On November 14th, 2019, Taylor Swift wrote an open letter to the public, the music industry, and, most importantly of all, her many millions of fans.
In it, Swift — who has sold over 50 million records and became a global sensation long before her 30th birthday — struck a tone of frustration and hopelessness, saying, in essence, that she’d be unable to perform the music from her first six albums when she accepted the American Music Awards’ highly coveted Artist of the Decade honor.
As if this blow wasn’t substantial enough to Swift and those who enjoy her work, it was also revealed that Miss Americana, Netflix’s years-in-the-making documentary about Swift’s life and career, wouldn’t feature any of the songs she’d created during her first 16 years as a professional.
The cause of both setbacks (and Swift’s immense dissatisfaction) could be traced to a $300 million deal involving Big Machine Label Group, private equity heavyweight Carlyle Group, and Scooter Braun — without any input from Swift (or her fans).
In one deal, the plight of many contemporary artists was encapsulated. Even after achieving international superstardom, musicians like Swift are often required to fight for the rights to their recordings.
Ultimately, Swift wrestled the ability to perform at the AMAs and release her Netflix documentary. But her ongoing struggle has sparked widespread interest in one of the music industry’s most deep-rooted and troubling practices. In the end, who gets to own the masters?
Though Taylor’s mass appeal allowed her to secure a new deal (which stipulates that she will retain ownership of her masters) with Universal Music Group and Republic Records, the reality is that tomorrow’s breakout stars are in the same position Swift was 16 years ago. That’s when she was on the outside looking in—a talented teenager with little more than a dream and the wherewithal to see it through.
And with physical music sales bottoming out, the battle for master rights is about more than giving artists what they’re owed; it’s about allowing them to earn a living. That is stimulating some different approaches to the problem, especially given immense changes in music distribution, fan connectivity, and access to fame. While Swift offered a high-profile case study, thousands of other artists have amassed serious, revenue-generating catalogs — it’s become nearly impossible to sell those catalogs without sacrificing complete control.
Among those tinkering with alternatives is Music Benefactors, a fan-to-artist investment platform that feels the key to success is letting fans participate in the royalty streams.
Maybe it’s crowdfunding 2.0, if 1.0 was a total disaster. But instead of conventional crowdfunding, Music Benefactor’s vision is to fundamentally alter the way artists interact with fans, create, and receive compensation. At its simplest, Music Benefactors facilitates investments from fans who wish to financially back their favorite artists — and cash in on royalties generated from radio and streaming.
“The artist could theoretically sell 99% of the copyright, but remain as a partner.”
At its most complex, however, Music Benefactors enables artists to forego signing their masters away to those whose interest in them starts and ends with dollars and cents. So, instead of private equity buying the masters, fans deliver the same investment capital in an exchange. If widely utilized, the platform has the potential to eliminate the type of predicament that Taylor Swift is battling through presently.
Music Benefactors founder Matthew Lutz says that the presence of fan investors opens the door for artist control. He first introduced the concept to Digital Music News last month, and we’ve since joined forces to broaden the idea. Technically, fans own the IP, but the stock market approach allows the artist to oversee the usage of the catalog. “The artist could theoretically sell 99% of the copyright, but remain as a partner,” Lutz told DMN.
But artists also have the option to sell smaller percentages of their catalogs — whatever makes sense for their financial needs and interest. Perhaps APOing a 10% share means fewer weeks on the road and more time with the family.
Lutz says the opportunity to upend the music industry appeared in March of 2015, when the Securities and Exchange Commission expanded the Regulation A requirements established by 1933’s Securities Acts.
The regulatory agency had been prompted to do so by the Jumpstart Our Business Startups Act Act (JOBS), which sought to ease the SEC’s regulatory burden on relatively small businesses, particularly startups.
These businesses — and many individuals — were afforded the option of raising funds from non-accredited investors. The JOBS Act also provided exemptions for SEC registrations, which had long made it fiscally improbable for most new companies to legally raise public funds. Whereas companies with 500 backers had previously been required to register with the SEC, the JOBS Act expanded the total to 2,000. Plus, investment-amount limitations assured that individuals — not corporations — would be the ones backing startups.
