Why hasn’t the music industry’s pro-UGC mentality translated to merch?

Today’s post stems from a realization that came suddenly to me last week: the music industry’s advancing relationship with user-generated content (UGC) on digital platforms has not yet extended into the physical world, and especially not with merch.

I’m admittedly writing this from a somewhat biased standpoint: I typically advocate for encouraging and supporting superfans where they are already active, instead of shutting down their self-organized activity for the sake of preserving an artist’s ego or brand integrity. Of course, artists’ rights should be protected and enforced wherever possible, but I think there are many opportunities to protect IP without alienating the very fans who constitute the music industry’s lifeblood.

Thanks to tools like YouTube’s Content ID and Facebook’s evolving Rights Manager for video, there are already many success stories of artists and labels striking a balance between IP protection and fan inclusion when it comes to embracing and monetizing UGC. But when it comes to fan-generated artist merch — what I’ll refer to in this piece as “user-generated merch” (UGM) — we still have a long way to go before we achieve both cultural acceptance and proper commercial monetization in a way that benefits everyone involved.

As I’ve written in the past, music companies are potentially leaving a lot of money and data on the table by not treating merch as seriously as digital recordings and streams. UGM in particular could help move this sea change forward by allowing artists and marketers to segment, retarget and cater to fans more effectively. After all, those who go out of their way to design and sell branded merch for their idols are likely the same people who are eager to shell out more money for physical experiences (e.g. VIP ticket packages or backstage passes), because they are already expressing their creative identity through tangible products on their own accord.

Fans and designers who help cover upfront manufacturing, creative and/or marketing costs for merch could also be financially incentivized to serve as ambassadors for artists by receiving a greater share of royalties on sales, while artists could spend less time worrying about logistics and more time on other activities. It seems like a win-win-win situation for fans, artists and particularly the platforms that enable UGM to flourish.

But upon doing more research, I learned that there are several legal and technological hurdles that are difficult, but not impossible, to overcome in order to make this fantasy ecosystem a reality. Below is an overview of these challenges, and some ideas for solutions based on real-world examples.

Traditional artist merch is “official,” “high-end” and wholly owned

Because merch is one of the last bastions of scarcity in a music landscape dominated by streaming and social media, many artists prefer to keep their merch as “official” and/or high-end as possible, at least according to public perception.

By “official,” I’m referring to the amount of ownership that an artist has over branding and distribution. An “official” merch collection historically comes directly and solely from a name brand, and is not approved to be sold by any other third-party vendor. In this vein, every major label has established its own in-house merchandising arm and/or acquired a third-party specialist (Universal Music’s Bravado, Sony Music’s The Thread Shop, Warner Music’s acquisition of EMP Merchandising) not just to streamline manufacturing operations, but also arguably to strengthen their credibility as “official” vendors of their own brands.

The “high-end” aspect is a matter of economics: there tends to be greater consumer demand, and a willingness to pay a higher price, for well-marketed products in short supply. This is the whole ethos behind brands like Supreme, Bape and other icons of the “hype economy” in fashion.

Many musical artists have attempted to recreate this hype in their own merch strategies — i.e. by doing limited runs around a tour or album release, charging exorbitant prices and/or partnering with luxury brands on exclusive lines. Recent examples include Kanye West selling sweatshirts costing up to $225 each and “church socks” for $50 a pair in front of his Sunday Service performance at Coachella; Justin Bieber partnering with Barney’s for an exclusive capsule collection around his 2016 “Purpose” tour; and boutique merch firm Barking Irons striking limited-edition partnerships with the likes of Bob Dylan, Yoko Ono and Billy Joel.

Crucially, these types of partnerships make the unspoken assumption that diehard fans of these artists prefer merch items that accrue greater value over time (like a vintage record) over those that are lower-cost and more easily collectable (like mass-produced CDs or cassettes), which is far from true in every circumstance.

At the major-label level, maximizing brand control and keeping things more “official” and “high-end” remains a priority for most artists — making any erosion of those two brand pillars, including user-generated merch, an immediate red flag. Labels’ marketing, e-commerce and legal divisions still spend so much of their time issuing manual takedown requests to vendors selling merch items that prominently feature an artist’s face, likeness, lyrics and/or other owned trademarks or brands without said artist’s permission. In my previous conversations, Etsy, Redbubble and Amazon have been some of the most frequently cited culprits in terms of allowing vendors to upload and sell infringing merch.

What makes this takedown process particularly painful for rights holders is that the fan-merch market reacts quickly to news and album-release cycles. For instance, a simple search on Etsy reveals a substantial range of items branded with the title, lyrics and/or music-video color scheme from Taylor Swift’s new song “You Need to Calm Down,” which just came out in mid-June.

