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January 23, 2008

Music Market=share market for labels

I apologise for my absence - been busy.

This morning I fielded a question from Jon David Francys via MySpace mail. He asked a very good question about the future for independent labels in the new environment and I thought I'd share my answer on this blog. I've adapted it a bit to suit this medium:

Jon,

A simple but important lesson from history:

Wherever there is turmoil, there is opportunity. Wherever there is opportunity, there is money to be made ...

Of course "independent labels" can make a good living. But they won't do it by churning out mass-marketed pap at great expense and hoping to strike gold (if that's not a hopelessly fucked-up metaphor).

They'll do it by, as you say, diversifying in the same way share traders do - try to spread the risk far enough that you don't go backwards, but not so far that you join the pack. How much do you know about the share market? I view it as a great analogue of the music market right now.

(This is my dad's trading philosophy, BTW, not mine, but he's used it to double his share portfolio in the past 5 years).

In the share market, there are two main types of traders. There are the "index traders" who are usually large financial bodies whose job it is primarily to not lose other people's money (insurance funds, superannuation funds, banks, etc). They know that the trend of the index (the average of all shares traded) is inevitably upwards. On any given day some companies will improve, some will lose, but overall the market will win more than it loses so they try to invest in as broad a chunk of the market as they can - it's the safest option - and they're so big they can get pretty close. The catch is that they don't pay a great deal of attention to any of the companies they invest in (they don't have time to do their homework) - they pretty much follow "the herd".

Then there are the individual investors - smaller, often individuals - who can't take that approach because they're only dealing with, say a couple of hundred thou - maybe a couple of Mill - in capital. Waaaayyy too small to get near the index, so they have to take more of a risk and try to pick winners. But they can still spread their risk (diversify) across, say, a dozen companies. These guys MUST do their homework on each company they choose, and if they do too much buying and selling, they churn through the broker fees, so they will lose money. Hence, the best ones know their companies really well and invest for the LONG TERM. The best companies to buy into aren't necessarily the General Motors' and the General Electrics, they might be smaller companies with vision operating efficiently in a niche market (like Google c1996). That's where profit (as opposed to scale) lies.

Now, I'd have put the Majors in the first category (and the market is going through a Great Depression-type downturn), and the successful future labels (like NETTWERK) in the latter.

To continue the analogy, "homework" in share trading means studying the companies via the brokers reports, the daily share performance data, the CVs of the company directors, the market in which the company is trading and, if necessary, a little about the technology the company is selling. Doing so requires a "network" of data sources - no single source will do it for you. If you invest too much into one company, you "expose" yourself to it's failure. If you neglect one, to might miss out on its wins ...

"Homework" with music means knowing the band members, their niche, the market for their niche, etc and having a network of venues, promoters, marketers, etc that can assist. It also means tapping all of the available revenue streams for each act and paying very close attention to - building and developing - each one.

I was fascinated by Guy Hands's comments about EMI having signed acts that have never released a record. That's an old tactic that the Majors used to control bands that might be a competitor to the one they are most interested in. They'd see another one who might operate in the same bit of market and "stitch them up" so no other company could drive them out of that market. Highly predatory, anti-competitive behaviour. But they can't afford to do that any more ... there' nothing stopping the rival bands from entering the market.

The labels who "win" in the 21st century will be the ones with the deepest catalog of acts that can turn in a long-term profit ... with probably a few big winners and a few small losers ...

Posted by Hughie at January 23, 2008 8:29 AM
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