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Resnikoff's Parting Shot: Less Ownership, Less Long-Term Value...

Sunday, July 26, 2009
by  presnikoff

Is the music industry getting too carried away with artist-friendliness, at the expense of fundamentally sustainable business models?  Sure, giving full royalty ownership and large percentages back to artists is a great way to woo clientele, but what happens when the capital runs out?  Is this all just post-major wishful thinking, fueled by digital euphoria and, until recently, excess venture capital?

The latest to stir that question is Polyphonic, the new venture involving Radiohead manager Brian Message, Adam Driscoll (MAMA Group), and Terry McBride (Nettwerk Music Group).  As described by the New York Times, the top-level model involves investment in promising artists, and a share of downstream revenues from touring, recordings, merchandise, and other activities.  But unlike a more traditional label deal, advances are not part of the package, and Polyphonic does not retain any ownership over recording or publishing copyrights. 

Instead, the Polyphonic team will apply its digital acumen to help artists pick the right partners, apply the most innovative approaches, and develop lasting, direct-to-fan relationships.  But the artist ultimately retains ownership and flexibility over its intellectual property, regardless of whether Polyphonic makes back its initial investment money.

Sounds like a refreshing departure from more restrictive major label deals, especially given the string of horror stories experienced by creatively-chained artists.  Indeed, the recording industry is hardly a beacon of altruism and transparency, though even in their darkest hour, the big labels can never be worthless.  The reason is that major label groups have spent decades amassing recording and publishing catalogs, a collective portfolio that never goes to zero.  Those residual values are the result of an investment philosophy that involves control over creative assets.

Can Polyphonic simply walk away from that?  Ex-eMusic CEO David Pakman was the first to question the approach out loud.  Pakman is now a venture capitalist, and therefore donning a more money-focused, down-to-business hat.  "I applaud that construct as I think that is the right new model with the right incentives," Pakman noted.  "However, it means the multiple applied to a company like Polyphonic, which is building no long-term equity value, is less than that paid on a company building longer-term equity value.  In other words, it is hard to sell a company like Polyphonic for a big multiple."

That is hardly a final verdict on Polyphonic, but it does dismiss the company as unworthy of venture capital investment.  Meaning, the Polyphonic partners can generate meaningful returns for themselves with the right investments and strategies.  But the firm itself may have trouble rising above boutique-level status, much less stir a lucrative exit.

So, perhaps the anti-major is simply worth less (though, hardly worthless).  Remember, major labels were definitely worthy of venture capital investment - as evidenced by huge corporate buyouts in the 90s.  Just ask David Geffen, or anyone else playing those lucrative cards in the day.

But even now, these traditional companies are being bought and sold.  Sure, EMI Group represents an investment disaster, but EMI Music Publishing remains a valuable gem.  Other assets, including recordings, are also a big part of the picture.  In fact, several EMI Music Publishing executives have expressed dissatisfaction with their lumped association with the overall distressed nature of parent EMI Group.

Then again, maybe those valuations are just relics of a much different industry.  In the current framework, entrants like Polyphonic would experience tremendous difficulty demanding control over copyrights - regardless of the upfront cash.  Consumers aren't the only ones with unprecedented levels of freedom and access, and that makes it difficult to impose old-school, control-based models.  It may also explain why VCs have been so frustrated by the music industry, and why they are so disinterested in approaches like Polyphonic.

 



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