How the music industry stifles creativity and denies artists their agency

Things I've learned about building a great business since leaving the music industry for venture capital

The music industry is structured such that it is nearly impossibly for most artists to build great businesses.

There is no middle class of artists. There are the elites (Taylor, Kanye), and then there's everyone else.

This has awful consequences. People are discouraged from using the most valuable and unique thing they have: their creativity. Most artists and creatives cannot capture a reasonable amount of the value they create, so they end up treating music as a hobby because it’s too hard to make money from art.

The TLDR of this? Less creativity, less high-quality art and we’re all left sad and longing for meaning in our lives. Maybe that's an exaggeration but hang with me for a minute.

I used to work as an Artist Manager in the music industry. A few years ago, I quit it and started working in Venture Capital. The bands I managed had all the accolades you'd expect from top tier Australian artists. I have a wall stacked with posters and platinum records that make it look like we were doing well. But in the real world,  we weren't doing that well. We were all still renting houses, living pay cheque to pay cheque, and some of us were working back-up jobs. We were creating a lot of value, but we weren't capturing even a small amount of the value we were creating.

My humblebrag wall - which is my Zoom background 😂

The music industry is constructed so that most artists will never capture even a tiny amount of the value they create. They are systematically denied their agency, and they don't even know this is happening. 

Fundamentals of a good business

@nikiscevak, co-founder of Blackbird. This was an off the cuff response to a question from @nickcrocker in 2019. See how obvious it seems to him? He even wrote this while in a meeting. This whole post came from this slack message.

Since moving over to VC, my eyes have been opened to what is apparently basic business sense to everyone outside of the creative industries. To have a great business, you need some, or all, of the following:

1. A direct relationship with your customers

2. Pricing power

3. Recurring revenue

4. Upgrade revenue

5. Low churn

6. Easy sales cycle

I'll break some of these down and talk about how they relate to artists.

A direct relationship with customers

This is the most fundamental rule. The more I've thought about it, the more I am convinced that this is non-negotiable if you want to have a really excellent business.

When you have a direct relationship with your customers, you can sell to them. You can get feedback from them. You can understand when and how they use your product. You can control your pricing and earn more revenue from them (this is called upgrade revenue).

For artists, this is even more important than it is for, say, a software company. Artists trade in culture and art. These things are fundamentally important to the people that buy them in ways that most businesses can not hope to replicate. Art has the power to inform a person’s identity, elicit emotions, build relationships, and much more. Name one other kind of business that could have this kind of relationship with their customers. Nurturing this properly can result in lifetime customers, advocating for your work, spending loads of money. There is a reason most artists will balk at me calling their fans "customers", and that's because the relationship is more complex and meaningful. It is not transactional as most customer relationships are.

At every point, the music industry tries to stop artists from having a direct relationship with their audience.

Spotify and Apple will never tell you who is listening to your music. They will never tell you who is paying for it. They barely tell you how they are listening to it or when.

Facebook, Instagram and every other social network will never give you a direct line to the people who follow you. They will sell you indirect access to them, but they will never give you their email addresses or allow you to contact them off-platform.

Most ticketing companies will not tell you who buys tickets to your shows. There are exceptions to this rule, but the rule is clear — they will resist sending you a list of names and emails of the people who are paying to see you play.

The same goes for most promoters. Live Nation is the most prominent promoter globally, and as a rule, they will resist telling you who buys tickets to your shows.

When you wrap all of this up, artists are denied the most fundamental thing a business needs to succeed: a direct relationship with their customers. All of the companies listed above are deliberately set up in this way. They own your audience, and that's how they make money. Most artists and their managers don't understand this. I didn’t understand it. Heck, most of the people I worked with in music don't understand this.

Pricing Power

This is a fascinating one. Pricing power is linked to the scarcity of resources, supply and demand. If you create a valuable product that is scarce and that people want, you can command a higher price for it. Think about it this way - a painting is the ultimate example of a scarce work. By definition, there is only one. If it's coveted, the artist collects a higher price than if the work was easily replicable. (Sidebar: NFTs 🤗).

Whole books are written about pricing power, and you can read a neat little definition over on Investopedia.

