Developing artists while your CFO is riding you

On Thursday, February 16th, Jim McDermott wrote a wonderfully thoughtful opinion piece about the major labels’ strategy behind licensing deals “advances” – an issue that has been debated repeatedly within the industry over the years, and recently got re-ignited on a panel in SF. You can read the article and join the conversation at Digital Music News, the article’s name is “Ex-Major Label Exec: ‘You Can’t Develop Artists When Everyone Thinks You’re an Extortionist’”. I added my own voice to the conversation yesterday, and I am posting my comments below for your reading pleasure (smile). Would love to hear back from you here (you can comment below) or at the DMN site. 

You Can’t Develop Artists When Your CFO is Riding You For Numbers
I don’t see the status of the industry as something that was developed intentionally by labels over the years. I think you would agree it’s quite the opposite, since they’ve been rather reactionary all along (at least since I joined in during the mid 90s, this is my point of view). Let’s take a step back for a second and consider our short digital history:

I think record companies got spoiled during the internet bubble days, when the “advance payment” model was introduced and most start ups had lots of cash from VCs to pay for access, pay to play. With many companies then going out of business in the aftermath of paying “advances”, the cash went straight to the bottom line. What a wonderful model!

We are, of course, dealing with (most of the time) public recorded music companies. These companies used to own hard goods – plants, studios, stock, etc. – and the mentality of the public company CFO is to try and drive stock price and revenue and margin increases by any reasonable means necessary.

During the past decade, while labels were getting out of those physical asset management business lines, they were also creating “digital business development” units that were originally designed to explore, approve and license new digital business models. But before you knew it, those units became a P&L center, with their members in charge of driving revenue numbers. Sales. So advance fees became a new business model. Even thought the bubble was gone, with iTunes launching there were plenty of other large profile entrants to the marketplace that could and did pay entry fees.

In the past handful of years, there has been a healthy shift in the industry, and most such “biz dev units” merged with “distribution” – and indeed, the decisions made about “advances” and such today are a lot more strategic in nature and driven by a holistic approach to the prospect, not a dry requirement to meet a red line. They are not punitive, but rather driven by a realistic approach of short and long term opportunity per prospect.

Reality still presents a challenge when one takes “art and entertainment” (where product quality is very hard to predict) and attempts to drive a public company with it. You just can’t make projections like you do with pizza. Back when there was stock to “play with” on the books, and plants, and studios, there were other elements to the business that drove recurring revenues. Catalog was business too.

Today, the revenue is mainly about the art itself, the IP. The result is that well, if the money is on the table with a major opportunity, it is hard to fault a businessman for trying to make a sale. There is no right or wrong in an open market environment. You can of course argue this has nothing to do with the art and is unfair to artists – that is an entirely separate story altogether.

Yes, taken as a whole, over the past say 15 years, the industry’s restrictive and punitive approach has done it more damage than good. I think it was due to a lack of strategic vision and to short-term, quarterly-numbers focused approach. Things are changing for the better, though time would tell if it’s too little too late.

So in the end of the day, I understand both sides of the argument, and believe that, with respect to our 2012 reality, the “truth” is in the middle and in various shades of grey.

On a separate note, I remain curious about the limited long-term vision that record companies take to their business line. They have realized a decade ago that their real assets are the IP. But the largest diversification has been 360 deals? Why not expand what IP means? How come the major labels don’t control Apps, games, and other IP? Why distribute just one line of digital IP (and the smallest at that)? We all know labels would do well staying focused on music, it’s what they know best. But the public entity that used to own plants, studios, stock, the public company that seeks aggressive growth – has so many exciting opportunities in front of its face these days, and yet none have acted on it. Diversification seems to be a more exciting and constructive approach than arguing with digital retailers over pay for play fees. Just an idea.

Shachar Oren, CEO