my database (yet). In hindsight, it makes sense that distributors would end up dominating the cash-advance space much more than streaming platforms, because the service at its core is about B2B fintech, whereas the likes of Spotify are ultimately focused on the end consumer/listener. (This may change if Spotify ends up acquiring a music distributor, like they’ve already done in the podcast world.)

3. Cash-advance programs could potentially benefit major labels in the long run, instead of competing with or cannibalizing them.

While some distributor-led advance programs are meant to compete with or at least challenge traditional deals, two of the programs in my database actually come from major music corporations.

In June 2017, Sony/ATV, the publishing arm of Sony Music Entertainment, announced a partnership with Lyric Financial that would allow songwriters to access royalty advances via a “virtual ATM” on their royalty portal. Then earlier this year, Universal Music Publishing announced a revamped version of its UMPG Window royalty portal, which offers its songwriters “one-click advances” on both local and international royalty pipelines.

I think financial innovation in the music industry will come from outside the major-label/publisher ecosystem, not from inside. That said, in a few interviews I did around this topic, the possibility came up that the standard major-label offering would unbundle into more open financial services on the one hand, and more exclusive marketing services on the other hand.

After all, the strongest suit of major labels today arguably lies in their marketing and promotion, not in their banking. In this situation, outside financial services would be natural partners rather than competitors to the majors.

It’s unclear whether this more specialized, fragmented approach to building out a music career would be more or less convenient for independent artists — i.e. it might give them more peace of mind to have a one-stop shop for both their financing and marketing for a project, instead of having to go through two separate parties.