Alternative Monetization Methods for Recording Artists

June 2016.

Introduction – Artistry as Commerce; Overview of the Brand/ Fan Connection

Monetizing music in alternative ways has become necessary for music artists – who need to enhance revenues – and expected by fans – who seek closer and more immediate engagement. It carries not only potential rewards but also risks that need to be identified and managed. Giving legal advice to music clients always has meant keeping an eye on how styles fit a market or how the act will be received, but it is no longer the case that once the key relationships are established, e.g. the right fit between artist and manager or the right label, the rest falls into place. The two main forces that currently are wrenching the industry, by flattening traditional revenue streams from record sales and music publishing, and at the same time disrupting the consumption patterns of fans through technologies like music streaming, mean that legal advisors increasingly have to be savvy in guiding indie and label artists to fresher, more entrepreneurial waters.

Yet, artistry and commerce are not usually compatible.  Many artists will tell you that their art chose them, not the other way around – or that they are a mess at business or it cramps their creativity. They are afraid of appearing to have sold-out or abandoned their fan base. They are no longer able to sustain their careers due to financial worries. Some give up. Others become lost or desperate. Labels on the other hand are over-stretched with budgets for resources and staff reduced each year. More is expected to be done with less. The survivors at the label level are mostly just happy to still have a job in music, even if it seems like they have to crank out quality art at budget prices. These pressures all give rise to risks that need to be identified in terms of potential consequences. Not all risks are negative and many risks can contain hidden opportunities if managed correctly.

Music is a valuable commodity. We have to proceed from that assumption because virtually the entire world craves it.  The desire to discover and experience music runs deep. If indie artists and labels find that their traditional methods of monetizing music have dried up, it is not because people no longer consider music to have much value. The unfortunate reality is that music has been made so ubiquitous that it is virtually free.  We can spend all day blaming the Internet, illegal file sharing, ad-based streaming sites, and bad licensing deals, but the genie has been let out of the bottle. There is a new paradigm now, where people do not have to spend nearly as much money to hear music as they used to. Despite noble efforts to adjust royalties and tariffs to compensate artists and labels given the new realities of distribution, there is a naturally occurring phenomenon in the marketplace now where once price rises to the level where people will be driven back to file sharing, they will go there – but, this is where opportunities come in. As it turns out, people are willing to spend lots of money discovering and experiencing music in new ways, where they increase their connection to the artist.  Since they spend less to get the basic music they have more money to spend on alternative music products. This can be seen as a general rule in relation to live events: the increase in ticket prices for concerts has been inversely proportional to the decline in revenue from CDs and other forms of recorded music.

Desire and passion are still a big part of human nature. So is belonging, and wanting to be part of a tribe. For sure, if technology essentially has unlocked the cookie jar called free music, people will tend to become overwhelmed with too many choices. Many will come back to wanting the comfort and predictability of hits. Many will value charts and blogs that bring sense to the chaos. Many will value each other’s opinions, but most importantly, most will still value the connection they feel if music can be made personal, to speak to them or help to define them – who they are. People tend to become possessive about their music. They call it “my” music. There is a primitive urge to get close to music and the people that make it, that is ripe to be monetized. Controlling and monetizing the artist/ fan relationship has the potential to tap into higher verticals of revenue where smaller numbers of fans are willing to spend much more. The concert industry continues to reflect strong demand among fans to get closer to artists. According to Pollstar, the trade publication for the concert tour industry, 2015 was a record year for the North American concert business with the total gross of the Top 100 Tours hitting $3.12 billion, which was up 14% over 2014. The 42.08 million tickets sold by just the Top 100 Tours was up by 10%, which also was a record. Average ticket prices were $74.25, an increase of $2.81 or 4% over the previous year. Globally the concert business was up 11%, for a total gross of $4.71 billion for the Top 100 Worldwide Tours. While this was an increase from the previous year globally, it was somewhat off the 2013 high of $5 billion. Statistics beyond the Top 100 become anecdotal. Less data is available for smaller tours and events and it is hard to draw conclusions across the board, based on regional trends. Some might argue that, just as sales for hit music tend to cannibalize sales for smaller artists, the same trend is found for live music revenues where the big acts disproportionately get most of the money. However, the fact remains that there is plenty of money in the ecosystem, and that money is increasing. This can be understood as a sign that consumer behavior tends toward wanting to interact with music artists for example at live shows, rather than simply listening to the music in a passive manner for example in a music stream. Beyond concert ticket prices it becomes difficult to track the revenues gained from making special connections with fans. That said, the number of artists talking about this phenomenon is evidence of its existence, much in the same way that scientists can infer the existence of elements in the universe without directly detecting them.