The “micro-licensing” gap between digital music and physical retail

I have yet to talk to a single person within these aforementioned label divisions who takes an openly enthusiastic and positive stance towards fan-generated merch — yet they tend to be much more accepting, or at least reluctantly tolerant, of UGC in the context of online media.

Part of this relatively higher enthusiasm for digital-media UGC may be due to demonstrated investment from outside tech companies in helping content owners enforce their rights. Over the course of more than a decade, conglomerates like Google and Facebook have built up the scale and resources required to maintain rights-management systems around digital assets (e.g. Content ID and Rights Manager, respectively) that not only align the incentives of both everyday users and content owners, but also actually work.

Other apps are now pressured to do the same: Snap is reportedly in talks with labels to license music for its platform — presumably to build a product similar to what is already possible on Instagram Stories — while rival shortform video apps like TikTok have reawakened music companies to the power of UGC to drive up both impressions and premium streams.

The concepts of “micro-licensing” and micropayments have also gained more ground in recorded music and publishing, to the point where many artists now view micro-transactions of their beats, melodies and other recorded works as a viable, passive income stream. Splice recently raised a $57.5 million Series C round on the thesis that this type of micro-transaction will continue to grow, while library-esque sites like Musicbed help pre-negotiate licensing terms in order to scale tiered pricing across potential thousands (or ideally millions) of buyers and sellers of recorded music excerpts, without necessarily compromising on quality.

Setting up a similarly collaborative, open “micro-licensing” system for UGM might be a logistical nightmare. Aside from sites like LyricMerch (which does not feature designs submitted by fans), no equivalent of YouTube’s Content ID exists yet for lyrics, visual trademarks, likeness rights or other aspects of an artist’s brand that might be used on merch. The whole lyric-scraping controversy that erupted last month among Google, Genius and LyricFind, as well as Wixen’s lawsuit against Pandora for lyrics infringement (which also involved LyricFind), demonstrated how lyric tracking has yet to be standardized even for such a renowned, consumer-facing and “tech-forward” market leader such as Genius. Hence why labels need to spend so much time issuing takedown requests for merch on a manual basis.

Source3, a now-defunct startup devoted to helping companies recognize, analyze and monetize branded IP in user-generated content, might have been the closest to successfully merging physical and digital formats under the same umbrella term of “UGC.” Founded in 2014 by the same team behind RightsFlow (the music licensing and royalty-reporting platform that sold to Google in 2011), Source3 focused initially on the hype around 3D printing, striking brand licensing deals with the U.S. Army and Epic Rights for on-demand, 3D-printed products.

However, it seems like the startup ultimately burned out on physical product, shifting its focus to digital UGC in the form of video and VR/AR. Facebook acquired and shut down Source3 in June 2017 — months ahead of the former’s first-ever music licensing deal with Universal — and much of Source3’s original team, including co-founders Scott Sellwood and Ben Cockerham, now work across label business development, media content operations, music research and publishing departments at Facebook.

What would a solution look like — and what examples already exist?

Likely the only kind of company who would be able to build and maintain the same sort of automated, collaborative licensing platform that we’re seeing with Content ID for recordings is yet another tech behemoth —perhaps one like Amazon that already commands a significant share of the e-commerce market.

In fact, such a solution already exists under Amazon, but it’s far from perfect.

The company’s Merch Collab program, housed under Merch by Amazon, allows media and content owners to collaborate with independent designers to create officially-approved merchandise, with the two parties splitting sales three-way with Amazon. Current participating brands come primarily from the film/TV world, including Shane Dawson, Neil deGrasse Tyson and the series Impractical Jokers and Annoying Orange. Qualifying designers can send submissions directly to these brands on an ongoing basis, while the latter can view and approve or reject responses in real time.

While heavily restricted and invite-only for now, Merch Collab is non-exclusive and is interested in “major entertainment brands, musicians, consumer products” and “social influencers [with] a minimum of 100K followers,” according to its website. At Music Biz, Amazon’s artist relations team mentioned that they are trying to bring more artists on board to be official merch sellers, and are already working with the likes of Marshmello, Billie Eilish, KISS and Third Eye Blind on setting up bespoke stores.

There are two major, and unsurprising, downsides to this program.

One, typical royalty payouts under Merch by Amazon are vastly skewed in favor of the tech conglomerate. For instance, without any outside designer involved, a brand will get less than a 14% royalty on each Amazon sale of a $15.99, short-sleeve T-shirt in the U.S., and a 40% royalty on the same item sold in the same country for $25.99. Under the Merch Collab program, that share whittles down even further: two-thirds of that existing royalty will be paid to the brand, with the remainder going to the designer (so in the case of a $15.99, short-sleeve T-shirt in the U.S., the brand will receive a 9.4% royalty with the designer receiving just 4.6%).

