The Music Business Rectangle: A new framework for rethinking power in the music industry

You may have seen that I ran a poll on Twitter shortly before the winter holiday break asking whom my followers thought “ran” the music industry — i.e. who had the most power, influence and control in deciding where the music industry was going, from a commercial and technological perspective.

The poll got a lot more engagement than I expected. Here are the final results:

Unsurprisingly, the top two choices in the poll were labels/publishers and tech conglomerates. This is consistent with a lot of the most talked-about music-industry narratives from the last few years — e.g. Spotify “taking on labels” with artist/manager advances and its now-shuttered direct-upload platform, or Tencent Music and its parent company now owning a stake in Universal Music Group.

That said, there were several people in the comments who voted “other” and suggested that other stakeholders, such as artists, fans, and performing rights organizations (PROs), had more power than the others. I, for one, initially thought the answer should have been artist managers in principle — since they oversee all aspects of artists’ businesses, and are arguably the best positioned to diversify into multiple revenue sources and integrate vertically yet nimbly (e.g. Scooter Braun acquiring Taylor Swift’s Big Machine catalog).

But after some more reflection, and after reading through everyone’s comments, I realized that trying to understand the question of power through the lens of organizations rather than assets might be a lost cause in the modern music landscape.

The organizational approach will likely lead nowhere because one could hypothetically make a one-sentence argument in favor of any kind of music company “running” the rest of the industry:

• Artists create the content and, increasingly, own their careers as well as their fan relationships.
• Labels and publishers own and “exploit” the content.
• Managers oversee all aspects of artists’ businesses, and are arguably the best positioned to diversify into multiple revenue sources.
• Streaming and tech companies control the pipes through which music ultimately reaches audiences.
• Fans and audiences are the ones actually streaming and sharing, and determining what’s popular.
• Concert promoters and ticketing companies account for the majority of many artists’ income in a streaming world.
• Investment and private-equity firms have more money than anyone else on this list.

All of the above statements are technically correct. In fact, this diverse group of organizations and stakeholders might be more accurately represented by a tense interdependence among nodes in a network, rather than by a clear hierarchy with one player “running” everyone else.

I watched the excellent film 12 Angry Men over the holiday, and can imagine a similar situation breaking out in this context: We bring these seven music-industry stakeholders together into a boardroom, seat them around a table and give them three hours to come to a decision about who in the room has the “most” “power.” But they each approach the discussion with their own incentives and biases, which end up clashing dramatically with each other. At the end, the argument becomes so heated and exhausting that the group somehow concludes that no one runs the music industry.

This argument becomes even more complicated once you realize that traditional boundaries among different kinds of music companies are increasingly blurring; management and tech companies are record labels, record labels and distributors are managers, gaming companies are event promoters, the list goes on.

As a result, we need a better framework for understanding power in music that is not confined to traditional organizational structures, but rather centers around more adaptable and transferable business concepts in a world where company boundaries are continually breaking down.

Put another way: The better question might be not who runs the music industry, but what runs the music industry.

Introducing the Music Business Rectangle: You can choose at most three corners

The most powerful players in the music business aren’t specific companies, like labels, publishers or private equity firms. We need to think about power more abstractly.

What’s more, virtually no music company in the world has all four of these advantages. The few, rare ones who do will end up running the rest of the industry.

I’ve visualized this argument as a “music business rectangle,” in which you can choose only three corners. See below:

First, let’s clarify my definitions of these terms:

1. “Capital to invest” refers simply to spare cash or other forms of capital that a company or person has freely available to spend or invest into its business.
2. “Long-term intellectual property (I.P.) assets” is also a pretty straightforward category; in the music business, it typically refers to long-term ownership of copyrights (be they on the masters and/or publishing side) and trademarks (with respect to merchandise and visual branding). Importantly, while I.P. can certainly increase in value over time, it is NOT considered capital in this case, because it cannot be “spent” in the same way that cash can.
3. “Direct-to-audience scale” (hereafter D2A scale) refers to having direct access to a large volume of music listeners and consumers, in a way that can be monetized without any middlemen in between. The “direct” aspect of this definition is super important. For instance, I argue that record labels do NOT have D2A scale because they don’t actually have direct, unencumbered access to streaming audiences; the streaming services themselves do, and filter out what kinds of audience data they feed back to labels. And for the most part, labels don’t have direct, unencumbered access to social-media fanbases; the artists do, and any label activity on their social media accounts typically happens at the discretion of said artists.
4. “Direct-to-talent scale” (hereafter D2T scale) refers to having direct access to a large volume of artists, producers, songwriters and other creative talent, in a way that can be monetized without any middlemen in between.

You (almost) can’t have it all

I structured this framework as a rectangle because, as I indicated in the diagram above, most music companies have at most three out of the four corners available to them. Missing one or more of these key competitive advantages puts a limit on your true “power” as a business.

To explain what I mean, let’s go through various kinds of traditional music-industry stakeholders and analyze where they fit in this rectangle. As you’ll see, nearly all of them are missing something.