Of course, people are consuming music that has been made by someone else. The artist is a brand that needs to be cultivated and kept intact, but branding goes well beyond the artist performing the song. Witness the rise of producers in electronic dance music, like Calvin Harris, Avicii, Skrillex or deadmau5. The same holds true for songwriters, like in-demand pop songwriters Julia Michaels and Justin Tranter who write behind the scenes for superstar artists. They wrote Justin Bieber’s 2016 #1 hit “Sorry”, produced by Skrillex (co-produced by Yektro and Blood Diamonds). Record labels themselves are brands, especially indie or specialty labels that can achieve much more focus on the type of music they make available (e.g. 300 Entertainment or Quality Control, the home of rappers, trap and party banging artists like Young Thug, Fetty Wap and Migos).

Fans are brand ambassadors who lighten the load otherwise placed on artists and labels for marketing. In this sense, marketing is not a one-way street where artists and labels send a message that is received, and that is the end of it. Fans create content on social media and talk amongst themselves. One of the most powerful forms of marketing is word-of-mouth. To get a grassroots campaign going is essential and low-cost. This creates the real-life ecosystem in which the brand can flourish. On top of that, standalone apps that simulate or enhance the artist/ fan connection can create a virtual world of monetization opportunities.

The Artist Has Become a Businessperson – Risk Management Fundamentals

The music artist increasingly is being cast as businessperson, with the artist’s label in a supporting role. Yet artists are often disasters at running a business, which is a distraction from their main job of writing, recording and performing – yet, it is necessary. This poses special problems for the lawyer involved in representing the artist or the label, because the artist is often ill-suited and occasionally incapable of fulfilling that function. Does the lawyer set up the deal to see if it will fail? Does the lawyer ensure that the artist gets training wheels, and what happens when they come off? Is it prudent to hire extra help for the project, or will that doom it to sink amidst excess overhead and indecision?

The problem is acute for indie and developing artists because of limited resources, yet the range of potential issues is vast. When we are thinking about alternative ways of monetizing music we are thinking outside the box. There is no cheat-sheet or no single checklist. We are often making it up as we go, so what to do? This is where risk management fundamentals become useful.

First, the job is to identify all of the things that could go right, or could go wrong – sometimes called a SWOT (strength, weakness, opportunity, threat) analysis. Second, we ask what would happen if each of them in turn, occurred? Third, we characterize the consequences in terms of outcomes; in terms of probabilities (not possibilities). Fourth, we analyze, and develop a plan. Risk management is often associated with negative outcomes but really it is about developing a view of what could happen, good or bad. A sound check party before each show could make extra money through paid admissions, and it could attract media. It could also attract expenses for extra security, and trigger liability concerns with fans tripping over cables and equipment. The artist might show up in a bad mood or there might be unattended minors who cause a ruckus. If there was an equipment failure caused by fans wandering around backstage before the show, this could cause the show to start late. If the show starts late it might have to end early. You get the picture. After we go through the first three steps, we develop a plan. This type of analysis allows the artist, the label, and his advisors, to deal with matters that have never been done before, and to get it right. Expect the unexpected, is one of my favorite expressions.

A lot of alternative methods of monetizing music, to create or capitalize on the artist/ fan connect, are live event focused. Beyond paid meet-and-greets before a show or paid photo-ops, there might be conversations with the artist, backyard barbeques, studio visits, golf tournaments, or even corporate events. What is happening is that the fans are getting up close and personal with the artist, causing all kinds of liability issues to kick in. Insurance, primarily in the form of comprehensive general liability, is essential whenever anyone is invited onto a premises. The artist, label or whoever is organizing the event, should make sure that there venue is covered and that the artist and the label both are named insured on a policy. Going the last mile means not only getting that in the contract. It means insisting on seeing a certificate of insurance with the name of the artist and the label on it as a named insured. Without that, you are back to square one, with a lawsuit to defend rather than having the insurer pick up the defence. This has been a fertile ground for lawyers practicing in the area of insurance law, because the process of adding named insureds is often handled badly, resulting in litigation. In Canada, an insurer’s obligation to defend is limited to defending claims that – if proven true – would fall within coverage under the policy: Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at paras. 74-76 and Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801, at pp. 810-12.

