How Private Equity Drained the Record Industry

Hello and welcome to Penny Fractions, an almost-weekly newsletter about the music business! Tonight at 7pm EST I’ll be hosting the second Penny Fractions reader call, which you can sign up for here. We’ll be talking again on the coronavirus’s impact on the music business, live streaming, and whatever else might interest y’all. The next call is scheduled for May 24th at 1pm EST, which hopefully might be a bit better for non-American folks (though let me know if it doesn’t work, as well!). If you enjoy the newsletter, please recommend it to a friend or sign-up on Patreon. Now let’s get into a little history lesson...

Earlier this year, I wrote about Scooter Braun’s purchase of Big Machine Records, the label best known for one of the 21st century’s biggest artists, Taylor Swift. I focused on the slightly less discussed entity in the drama, the Carlyle Group, who helped back Braun’s Ithaca Holdings purchase. This felt like a good entry point into seeing the extent to which private equity, the industry currently known for offloading crushing debt onto journalistic and retail businesses, was seeping into the music space. Yet, the Carlyle Group, who’ve invested in Nielsen and Beats Music, are one of many private equity firms tied to music. This week I’ll go through a slightly extensive, though certainly not comprehensive, history of private equity’s roots in the music industry. Now let’s talk about Ted Turner.

Blame It All on Ted Turner

Son of an anti-communist billboard salesman, Ted Turner spent the 60s and 70s buying up southern radio stations, founding CNN, the pioneering 24-hour cable news channel, and wanted to expand. He wanted to own the Columbia Broadcasting System, more commonly known as CBS. Unfortunately for Turner, there were two issues: 1. CBS wasn’t interested in selling; and 2. Wall Street wasn’t interested in financing his scheme. Turner’s plan of a leveraged buyout for CBS, was a maneuver that was seen in spades across the decade but left potential investors leery. Even if chances of Turner’s plans succeeding were almost dead upon hitting the press, CBS got spooked. The broadcast company spent nearly a billion dollars to buy back its own stock to avoid a Turner takeover. That defensive move saddled the company with massive debt that it quickly acted on to alleviate.

In 1986, CBS began unloading various parts of its company, including its book publishing arm and CBS Songs, the former music publishing arm of CBS Records. That same year, a relatively unknown company called Triangle Industries, with the backing of the famously illicit investment bank Drexel Burnham Lambert, made an offer to Laurence Tisch, then CEO of CBS. Walter Yetnikoff, then president of CBS Records, made a frantic bid not to be outmaneuvered out of the company that he thought was rightfully his. Though not originally reported at the time, Yetnikoff asked Sony to help finance the deal; a company whose working relationship with CBS dated back to the late 60s.

CBS’s board of directors rejected both billion-dollar-plus offers but a year later, after the Black Monday stock market crash, Tisch was ready to make a deal and sold CBS Records for $2 billion. This was the largest record label sale at the time, at least six times larger than General Electric’s sale of its stake in RCA/Ariola to Bertelsmann (a century-plus old Germany media conglomerate) only one year prior. Now, which company helped provide assistance to Sony when making such a big purchase? I’ll let the New York Times Magazine explain (emphasis mine):

Sony, innocent in the ways of big-time mergers and acquisitions, knew that it would need help. Schulhof called on a new ''boutique'' merchant banking firm, The Blackstone Group, headed by a former co-C.E.O. of the Lehman Brothers investment banking firm and the United States Secretary of Commerce, Peter G. Peterson, and Stephen A. Schwarzman, an acquaintance of Schulhof's.

Blackstone, one of the earliest private equity firms to exist, helped play a small part in this deal but signaled a bigger shift within the music industry. Across the music trade press, the potential (and eventual) sale of CBS Records suddenly made every record label’s value skyrocket. There was a giddiness across the music industry to ingratiate itself into the monied world of Wall Street. (“It says record labels can be valued in the same manner as any major U.S. industrial corporation.”) All of a sudden, eight, nine, and even ten-digit price tags were being put on records labels when the industry had only become a billion-dollar industry in the early 70s. Sony’s purchase set the stage for the high-priced acquisitions and consolidations that defined much of the 90s boom. Once the collusion-filled CD bubble burst in the early 00s, private equity was ready to make its real debut.

Reshaping a Broken Industry

In March 2004, Billboard ran a story titled “Opportunities For Strong Stomachs”, which surveyed the landscape for music investments. The summary was mixed with there being lingering fear over the stability of the industry, although this line stuck out to me: “But opportunities also exist in areas like publishing, distribution, and independent labels.”

Andrew deWaard, an assistant professor at the University of California, San Diego, argued in a chapter from the forthcoming book Content Wars: Tech Empires vs. Media Empires that 2004 was the year when financialization kicked into high gear within the music industry. A pattern emerged in the 00s where private equity firms took swings at running the music industry’s largest firms.

The best example was Warner Music Group (WMG), which was bought by Bain Capital, Thomas H. Lee Partners, Providence Equity Partners, and Edgar Bronfman Jr. in 2004. deWaard highlights thousands of layoffs, musicians being kicked from the label, and executive firings; yet the private equity firms quickly recouped their investment, which made WMG’s 2011 $3 billion sale to Access Media a sweet little bonus. Warner wasn’t the only label enmeshed in private equity, as Tailwind Capital Partners helped Concord Records buy long-standing California label Fantasy Records in 2004.

