The democratization of record-label advances

Over the past few decades, streaming, social media and other technologies have transformed the recorded-music industry by democratizing artists’ access to fans from around the world.

But while marketing innovation continues to thrive, there’s another area of recorded music that tech has been much slower to democratize: The advance.

If you’re an artist who wants to get funding for your next album, where do you go? Historically, the only realistic answer was to sign to a record label, who would give the artist an upfront advance on future royalties in exchange for majority ownership over their master recordings. As has been widely covered, many of those deals end up being heavily stacked against the artist, especially at the major-label level.

There are some funding alternatives emerging — such as regular crowdfunding sites like Kickstarter, and equity crowdfunding platforms like Corite and Bumper Collective that allow fans to buy “shares” in an artist’s future work. But these solutions are not for everyone, and don’t quite solve the deeper, systemic issue at hand: Traditional labels still have a stranglehold over the market for recording advances, such that industry capital is locked inside unfavorable deals that are only accessible to artists who have achieved a certain level of commercial success.

A growing number of independent music distributors are looking to change this by opening up capital to tens of thousands of indie and unsigned artists, without taking away their rights.

The past three years have seen a surge of over a dozen distributors launching their own cash-advance programs, in which any qualifying artist (often a customer of said distributor) can apply for and get an advance on their future royalties within a few days.

One of the most prolific such programs is TuneCore’s Direct Advance. Launched in 2017 in partnership with Lyric Financial, the program has issued 12,000 advances to artists across 32 countries so far, totaling around $20 million in value. Lyric Financial tells me TuneCore is on target to surpass 20,000 total advances by the end of this year.

Other competing advance programs are less prolific, but still gaining steam and worth following. Swedish distributor Amuse launched its Fast Forward advance feature for its own customers in February 2019, and the number of advances it’s given out so far is “in [the] hundreds, heading towards thousands,” a rep tells me. Stem — the distributor that controversially kicked off the majority of its user base in mid-2019 to focus on more established acts — launched its Scale advance feature in February 2020 and plans to deploy $100 million in capital for advances, partnering with CoVenture on funding.

Other examples of distributors with advance programs include Symphonic Distribution and CD Baby, which partner with Sound Royalties and Royalty Exchange, respectively, on funding and tech support. There are also some independent advance platforms that aren’t tied to a single distributor, such as The Music Fund, which was part of the Techstars Music 2019 cohort and has given advances to around a dozen artists so far.

(It’s worth noting that while they partner with distributors on these newer advance programs, Sound Royalties and Lyric Financial have been around for 10 to 15 years and are not distributors themselves. They’re more like music-centric banks and tend to strike longer-term advance deals with higher fees, which hasn’t gone unnoticed.)

Cash-advance and microlending programs are already quite commonplace outside of the music industry. Many payments and ecommerce platforms including PayPal, Shopify, Square and Stripe run their own programs that give upfront capital to qualifying customers, in the form of either loans or advances. In this sense, while it may be on the forefront of culture, the music industry is still catching up to the rest of the world when it comes to financial innovation.

We need this innovation now more than ever, especially in the wake of the COVID-19 outbreak; tour and festival cancellations are leaving many performing and behind-the-scenes artists out of work, and scrambling for capital from other sources to make ends meet in the interim. Sound Royalties opened up no-fee advances last week to qualifying artists in need of funding amidst coronavirus-related shutdowns; to my knowledge, no other distributor has removed their advance fees yet, which can be as low as 5% or as high as 25%.

In any case, we should be scrutinizing these more open distributor advances just as much as we might critique a traditional label deal. Because these kinds of offers are so new, there’s little to no regulation or standardization — and the distributors, of course, are coming to the table with their own financial incentives.

Why this trend matters

1. The artist’s perspective

For many artists, a six- to seven-figure upfront advance is still the shiny object that draws them to a major-label deal.

But due to how these deals are typically structured, most advances will never be recouped. As Theo Papadopoulos argued in the Music & Entertainment Industry Educators Association (MEIEA) Journal, standard recording deals perceive artist royalty payments as “a cost of production” to be minimized as much as possible, by piling up investments that the artist must recoup with their advance. “Most recording contracts will require more than just recording-related costs to be recouped from artist royalties,” wrote Papadopoulos. “Recoupable items may include promotion, tour support, video production, and independent promoters, and can vary from 50 to 100 percent of each expenditure item.”

Hence even in the face of millions of streams, radio spins and/or record sales, artists may not successfully recoup — to the point where “what might be perceived by consumers and aspiring superstars as success … may in fact be a failed investment, for both the record company and the artist alike,” wrote Papadopoulos.