Beyond the logistics and liabilities of alternative types of live events, there is the money itself. The same kind of SWOT analysis is useful here. There is the perennial question of personal management versus business management. As artists and labels veer further away from traditional things like recording and live shows, into more entrepreneurial pursuits, it raises the question about whether existing management is qualified, and whether they should be involved at the same financial level. Management agreements for artists typically have a tension in them between the manager being able to commission anything involved in the music industry but at the same time might have a carve-out for business ventures. While it might be, that the manager would win that one, and be able to commission endeavors that were alternative in the form of monetizing music, the question also needs to be asked whether the manager is going to bring the right kind of acumen. When there is money involved, there are administrative issues. Running a business is not done best out of a shoebox of receipts.  There are tax issues, and there is vicarious liability. This becomes a fully-functioning business, requiring the services of a marketing department, a production team, an IT department, a finance department, and a CEO. That might sometimes be one person, but the roles are different and need to be addressed.

From a lawyer’s perspective when advising artists, it is important to identify potential conflicts of interest. These conflicts can be found lurking in deals between management and artists, and between the lawyers and their own clients.

Music as a Brand

Increasingly I see artists taking on the role of being their own social media coordinator. Some are better than others. Some have a knack for documenting each and every important thought or event in their day, for the benefit of their fans. Others only reveal to everyone the depths of their ineptitude. This has become a litmus test for success. Ideally the artist will be doing this almost like breathing. For those that can, it is seamless. Instagram is filled with artists who have found a way to express themselves in their everyday life through pictures and short posts about how they feel in the moment. Lady Gaga for example makes even a plate of pasta she prepared seem special. For others, not so much. They struggle, and it shows which is the kiss of death in the hyper critical world of online social media.

However the artist chooses to position the brand, the artist needs to think in terms of marketing it. The artist’s brand needs to be cultivated, and kept intact. To think about the essence of a brand in the musical space is to recall the greatness of so many; David Bowie the musical chameleon, Lemmy Kilmister the hard rocking, hard living front man of Motörhead, Kurt Cobain, John Lennon, and Wolfgang Amadeus Mozart, they all had edge. I cannot tell an artist how to be, nor can anyone. But once an artist has a sense of identity, even in a rough way, it is time to start messaging it. This can be done by treating this as a marketing exercise. What is the artist (or label)? e.g. the artist is a singer of passionate songs. What is the purpose and conviction? e.g. to feel the essence and soul of life. What does the artist offer and to whom? e.g. the artist offers a gateway to joy or release. Granted these are all general ideas, but the point is that through careful cultivation of the key message, maintaining the brand along the same lines, the brand can develop to be powerful and recognizable. When that happens, alternative types of value can be created that can be monetized.  The artist is no longer a singer of songs. The artist is a force of nature and wonderment; a magnet for desire. This simple approach does not involve a lot of time or money. Rather it involves introspection, with a view to how the brand can be projected effectively.

The fans crave a connection that is as unfiltered as possible. While it seems that many top artists currently have Instagram accounts, and it seems at times awkward for them to be over-sharing, it also is true that this creates a strong bond. These same fans who follow the artist on Instagram will pay to do just about anything that is offered, if it seems to be enhancing the connection. Witness the immense popularity of electronic dance music festivals each summer or festivals like Coachella or Glastonbury, that rake in millions each day where the fans do not necessarily see the show but they experience the event. They have to be there because it is part of who they are, so they have come to believe.

That said, just as a brand can be built up, it can be torn down. Easy examples of mistakes would be ethical or criminal blunders, but a more nuanced and common mistake would be to allow others to have too much control over the message. A related pitfall involves partnering with people who are spinning a contrary message, or signing sponsorship or endorsement deals for products and services that do not fit. Restaurants and bars are a temptation for artists looking to monetize their music in different ways but the food and beverage industry is a tough, specialized area with high costs and tight margins. The country artist Toby Keith enjoyed initial success lending his name to a burger and steak chain called “Toby Keith’s I Love This Bar & Grill”, inspired by his hit, “I Love This Bar”. However the chain has seen numerous evictions over the last couple of years for unpaid rent. In 2012 Jimmy Buffett parted with “Cheeseburger in Paradise”, a chain of theme restaurants named after one of his hit songs from the 1970s. The burger chain originally had launched through a partnership involving his company, Margaritaville Holdings LLC, but after a subsequent restructuring that left him with only a 2% royalty on profit, he sold that too, along with the right to associate the song with the restaurant – seemingly losing control of an important element of his brand.