While most saw the JOBS Act simply as an ever-rare bipartisan success, Music Benefactors’ founders saw it and the lessened SEC stipulations as a chance for a new beginning in the world of music.
Now, after years of brainstorming, figuring, planning, and executing, the platform’s team has unveiled the Artist Public Offering (APO), a one-stop program that unites artists with fans, giving the former peace of mind and financial security, and giving the latter a fiscally sensible way to back their favorite music professionals.
APOs divide a particular work’s master rights into a pre-arranged number of shares before making these shares available to (non-registered) investors for a fair market value.
In this way, artists can keep control of their masters, their investors will have their best interests at heart, and no one person or group can dominate the investment. Plus, investors are able to receive long-term payments (from streaming, radio, and sync), and artists will receive much more cash upfront than they would in many years of working beneath a record label. Similarly, artists can sell as large — or as small — a portion of their royalties as they’d like.
Additionally, APOs make it financially easier for up-and-coming acts to get started without signing their rights away, and unreleased music — which becomes the property of labels under most standard contracts — remains under the control of the artist.
Compared to outright royalty sales, APOs grant artists substantial control and financial independence; while private buyers have an incentive to buy low and sell high (as Scott Borchetta, CEO of Big Machine did), APO investors buy at an artist-friendly rate and can turn a stellar profit relative to their initial investment, and without needing to consider selling.
Similarly, the seeming benefits of IP loans — with upfront payments issued to artists — present some tricky drawbacks. In essence, IP loans give musicians a fraction of their works’ total and potential value in exchange for the right to possibly lucrative future earnings. And if things don’t work out and a loan can’t be repaid, masters can be taken as collateral.
In theory, APOs encompass all the perks of private sales and IP loans, while minimizing many of the drawbacks associated with IP-based upfront payments. Lutz says APOs give artists financial and creative authority over their own careers, while creating an even tighter artist-fan relationship.
But what about the middleman problem?
In August 2009, PledgeMusic, a direct-to-fan music platform, debuted. The company’s ambitious goals — connecting fans and artists, funding innovative projects, and allowing bands to market products without consulting retailers — appealed to a large number of artists. Weezer, Sum 41, The Libertines, “Weird Al” Yankovic, and many other well-known artists utilized PledgeMusic, and the platform’s future looked bright.
Around its nine-year anniversary, PledgeMusic became slow to pay artists; by its 10-year anniversary, it was bankrupt.
An intelligent, viable initial idea had been disrupted by a harsh reality: Employees also needed to be paid, and even with artists contributing a portion of their projects’ earnings, the costs and demands of a growing platform made it impossible to stay financially afloat. To ask more of artists would be to lose their support and fans’ interest; to cut employees and costs would be to compromise the capabilities of the website.
The PledgeMusic episode and its troubling aftermath — some artists simply weren’t paid their owed money — raised questions about the effectiveness of the direct-to-fan business model. To be sure, this aftermath casts a long, doubtful shadow over all similar endeavors, not excluding the Music Benefactors and their APOs.
But according to Lutz, the cause of PledgeMusic’s downfall (and the bankruptcy of similar efforts) is attributable to the inherent challenges associated with supporting a middleman — the company whose employees code, write, pack, ship, organize, and lead — and not to the system itself. With APOs, they note, there are no middlemen, in the full-time-employee sense, and a small portion of royalty payments (and/or fundraisers) will cover nearly all costs.
Lutz is stripping out the middleman and its dangerous escrow arrangements. Instead of a holding-pen for cash, Music Benefactors is merely a facilitator of an investor relationship involving fans and artists. The money isn’t parked in a gray zone; it’s delivered directly from fans to artists, and from royalty-generating asset to fans.
That important structural shift alone makes a dramatic difference in the artist-fan relationship. Instead of project-focused crowdfunding, the APO focuses on valuable, exiting IP. And instead of tossing donations into a pot and getting some special item in return, fans are positioning themselves as micro-investors. Lutz sees his model producing exponentially greater rewards — while eliminating one of the industry’s biggest ownership issues.