Sony Music’s Past and Future
The long debate as to whether Twitter is a productivity killer or a unique source of information won’t be settled any time soon. Although giving over countless hours to the platform over the years, I’m firmly on the side of it being a unique source of information. One such example is from Silicon Valley product leader, Sriram Krishnan and his recently collated list of company memos.
The one that immediately jumped out, due to it’s relevance to this publication, was former Capitol Record Exec Dave Goldberg’s vision for the future of the recorded music industry to then Sony Entertainment CEO Micheal Lynton. The memo, written in 2014, provides a unique insight into strategy at the recorded music industries lowest point in recent history.
Lower revenue and higher margins
“A digital-only recorded music company will be a much more profitable one after one-off restructuring costs.” Dave Goldberg, Sony Memo
At the point Dave Goldberg was writing, the music industry had lost $10b from its total revenue (1999–2014) and was at the lowest point of the steep decline. There were signs of recovery but at that point, streaming had barely made any impact.
The basis for Dave Goldberg’s vision for Sony Music (and more broadly, the recorded music industry) is that music had become a digital, non-rivalrous product and therefore the music industry needed to adapt its strategy to match this shift from physical CDs. Core to this point is the opportunity it provides to gross margins. The opportunity to further monetise existing catalogue that doesn’t require A&R, marketing and other high fixed costs, is only enhanced by the close to zero cost distribution that streaming is built on. With this opportunity in mind, the new goal, according to Goldberg, was to build more of this highly profitable catalogue. That said, signing new artists that translate into highly profitable catalogue artists has long been an aim of the music industry and nothing was about to make this any easier.
Changing their ways
“Not all new publishing writers would be on recorded music contracts but all new recorded music contracts should be combined with publishing” Dave Goldberg, Sony Memo
The strategy behind building a successful catalogue business, according to Goldberg, is an investment in genres that have lower fixed costs and monetise well. This would need to be combined with offering more transparent and fair revenue splits with artists as well as bringing more rights together under one company (recorded and composition rights).
Ditch the PROs and help the DSPs
“The goal for digital is for subscription and ad-based services to become the predominant means for people to access music…This should help build more stable long-term revenue streams for both recorded music and publishing.” Dave Goldberg, Sony Memo
Goldberg’s view was that the major labels should do everything they can to encourage growth in the number of customers that subscribed to DSPs (Spotify, Apple Music, Deezer etc) and also the number of competitors in the DSP space. Streaming revenues provide the one stable growth opportunity for the music industry and major record labels needed to look beyond the short term profit pool gains they will make by squeezing the DSPs. Building on this idea, Goldberg suggests labels allowing DSPs to pay a fixed royalty rate, unrelated to the number of streams of music, therefore allowing a fixed cost of music royalties to be spread across every existing and new premium subscriber they can acquire.
In addition to encouraging the growth of this new revenue stream (streaming), Goldberg also gives his recommendation on how to modernise an older one (performance royalties). Performing Rights Organisations have been slow to modernise and with the advances in new technology, there was, and still is, an opportunity for rights holders, especially at scale, to invest in the solution in-house, creating efficiencies and capturing the cost of outsourcing this task.
Shifts in Strategy
Goldberg’s strategy tackles some of the biggest challenges that existed in the music industry then and still exist now. Moving away from historic short term thinking to help create a competitive landscape of DSPs, that provide a sustainable revenue stream, is key for the health of the industry. Central to this is supporting the growth of those DSPs that are struggling with the marginal costs associated with their revenue streams (every new DSP subscriber incurs a high cost of sale on the music royalties paid to record labels). Goldberg’s recommendation of offering a fixed amount for the DSPs to license the music over a set period, incentivises them to aggressively acquire customers to spread out that agreed fixed cost. This cost will be spread over more paying customers, therefore increasing the overall subscriber base of people paying for music via the DSPs and sustaining this revenue stream, which should be the long term goal of the music industry.
The other major change Goldberg suggested was in how music copyrights were collected. The music copyright system was created in an age when there were limited channels to distribute content but since the invention of the internet, and therefore the creation of an endless number of new channels, new copyright demands have emerged. To enable distribution of a range of content on a range of budgets across these channels, as well as the ability to collect any revenue due, has been something the existing performing rights organisations and intellectual property law has struggled with. This observation is core to Goldberg’s suggestion to bring these services back in-house. Customers of any product or service (business to business and business to consumer) now expect simplicity and the music copyright system is anything but simple. Creating these services in-house, with the new technologies available, gives the music industry an opportunity to learn from the success of the DSPs and design around customer behaviour, not fight against it.
Sony and the major’s recent direction
Since 2014 (when Goldberg’s memo was written) we’ve seen an acceleration in the growth of the music industry revenue’s (see the first chart above), mostly from the streaming revenue generated by DSPs. His comments on Sony and the wider industries need to focus on catalogue has been somewhat echoed and somewhat ignored by current Sony Music CEO Rob Stringer in a recent Music Business Worldwide interview.
“The sheer volume of music that comes through the distribution platforms has increased greatly — there are 40,000 tracks added every single day….It would be obvious to anybody with common sense that we would need to up the number of tracks we potentially have ownership [on] or a partnership [with].” Rob Stringer in Music Business Worldwide, 2019
Stringer’s approach to building a catalogue is based on volume, which should allow the creation of a large catalogue, therefore increasing the size of the most profitable part of a record label. His strategy also includes transparency and delivers on Goldberg’s vision of bringing the publishing arm together with the record label, therefore simplifying things for themselves, artists and customers.
“I have genuinely lost count of the number of high-ranking Sony Music executives over the past decade who have sold me the “One Sony” dream.” Tim Ingham, Music Business Worldwide
Although this demonstrates a sizeable shift in strategy from any of the previous regimes, Stringer’s new direction fails to counter the threat of many artists rejecting the high royalty splits record labels have historically demanded, given their new negotiation power. Choosing to stay independent using the new wave of DIY tools that have been created in recent years has become an increasingly popular choice. Having as many artists on their books as possible is certainly a good negotiating tactic with the DSPs, however, ensuring the DSPs survival doesn’t appear anywhere on his public priority list, only referencing a need for music not to be ‘undersold’ in their negotiations. Respecting the value of music is certainly important but helping to create a number of (relatively) profitable DSPs should certainly be higher on his list unless he would like to return to the dark times of world without streaming revenues.
The real missing piece
Both Goldberg and Stringer convey a compelling future for Sony Music and more broadly the music industry but without addressing one key element. Why should artists want to be part of it?
Even with the improvements made, from better deal terms to greater centralisation of services, the opportunities for artists to replicate the major label experience independently has never been greater. This is not to say these visions for Sony and others aren’t important (they’re essential) but in addition to this, the bigger problem to solve is the value major record labels will offer to artists when alternatives routes become cheaper and easier to access.
A remaining challenge for both artists and labels is the ability to successfully utilise the volume of new platforms to build an engaged audience. With existing platforms such as Instagram and newer platforms such as Tik Tok there is an incredible opportunity to build audiences to monetise through a number of revenue streams such as merchandise, streaming and live concerts. The challenge to this is there is no existing formula for success and the rules keep changing, either by product changes at the existing platforms or the creation of new platforms. The ability to stay at the forefront of these skills is something that will bring the record labels significant leverage.