Katy Perry on the other hand, seems to make more money than any other female artist due to her affiliation with the international beauty and fragrance brand, Coty. Granted this is an endorsement deal rather than an equity stake, but the fit is right. Everyone can take a cue from artists such as Diddy who has DeLeon tequila in a joint venture with international beverage giant, Diageo; or Justin Timberlake or dozens of other artists who have their own liquor brand.  One of the bigger trends at the moment for music artist endorsement or direct investment, seems to be related to the increasingly-legal nature of marijuana in North America: Melissa Etheridge reportedly has her own brand of cannabis-infused wine, Wiz Khalifa has lent his name to a brand called Khalifa Kush, Lil Wayne has a line of blunts targeted at marijuana smokers, and The Game has designed a vaporizer.  With Canada moving quickly toward legalizing marijuana for recreational use, Snoop Dogg recently as jumped-in, giving Tweed Inc. rights to use his brand in exchange for cash and company stock.

What Diddy, Snoop Dogg and other music artists do, when successfully venturing into non-music business opportunities, is to make the non-music brand their own. This is not simply lending the artist’s name to someone else’s brand. Depending on the circumstances it might help, but the artist does not need to make a direct connection in terms of letting the artist’s professional name or image be used. The successful brand strategy seems to be, for the artist to absorb all of his or her brand connections into a lifestyle statement. The list of possibilities is endless. What is constant, however, is the deft leveraging of the impulse that fans have to connect, with a connection point that monetizes while enhancing the brand. Done right, everything comes together like an orchestra playing the same tune.

Embracing the Outliers

There is tremendous opportunity for building on the willingness of some fans to pay much more in order to enhance their engagement with the artist – superfans, if you will. A primary example is the private show, where top stars routinely charge $1 million or more for a short set behind closed doors, but that concept can be scaled-back to fit just about any artist, and any superfan’s budget. There are plenty of superfans who would pay a week or a month’s salary for their favorite artist to play a private show. When Justin Bieber was booking his spring 2016 tour he added paid meet and greets, with photos costing a reported $2,000 each. From media reports, sales have been brisk, and the mathematics gets interesting fast. If there are 100 paid photos per city, that works out to $200,000 per city. If there are 30 dates on the tour, that works out to $6,000,000 in gross revenue. Thank you YouTube and Spotify for streaming the music – even at shockingly low rates – when it attracts enough superfans willing to pay dearly for photos with the artist!

In terms of records and merchandize again, there are some people who cannot get enough ‘stuff’. Vinyl sales figures for example are tiny when compared to music streams, downloads or even CD sales, but vinyl sales have been steadily increasing over the years since people ditched their turntables for tape and CD players. The story-within-a-story is that collectors’ editions drive vinyl sales. Many of those vinyl records might not ever be played. Yet, they are highly collectible and prized by superfans.

The role of advisor to the artist involves considering how to engage these outliers called superfans, so that their demand can be identified and monetized. There might be a temptation in to cater to the superfans. This could be, for example, having graduated seating for a live show, with the best seats close to the front selling for astronomical prices and then gradually decreasing in price to the back of the hall. However, some caution is warranted. Most of fans are not so-called superfans and many regular fans will howl over ticket prices that seem unfairly high or elitist when put out of what seems to be an affordable price range. From a regular fan’s perspective, it might seem more fair for a fan to be rewarded with the best seats for having lined up in the rain for 24 hours, rather than for having a fat wallet to pay extra. A savvy advisor will strike a balance so that regular fans do not get displaced by anything done to cater to the ones willing to pay extra. Similarly, there is a risk of creating a walled-in experience and reducing exposure overall. While it might be tempting to advise an artist to limit access to the artist to those who would pay an astronomical sum, that will quickly make the artist become irrelevant to most – and indeed may cause a backlash. The takeaway here is that catering to superfans, for example, by making collectable merchandize available to them, or providing them with the opportunity for special experiences with the artist, must not come at the expense of regular-fan expectations.

