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What the Recorded Music Industry Can Learn from the Whaling Industry of the 19th Century

Photo of Zach Fuller
by Zach Fuller

A high-risk industry with large upfront costs and no guarantee of return. No, this is not the recorded music industry, nor is it venture capital (VC) – this is the whaling industry of the 19th century. While the comparison may at first seem fanciful, as one of the United State’s first global industries, it is worth considering the way in which it functioned, particularly as its structure appears to continue in the start-ups that dominate much of the discussion about America’s economic future. America’s whaling fleet was financed in a manner that is largely indistinguishable from the venture capital industry of today and, by extension, the way that music industry finance has historically operated.

In the days of the whaling industry, a core financier would raise funds from wealthy New England families, who would pool their resources in the hope that one of the whaling voyages would yield a large profit. Further down the value chain, crew members would be compensated with shares of the final proceeds of the voyage (stock options anyone?), while whaling agents would have been tasked with raising and allocating finances, effectively a proto-general partner in a venture capital fund or an artist and revenue (A&R) department in a modern record label. Indeed, record labels invest billions annually on A&R only to recoup on and profit on a few acts. Most investors would recoil at the very prospect, and so for all their perceived faults, funding artists has historically been the close-to-sole preserve of record labels and music publishers. That, however, is now set to change:

  • Financial innovation: Companies such as Patreon have begun to gain serious momentum, with three million creators paid a total of $500 million as of January 2019, though not just musicians. The launch of YouTube’s tipping and membership tools, ostensibly based on the Chinese model of monetising fandom that has thus far proved so successful on live streaming platforms, may eat into much of Patreon’s market. Additionally, a new breed of funding tools is emerging which could address this, using a form of debt financing rather than donations, one that takes the VC/Whaling model and flips it on its head. There are some notable examples: Swedish distributor/label Amuse’s Fast Forward programme fronts artists’ music against anticipated streaming revenues; media investment arm 23 Capital lends to more established artists and songwriters against historical royalty income; and the Music Fund targets the long tail of artists, investing in early-stage royalties. Although 10% of independent artists presently use some form of funding tool, most still rely instead on income. Should investment arms take a note out of the whaling/VC model of risk mitigating, we could see that flip and a greater share of artist’s revenue stabilising as they take on some form of investment to alleviate navigating the innately uncertain ebbs and flows of streaming income. It also serves to align incentives as those taking the risk are compelled to push artists into playlists and other promotional forms in order to recoup. Such a model is far less centralised than the Medici model of artist patronage, where wealthy families would invest in artists they particularly liked.
  • The future of the music business is salaried employment: If the whaling model proves popular, we may see a model emerge where artists become almost akin to salaried employees who then share in a profit once costs are recouped.This model is effectively already in use in South Korea where artists are kept on a salary. From a business perspective, this stabilises liabilities in order to create more predictable outgoings and better models of prediction for how to invest. It would not be surprising if the new tools offered by companies such as Amuse mean such companies employ similar practices if they are to take on the risky endeavour of music investment.

Investment in music continues to increase. Despite the number of deals being mostly stable (between 182 in 2017, 213 in 2015), median deal value for music start-ups has more than quadrupled in the last five years, going from $360,000 in 2014 to $1,620,000 in 2019. While money and music have had a historically tempestuous relationship (Mo Money, Mo Problems), perhaps a few lessons from industries past may show the way to the future of artist funding and how risky asset classes with infrequent but potentially large pay-offs are funded in general.

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