In music, artists spend time, energy and resources to create products, but they can not control supply and demand. Because of this, they have no say over the prices their products are sold for. When an artist writes a song, they send it on to their distributors (labels), who then send it on to Apple or Spotify for distribution to customers. Apple and Spotify decide on the price, and they decide on the quantity produced (it's the internet, so infinity). Music is abundant, which is why it is so cheap. Fundamentally this is probably a good thing because it’s good for consumers. The point I’m trying to make is that the artist who created the work has no power over pricing.

In 2007 Radiohead ran an experiment with their record In Rainbows. They decided to do their own distribution, which meant they had control over pricing. In Rainbows was sold from their website at whatever price the customer wanted to pay. Trent Reznor famously paid $10,000. Many people paid $0. Very few people got the gravity of this strategy at the time. Nicky Wire of the band Manic Street Preachers said flatly that the offer "demeans music." Fortune magazine listed the In Rainbows experiment in its article, "101 Dumbest Moments in Business."

But it was a genius move and the first example of a decentralised music industry. There were no middlemen in between Radiohead and their customers and so Radiohead got to control their pricing and built a direct relationship with their customers.

Upgrade revenue

This is an easy one to explain. To acquire a customer, you need to spend money. Once you have acquired that customer, it's possible to sell them more things without the cost of acquiring them all over again. By increasing the amount of money a customer gives you over time minus the cost of acquiring them, you increase that customer’s Lifetime Value (LTV).

Imagine if an artist could acquire a fan through some direct marketing (say, a TikTok video). That fan goes and buys a song, and you collect their contact details as part of the transaction. The money you spent to make that TikTok video is a one-off cost. Now that you have that fan as a customer, you can send them offers for new products (tickets to shows, merchandise), all without the cost of re-acquiring them as a customer. This means you make more money per product sold, and the overall value of that customer to your business increases.

Because artists don't have direct relationships with their customers, it's nearly impossible for them to get any upgrade revenue. So they end up paying to acquire their customers again and again, or they rely on their partners to give them access to their customers. This isn't free and usually comes as a direct cost (Facebook) or a ticket clip (Spotify). It's fucking brutal!

Learn more about CAC and LTV ratios here.

Low Churn

Churn is the word used to describe customers who stop becoming customers. When they stop buying your records, they "churn".

If you haven't skipped the sections above, it should be pretty apparent that artists don't own their customers, so they can't even measure churn. They have no idea which fans have been around since the first show or who just jumped on the party bus.

If your band could measure their churn, they'd be able to design experiences and products that kept churn low, which means LTV per customer would increase. You might not play your next show in a seated theatre if you saw that the fans who came to your last three shows didn't come to the seated theatre show. You might reconsider the genre pivot into dubstep if you knew that 50% of your fan base doesn’t like to dance.

But no, artists don't know who their customers are, so there is just no way they could ever understand what their churn might be.

This sucks hard, and here is why

All any of us can aspire to in our work is to make or do things that have value. If you're good enough to make something that people want, that's an incredible thing, and I'd say you're winning at life if you can do that.

Artists create SO MUCH value. It's easy to talk about the intrinsic and personal value that art can have - how it can "illuminate our inner lives and enrich our emotional world." How every one of us has a song that we listened to on repeat, which takes us back to a place or time that carries meaning. But beyond the social and emotional value, art has a significant impact on our economy, education, health, and society. In Australia alone, culture and art contributed $111.7 billion to our economy in 2016 -2017.

Here's a sweet infographic from the UK's Arts Council if you don't believe me.

Artists create an extraordinary amount of value, yet the industry within which they operate is set up to deny them any chance of capturing a meaningful amount of that value.

The result is that most artists do not prosper from the primary thing they create - their art. In the music industry, artists need to find supplemental forms of income because they can't really capture the value from their most valuable contributions. They sell merch or play shows or whatever else it is they need to do. All of this takes time and resources away from what they do that is most valuable to the rest of us — making music.

The compounding effect of this is that most artists do not get to spend a long time refining their craft, which means fewer artists making high-quality art.

What does this cost us????

Imagine a world where artists could capture a reasonable amount of the value they create, then prosper and be rewarded for creating increasingly valuable work. Imagine the benefit to all of us if artists could spend their lives getting better at what they do and sharing the fruits of their labour with us?

Imagine a world with infinitely more high-quality art because the people who make it are incentivised in the long term.

I want to live there!

How do we get there? TLDR probably Bitcoin but I'll write that up later.

As always, come at me in the comments with your disagreements or @ me on Twitter.

And do your artist friends a favour and share this story with them! I hope it helps.