Artists = Long-term I.P. assets + D2A scale
Missing: Capital (with exceptions), D2T scale (with exceptions)

To revisit what I said earlier about artists: “they create the content and, increasingly, own their careers as well as their fan relationships.” Therefore, on a fundamental level, a growing number of artists have the benefit of long-term I.P. ownership and D2A scale, at both the independent and major levels.

But those are only two out of the four available corners. What about capital and D2T scale? Unfortunately, they’re usually missing for artists.

Firstly, the vast majority of artists today can barely make ends meet from a music career alone, leaving them with little to no spare cash to invest meaningfully in their business without taking additional funds from another source (e.g. from a label, distributor, publisher, brand or other investor). There are a small number of celebrities who have been able to amass the capital necessary to invest back into their own careers in a diversified and truly industry-changing way — think Rihanna, Jay Z, Nas or Marshmello — but they are the exception rather than the norm.

And while many artists have a sprawling network of fellow creative talent around them with whom they collaborate, that scale usually doesn’t translate in a monetizable way to their business operations. Most artists are operating on the scale of one — i.e., themselves.

The exception is if artists start their own labels and begin signing other artists and producers, building up a large roster of talent and catalog that generates significant passive income for the owners (e.g. Jay Z-owned Roc Nation). But the vast majority of these ventures never scale up beyond ten or so acts — falling far behind the D2T scale that major labels like Interscope or Atlantic have achieved.

Managers = ??
Missing: Capital (with exceptions), long-term I.P. assets, D2A scale (with exceptions), D2T scale

Please don’t interpret this as a dunk on managers (I know many of you are managers yourselves!). They do super important work on artists’ behalf, and some of the most influential people in the music industry today have their roots in artist management (Scooter Braun, Troy Carter, Guy Oseary, etc.).

But under this “music business rectangle” framework, the vast majority of artist managers actually don’t have much of a competitive advantage against other kinds of music companies.

Firstly, at its heart, artist management is personal people management, not just business management. This makes management quite difficult to scale as a business, eliminating D2T scale from our consideration.

Secondly, the vast majority of managers are working behind the scenes to grow their artists’ platforms, not their own — eliminating D2A scale as well. There are a few exceptions, in that influential managers like Scooter Braun are also highly public-facing figures with their own social-media accounts, and can influence audiences directly without going through industry middlemen.

Thirdly, the way artist-management contracts are set up, the success of a manager is tied to that of their artist, typically in the form of a manager taking between 15% and 20% of the artist’s earnings. Typically, said management contracts do not include any copyright co-ownership, which takes the long-term I.P. advantage off the table.

Last but not least, note that Scooter Braun was able to acquire Taylor Swift’s back catalog and gain an I.P. advantage only because he had the massive amount of capital to do so. Most managers don’t have that luxury, because they are working with (and dependent on) artists who are fighting to build up capital themselves.

Labels & Publishers = Capital + long-term I.P. assets + D2T scale
Missing: D2A scale (with exceptions)

There’s a good reason why a lot of people think labels and publishers run the music business, as evidenced in the Twitter poll above.

Most obviously, labels and publishers have the advantage of long-term I.P. assets, by nature of being labels and publishers. They also benefit the most from direct-to-talent scale, by way of maintaining massive rosters of artists and songwriters. According to the RIAA, major labels are signing over 50 new artists every month.

At the major level, labels and publishers also have enough capital to take unparalleled risks on artists with a perceived trajectory towards mainstream success, to the tune of multimillion-dollar promotional budgets and up to six- or even seven-figure upfront advances.

But as I mentioned earlier, the one handicap of labels and publishers is that they do not have direct-to-audience scale. Artists and tech platforms, not third-party rights holders, have direct access to their audiences, giving the former stakeholders more leverage. As a result, as researchers have previously argued, labels and publishers increasingly serve as “financial and marketing organizations” on the backend, as their importance to everyday consumers wanes over time.

Fans = D2A Scale
Missing: Capital (with exceptions), long-term I.P. assets, D2T scale

I realize that the label of a “fan” is somewhat broad and homogenizing. For the purposes of this analysis, by “fans” I’m thinking specifically of any consumers who enjoy listening to music and do not work directly in the music industry or on artists’ direct teams.

As I alluded to earlier, fans are the consumers deciding what’s good and popular; they, for the most part, are the market, and do wield a lot of influence accordingly.

But typically, these fans do not own long-term I.P. assets, nor do they own a significant amount of wealth or have direct access to a scaled roster of talent within their own businesses. Where fandom gets its power is in its collectivity — i.e. in its D2A scale.

Fan armies that coordinate online in droves to maximize their artists’ placement on industry charts, or to protect said artists against any critics or haters, comprise some of the most interesting examples of D2A scale at work. Occasionally, scaled, collective coordination can also give fans the power of capital — e.g. in the form of fans crowdfunding money to buy out billboards in Times Square that promote their favorite artists. But fandom’s strength and leverage lie mostly in its own numbers, and in little more.