Framing a traditional label deal in banking and financial terms makes it sound particularly unfavorable. “If you’re an artist who has a major-label deal with an 85/15 split in favor of the label, and you have to recoup your advance out of your 15% share, you have to generate 6-7x the size of the advance on gross sales in order to recoup,” Abhi Kanakadandila, Head of Strategy at Stem, tells me. “It starts as a loan with a 566% interest rate, and then the label owns 85% of your company moving forward.”

Aside from the advance itself, there’s also the wider issue of cash flow. As discussed above, an artist may not see recording royalties for years in a major-label setup. But even if they’re independent or unsigned, an artist still may not see royalties for as long as half a year depending on which distributor(s) they use — which can put them in a financial bind if they need additional capital to, say, market a tour, produce a music video or land a feature with a bigger artist.

In contrast, with cash-advance features from music distributors, payments companies and ecommerce platforms, it’s now possible for a qualifying artist to get upfront working capital from multiple different sources — say, from Stem, Patreon and Shopify — within the same week to help fund their business growth. Of course, these advances don’t come for free, but they put a growing number of artists in the position to act more properly as entrepreneurs and take bigger risks on themselves.

2. The distributor’s perspective

Distributors also have a lot to lose in this situation, not just artists.

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 beyond just bare-bones content aggregation and royalty payments; in many cases, they actually start to look more like traditional labels, selling hands-on services like digital marketing, playlist pitching and sync licensing.

This is especially the case for distributors catering to the “middle tier” of artists — i.e. the tier of artists in between completely new/DIY and major-label, whose specific creative and business needs are still underserved. This tier is getting more crowded by the month, and market share is still anyone’s game.

Cash advances are one way that middle-tier distributors can not only make a higher margin on higher-performing artists, but also retain those artists long-term instead of losing them to a traditional label deal. “In distribution, once you want to acquire a certain size of clients, advances become part of the game,” Tony van Veen, CEO of DIY Media Group and former CEO of AVL Digital Group (CD Baby’s parent company), tells me. “If your rivals are offering advances and you’re not, you’re at a competitive disadvantage.”

In general, it’s also relatively low-risk for distributors to give out advances, as long as they can pick the right artists and customers who have predictable revenue coming in. Unlike with a traditional label, which typically fronts high establishment and marketing costs for each artist they sign, a more open distributor typically has no marketing or promotional costs in giving out their advances — just the cost of the underlying tech infrastructure. Hence they can sign a larger number of smaller deals, and can make as much as a 25% incremental margin simply off of delivering already-predictable revenue to artists on an earlier schedule.

What to look out for

As the market for independent cash advances continues to heat up, there are three variables that I think are important to look out for when evaluating which deal is best for a given artist.

1. Financial terms

The most obvious variables to consider are the actual terms of the advance.

It’s important to reiterate that most distributor-led advances are not like traditional bank loans. In a typical loan, a bank would give an artist an upfront sum of cash in exchange for monthly payments with a set interest rate over the term of the loan, and occasionally with collateral involved.

In contrast, distributor-led advances are what the financial world calls merchant cash advances because they’re repaid not with set monthly payments, but rather with a percentage of future sales. In such an arrangement, the artist or small business doesn’t own the distributor any funds unless they generate revenue. The majority of distributor-led advance programs also don’t charge extra penalties if artists can’t pay off their advance in the allotted time.

The sizes and terms of the advances vary widely. Amuse has given out advances worth up to $300,000 each, and will only advance six months’ worth of revenue; The Music Fund offers advances worth up to $50,000 each, but terms can last as much as ten years. Stem Scale recipients have the option of choosing between three and 18 months for their advance term, based on how much of their revenue they want to dedicate to paying off the advance.

Importantly, the fees that distributors charge on top of 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. Moreover, if the artist grows much more quickly than expected after signing the deal for the advance, they’ll end up paying a much higher fee than they should have.

In general, microloans tend to command higher interest rates than the market average, because borrowers are more likely to have poorer credit and/or higher risk of defaulting on the loan. But in the case of distributor advances, they’re neither assessing artists’ credit nor asking for collateral.

So why can the fees get so high? Some suggest it’s because the market is relatively new, and comes with risks that are as yet unknown. “There’s not much data, so there’s a newness premium being associated with it,” Brian Harwitt, principal at CoVenture (Stem’s funding partner on advances), tells me. “But I firmly believe the costs will go down over time.”

2. Catalog and split considerations

One major way that most distributor advance programs differ from traditional label deals is that the former gives artists advances on their back catalog revenue, not on that of their future releases.

One concrete example: Nathan Peters, an artist who performs under the name of Sinitus Tempo, recently received an advance of $3,300 from The Music Fund in exchange for 80% of the revenue on a few of his older tracks, for a total term of two years. The deal allows Peters to release future songs through any distributor he chooses, without The Music Fund taking a cut of those newer projects.