Secondly, according to Merch Collab’s terms of service, Amazon owns the copyright to all accepted design submissions by default. Brands can also buy out the full copyright to these designs by paying Amazon either $5,000 or 2x the royalties the designer earned on the submission, up to a maximum of $100,000 — whichever amount is higher. Either way, the designer (a.k.a. the fan) gets screwed over with respect to ownership and control over their work, let alone compensation in the case of a buyout.

Thankfully, some friendlier precedents also exist for musicians and designers alike. Back in 2013, marketing agency Creative Allies proposed a friendlier rev-share model in which the agency would work with musicians to crowdsource designs for posters and merch, then the winning design would be featured on “official” items for purchase with the designer and musician receiving a 10% and 50% royalty on sales, respectively. That leaves just 40% to cover Creative Allies’ manufacturing and printing costs, versus a majority cut (up to 85% in some cases) under Amazon’s merch program. Moreover, Creative Allies’ terms of service allow artists to maintain ownership over any proprietary content they upload to the platform.

While it’s unclear whether the agency is still abiding by its originally-proposed model today, recent case studies show the potential of UGM to promote an artist’s brand or tour — particularly in the case of rallying local communities, in which word of mouth is a powerful marketing force. The company worked with rapper Fetty Wap to host a contest where local artists could submit their own poster designs for each of the 19 stops on his “For My Fans” tour, and recently closed a similar contest with indie folk band The Head and the Heart. All submissions to the latter are still available to peruse and upvote on the contest website.

Beyond music: UGM inspiration from other industries

As with several other technological advancements, music is actually behind other industries like sports and online gaming when it comes to implementing these kinds of collaborative, scaled licensing systems for merch.

For instance, Fanatics, a sports merchandising company last valued at $4.5 billion, regularly makes officially-licensed merch for national teams within seconds of major draft picks, score updates and similar announcements. While not completely “fan-driven” or “user-generated,” that rapid-fire pace is similar to those of the aforementioned self-starters on Etsy who are constantly monitoring Taylor Swift and other musical celebrities. Fanatics is able to take advantage of these unexpected news bites in commerce form without leaving money on the table for the teams involved.

In the gaming world, For Fans By Fans — a site focusing on sci-fi, gaming and anime fandoms — has hosted several “Fan Forge” open-submission contests for fan art around specific gaming properties (e.g. Guild Wars 2 and Warframe), and has partnered with Valve/Steam on a “Merchandise Workshop” that allows artists to submit designs for games on a rolling basis. It seems the program is not well-managed, however, as it frequently receives poor reviews on customer service.

Film and TV brands are particularly early movers in partnering with self-serve/custom merch platforms. Disney maintains an official store on custom merch platform Zazzle, and the latter also has licensing partnerships with several other entertainment and university brands that allow any fans to design and sell their own custom merch, using said brands’ logos and other visual assets.

Importantly, Zazzle’s terms of service are even worse than those of Amazon, at least from the perspective of the fan or designer (although this does also imply a better deal for the artist or media brand). Unlike Amazon, Zazzle requires not only that any uploaded fan artwork remain exclusive to their platform, but also that fans automatically revert ownership of any of their accepted designs and products to the original brand IP owner (e.g. Hasbro for Transformers fan merch, or Sony for Outlanders merch). The only benefit for these fan-designers on Zazzle is a 5% to 10% royalty rate on all sales, depending on the brand.

Music companies looking to enter the UGM market would do well to learn from these flaws: i.e. building atop an on-demand manufacturing system that can react and move quickly alongside the rapid-fire industry news cycle, giving fans and the wider public a stake in the outcome by allowing them to vote on submissions and baking in mutually beneficial royalty-split terms for musicians, designers and platforms.

In conclusion: the existing solutions aren’t perfect, but almost all the tech required for UGM is there

To sum up, with improvements in tracking technology and licensing agreements, UGM (user-generated merch) could potentially be treated as just another form of UGC (user-generated content), and could therefore align incentives in a similar way among recording artists, labels, designers and fans, instead of being just another tedious litigation target.

Fans can get more access to more product, or at least have a stake in the outcome by vetting design submissions from their peers.

Recording artists and labels can use UGM to drive up their brand awareness and impressions and meet superfans’ demand for more product — provided they are willing to look beyond a scarcity model for physical product.

Visual artists making high-quality work can use UGM to cross-promote with a brand’s audience that they previously would not have access to, like a more democratic form of influencer marketing — but until royalty-split and copyright-ownership terms in the contracts of these programs are friendlier towards designers, UGM alone will be unrealistic for sustaining an independent design business in the long term.

All the operational pieces are there; incentives are a completely different story.