Fans are Brand Ambassadors

The cliché is that when music artists accept awards, one of the first and most important thank-you’s goes to the fans, e.g.: “without you, fans – I would not be here”. This is not simply an acknowledgment that, without an audience, the performer would have no reason to exist. It is not simply a statement that it takes thousands or millions of people consuming music to make an artist and his or her label wealthy. It is a call to action.

Beyond viral campaigns, contests and traditional fan clubs, which tend to be limited in terms of how key messages are made, fan activities – especially in social media –can shape and build brand awareness leading to increases in volumes and revenues. Getting people to create content – wanting to do it – so it will then grow, virally, is the goal. The first step is to take stock of who is a fan and who already is engaged. There are plenty of analytic tools available for that purpose. Fan metrics can be broken down by region, age, friends, gender, tastes, other interests, etc. Then, people need to be given something to do. People gravitate toward tasks. Aside from asking a potential fan to “like” something, questions can be asked or questions can be raised. This can be done at least partly, simply by having a rock-star attitude, by being provocative or by being opinionated on a topic where the artist hopefully has an interesting opinion. It does not have to be deep. You create a dialogue. The give-and-take of interaction between fans and the brand, or perhaps even between fans and the artists themselves, should fit with the brand’s image. The fans should end up feeling that they “get” the brand and that their attention has been noticed. This turns them into brand ambassadors who will want to spread the word about the connection they feel. They will gladly become marketers who add value to the artist’s music proposition.

Virtual Worlds Can Create Real Money

Monetizing lessons can be learned from the gaming and mobile app spaces. Freemium is a key concept. There is no reason it cannot work in the music space. Typically a basic version of a game or an app might be given away for free, with added levels locked until either the user pays to unlock the feature, or until the user collects digital credits by doing tasks or achieving goals. Borrowing the concept as an alternative method of monetizing music, the game or the app could simulate the artist-fan connection, thereby creating a virtual world of monetization opportunities where fans would have the opportunity to unlock increasingly closer access to the artist.

This is part of the evolution of the traditional fan club into social media online and onto mobile devices in particular. Fahlo is probably the most advanced fan-connection app released to date, but already it is set to be replaced, when its owners roll out their next generation app called Bkstg (not yet released as of when this is being written). Fahlo claims to get fans closer to artists by letting them prove they are the biggest fan with trivia and lets them show what they are thinking with polls, which provide valuable metrics to the artists and their labels. It provides behind-the-scenes photos and videos with notifications straight to mobile phones. Fans can be rewarded for everything they do, like sharing a photo, reacting to a post, commenting on a video – all to earn more coins. The coins can be used to unlock videos, or redeem them for experiences and other cool stuff. If they are not able to win outright, Fahlo drives fans to purchase VIP packages, such as the Fahlo #GetCloser VIP Package for Ariana Grande 2015 Honeymoon Tour. The VIP Package came in at a hefty premium over the regular ticket price for the show and included a pair of cat ears with WiFi receivers so that when placed the happy fan’s head during the show, the cat ears would light up automatically when a signal is broadcast as the music is playing. Basically the sound and lights crew control when the ears light up, sometimes even creating a wave effect in the crowd - pretty cool indeed for young teens that comprise the artists’ fan base, with lots of them willing to pay, or able to extract the money from their parents, for this enhanced experience and connection. Bkstg promises to take this kind of interaction to the next level, in a ground-up re-write of the app itself. It is reported to have raised $20 million from a diverse group of strategic investors that includes Mark Cuban Companies, Live Nation, Scooter Braun Projects and Three Six Zero Group. As with most things online it will be given away for free, in order to achieve maximum traction with fans and artists alike.

Final Thoughts

As the music industry changes, it creates new opportunities. There is no sense trying to keep it contained in the past. Failed attempts by the music industry to stop illegal file sharing have proved that point. Better, is to run around to the front of changes, and embrace them. Increasing gains with concerts, streaming and myriad other methods of experiencing music are indicators that the industry still holds the potential to create value as long as it can be found and harnessed.

Indie and label artists have no choice but to use alternative sources of monetization for their music at home and on the road. This is how they will flourish in the ecosystem of artist brands, where music is increasingly free, but fans still value connection with artists and the music, and are willing to pay for it.

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