More importantly, the deal suits Peters’ specific career, which has a high content output compared to some of his peers. “I put out a lot of music, and the majority of my income is coming in from my newer work,” Peters, who was briefly signed to HiPNOTT Records before going fully DIY around 2016, tells me. “This kind of deal might hurt artists who don’t release music as frequently, or have only a few tracks out.”

Stem Scale is structured in a similar way. “A number of artists who started on Stem have since signed with major labels, but can still access money through Scale if they’ve kept their older catalog with us,” Milana Rabkin, CEO of Stem, tells me. “Our advances are based on historical revenue, and don’t require artists to deliver new content through our platform.”

Another small but nonetheless important consideration is whether the distributor or platform offering the advance can handle splits — which is relevant for any artist releasing music in collaboration with other producers, songwriters or performers.

On Stem, “artists can take advances against their own share without holding up the earnings of any of their collaborators,” says Rabkin. Meanwhile, third-party platforms like The Music Fund can only work with distributors that have split capabilities built in, unless artists want to give up all their revenue on a track for the advance term.

“If an artist on DistroKid gets funding from us, we essentially become a member of the band and register our split through the distributor, which is easy to setup,” John Funge, co-founder/CEO of The Music Fund, tells me.

But many major distributors, including CD Baby, TuneCore and AWAL, don’t support splits on master recording royalties yet. “For those distributors, we either have to make deals where we get 100% of the revenue of whatever track the artist sells us, or we ask them to move their catalog to DistroKid,” says Funge. “We’ve found artists are happy to do that.”

3. Level of automation

While the deals these distributors are offering artists might be highly data-driven and personalized, they’re not always personal.

For instance, The Music Fund is close to fully automated, such that artists can apply for and receive an advance without talking to another human being. In the past, the company has partnered with music analytics platforms like Instrumental to help scout and recruit artists.

“Normally, bigger deals have a higher cost in part because of people negotiating back and forth,” says Funge. “Because our platform is fully automated, there’s just a negligible cost of running infrastructure, which means we can make smaller deals of $2,000 or $3,000 more efficiently.”

Amuse sends push notifications to qualifying artists about advance opportunities, the terms (including the advance amount and the fee) of which are also automated and non-negotiable. In contrast, with Stem Scale, artists have a bit more flexibility around their payment terms, and will be wired to a dedicated account manager if their advance request is accepted.

These deals will likely get further automated across the board over time, which could have both positive and negative effects with respect to which kinds of artists can get access to these deals. “Ironically, the emerging artists who might need the advance the most are also the least likely to get it, because they don’t have a regular track record,” says van Veen. “That can only change if the distributor starts truly acting like a label, doing A&R and placing riskier bets on artists. But the distributor is likely looking at this not with a label formula, but with a financial services formula — saying, if the numbers make sense, we’ll give you the advance.”

Long-term implications

One big question likely running through your minds: Will offering better advances help these distributors poach talent away from major labels?

The distributors themselves claim that their role is simply to expand the landscape of the deals that are possible for independent and middle-tier artists in the first place. “It’s not us versus them — I think it’s just optionality,” says Rabkin. The availability of these advances could also help artists and their teams gain more clarity around their own market value, and get comfortable enough with projecting their own finances to know when a more traditional label deal isn’t right for them, if they eventually decide to go that route.

“What I still haven’t answered in my mind is whether the smaller offers from the Stems of the world will still be attractive to larger artists who are getting seven- to eight-figure advance offers from bigger labels,” says Harwitt. “Will the long-tail economics of owning their own catalog outweigh the upfront payment and marketing services from those labels? It wouldn’t surprise me if you saw labels overpay to make sure they can still sign certain artists.”

Interestingly, there may be a future in which these outside financial innovations for indie artists actually benefit major labels and publishers, instead of cannibalizing them. In fact, Universal Music Publishing and Sony/ATV, the publishing arm of Sony Music Entertainment, each already offer their own royalty-advance features, which songwriters can access through their respective royalty portals. Sony/ATV’s advance tool is powered by the same financial firm who powers TuneCore’s advances, Lyric Financial.

“The real value of a label is in spotting, developing and marketing talent,” says Funge. “I don’t think labels provide as much value as a financial institution. In that sense, using data and algorithms to give artists the best deals, in the most efficient way possible, can be disruptive in the sense of allowing labels to focus on their core area of expertise.”

Further splintering and fragmenting music companies into separate finance and marketing functions could come with a whole other set of challenges. But if it helps to level the industry playing field by opening up more opportunities for independent artists to get the kind of funding previously restricted to the upper echelon of celebrities, and on better terms, the trend will be hard to stop.