Private Equity = Capital, long-term I.P. assets
Missing: D2A scale, D2T scale

In the replies to the original Twitter poll, a lot of people claimed that private equity firms were gaining more and more influence in the music industry, as they are now providing the funds behind several landmark catalog acquisition deals — from Shamrock Capital acquiring Stargate Publishing, to Round Hill Music spending nearly $250 million to acquire Carlin America, to the Carlyle Group backing Scooter Braun’s Ithaca Holdings, which now owns both Big Machine Label Group and Atlas Publishing.

As streaming revenues continue to increase globally, it’s inevitable that recorded music will continue to be commoditized and financialized into investment vehicles in 2020, rewarding the players who embrace that culture.

But based on the music-business rectangle framework, I would argue that private equity is not that influential in the music industry yet, because capital and proximity to I.P. are their only real competitive advantages.

PE firms are arguably the furthest that a music-industry stakeholder could possibly be from music audiences. At large, these firms don’t interact much with talent or with music consumers at all, limiting their understanding of maximizing the value of catalogs from a marketing and fan-engagement perspective. In my mind, lacking that knowledge limits their power.

Concert Promoters = Capital + D2A scale + D2T scale
Missing: Long-term I.P. assets

Around 24 hours after posting my Twitter poll, I realized that live music was virtually nowhere to be found in the conversation that was ensuing online. That may have been partially due to a flaw in the poll itself; because Twitter polls can hold only up to four choices, I didn’t include the live industry as a potential option for voters. But even those who voted “other” and explained their reasoning in the replies rarely mentioned concerts — even though touring is an increasingly important source of revenue and fan engagement for many independent artists.

Putting together this music-business rectangle actually helped me a lot in unpacking why live music was so blatantly left out.

Concert promoters like Live Nation and AEG have direct access to both massive audiences on the front-end and large rosters of talent on the back-end. They also have ample capital to invest not only in marketing, but also in mergers, acquisitions and exclusive deals with venues that some say verge on monopolistic, at least in the U.S.

So, that knocks out three of the four corners in the rectangle. But the last remaining corner is the live sector’s Achilles heel: these promoters don’t have the benefit of long-term copyrights whose value can increase over time.

Yes, Live Nation’s revenue overall is growing over time, in part because ticket prices in general are rising four times faster than the national inflation rate in the U.S. But the nature of the live industry means that Live Nation’s income is derived not from passive catalog or intellectual property, but rather from one ephemeral, one-off gig after the next, limiting their decision-making power in the world of streaming and digital content. The closest things that major concert promoters have to long-term I.P. ownership contracts are long-term venue contracts, but they tend to be much shorter-term.

Streaming services = Capital + D2A scale
Missing: Long-term I.P. assets (with exceptions), D2T scale (with exceptions)

One common and understandable stance in this debate is that streaming services run the music industry, because they control the pipes through which music flows to millions of fans around the world, whether algorithmically or editorially. That’s not wrong — but as the music-business rectangle demonstrates, it’s an incomplete picture of power.

Let’s take Spotify, for instance. They have access to a highly scaled audience of 248 million monthly active users and 113 million paid subscribers. And they have the capital as a public company to invest in top-tier engineering and marketing talent, and to acquire a variety of media production and distribution startups.

But streaming services don’t really have direct access to I.P., nor to a scaled roster of talent. The only way that would happen is if said services bypassed third-party distributors and asked artists to upload their music direct-to-platform — and we all know how that went with Spotify.

This also helps to explain why Tencent Music’s new equity stake in Universal Music Group matters so much for anyone in music. As I argued in a recent piece for NPR Music, Tencent Music has a large audience (i.e. D2A scale) and more than enough cash to keep afloat (i.e. capital) — but not the expertise in artist marketing and creative development, nor the direct access to I.P. and talent, from which labels and publishers benefit. Owning a part of Universal fills that gap, completing the rectangle and putting Tencent in a nearly unparalleled position in the global music business.

The power of unconventional industry players

This rectangular framework will also help us understand why certain types of non-music companies are gaining more and more influence on the industry — and where their key handicaps remain.

Some examples below:

A bit more context on these: On a higher level, corporate brands (e.g. Red Bull, Mastercard, Toyota) and gaming companies (e.g. Riot Games) have the same three competitive advantages. They usually have a sh*t ton of money to spend, own long-term I.P. in the form of their own trademark/branding assets and have direct access to an expansive paying customer base (and an even larger, more casual advertising audience).

Their one important liability is a lack of access to talent at scale — hence why so many of them partner with major labels to start their own label imprints, with mixed results.

Meanwhile, Netflix has become so powerful precisely because it has conquered all four corners of this rectangle in the film/TV world. It has an award-winning slate of original content; a massive amount of capital to invest into producing and marketing said original content; D2T scale in the form of direct access to a diverse roster of talent to create said original content; and D2A scale in the form of nearly 160 million paying subscribers globally. It’s no surprise that tech companies across several industries, including but not limited to music, are trying to build their own version of Netflix.

I would love to hear your feedback on the Music Business Rectangle: Does this make sense to you? Do you think any particular competitive advantages should be added to or removed from the core diagram? Feel free to comment below the post on Patreon or reply via email to me directly. In any case, I hope this drives the point home that our understanding of where power is really clustered in the music industry will be continually warped and challenged in 2020.