While the purchase of WMG was fairly grim for those not cashing those high-level checks, it was a better outcome than the next big private equity entry into music. In 2007, Terra Firma purchased an already-struggling EMI Records to near-disastrous results that were captured in the book Selling the Pig, which I wrote about last year. Tough-nosed banks, EMI’s massive debt, and Terra Firma’s inopportune time to purchase a record label before the financial crash left Terra Firma to eventually split recordings to Universal Music Group and publishing to Sony/ATV. Once this closed out after a number of years, many employees lost their jobs, many artists left the label, and many initiatives launched and failed so that by the end of the early 2010s, only three majors still stood.

Private equity helped accelerate consolidation and, similar to the late 80s Sony purchase of CBS Records, also helped inflate the value of an increasingly-limited stock of record labels and publishers. Then, to close out the decade, in 2009 KKR (Kohlberg Kravis Roberts & Company) decided to hop into a joint venture with Bertelsmann to collect up music rights, without any viable major labels to purchase. In a way, the deal confirmed what Billboard printed five years prior: the best way for finance to enter music wasn’t through flashy, yet extremely risky, record labels but rather through music rights.

Same Old Business Moves

If the direct purchase of record labels hit a dead end, private equity needed a new path. An early follower of the KKR/Bertelsmann model was Round Hill Music, which to quote their own 2014 press release (bolding, as always, is mine): “Round Hill Music Royalty Partners invests in music copyrights with an emphasis on iconic compositions that generate annuity-like royalty cash flow. The Firm leverages its deep experience and industry contacts to increase cash flow through improved licensing and administration.” The firm started in 2012 with $200 million, raised over $200 million in 2014, and yet another $260 million in 2018. But don’t worry, they’re spending that money! Round Hill wouldn't be alone in hoovering up publishing rights.

Lyric Capital Group (see more) and Trilantic Capital Partners, both of which got their start only a few years ago, saw the former follow the Round Hill path, while the latter crept into music management. EQT bought a 40% stake in Epidemic Sound, the Swedish music production company perhaps best known for populating Spotify playlists with “fake artists.” These firms were diversifying what they thought were the best ways to seed themselves into the music industry.

Back in 2017, the Blackstone Group (yes, that Blackstone Group) purchased SESAC, the Nashville-based for-profit music performing rights organization. SESAC wasn’t new to the world of finance since it was bought by the private equity firm Rizvi Traverse Management in 2013 and would go on to purchase mechanical rights house Harry Fox in 2015. Suddenly, private equity was directly enmeshed within the business of artists getting paid for their labor without all of the messiness of record labels. This ended up coming to a head during the fight to pass the Music Modernization Act in 2018. SESAC and Harry Fox temporarily held up the legislation but eventually folded under public pressure by songwriters. Nearly thirty years since Sony’s purchase of CBS Records, private equity can be found within nearly all aspects of recorded music.

Thus, it can’t be too shocking that Warner Music Group, which spurred this wave of financialization, last year announced a partnership with Providence to launch a new catalog investment platform called Tempo Music Investments with the explicit aim of collecting songwriters’ catalogs like Pokemon cards. All of these deals and purchases might exist on a more abstract plane than the digital platforms that occupy headlines and criticism within the music industry. However, the oligopolistic control of major labels, which in turn dictates the rules of streaming platforms, can be traced back to the mid-80s dreams of luring Wall Street cash into the record industry. Ultimately, record label executives succeeded, but to the detriment of thousands of jobs, many artists’ careers, and the destruction of several labels that helped create this industry.

Unheard Labor

Let’s start with some good news: Bandcamp’s second promotion of waiving the company’s fee on purchases resulted in $7.1 million in sales. The company plans to continue this promotion into June/July, so go ahead and support your favorite artist if you’re financially able to! Over the last couple of months, a couple of new artist groups (Music Workers Alliance / United Musicians and Allied Workers) have emerged with collective demands towards the United States government, as there are continued discussions of providing relief for all those hit by the coronavirus. Hidden in a piece of news about Insomniac furloughing half of their staff is that by Billboard’s count, over 24,000 people in the live music industry have been laid off or furloughed. The last item is that the Ivors Academy and the United Kingdom’s Musicians’ Union have announced a petition for the British government to examine the music streaming business.

6 Links 2 Read

Spotify should pay musicians more? Let’s talk more about how / No Spin Zone: Spotify's Latest Earnings Shoot Straight on Losses, Pandemic Impact & On-Demand Video (Analysis) - Music Ally

Penny Fractions is very much a pro-spin newsletter, so don’t let the headline above fool you. Either way, these two pieces are a fairly solid walkthrough of Spotify’s current financial position and help explain what exactly Spotify can and can’t do to pay musicians more. (Hint: rates just can’t go up on a dime...but also Spotify could stop fighting government-mandated songwriter payout increases…)

The Scarring - The Next Recession

Michael Roberts lays out a case for why there shouldn’t be expectations of a “v-shaped” recovery from the coronavirus and that the longer we’re in this recession, the longer and less likely we’ll be to return to the level of economic prosperity we were previously experiencing. That kind of “success” was already not felt evenly amongst society, so hopefully, any recovery might take that into account, even though early signs would point towards notsomuch.

Small Clubs Are Where Rock History Is Made. How Many Will Survive? - The New York Times

Solid reporting on what could be the dire situation facing independent music venues across the country the longer this pandemic continues.

A Brief History of the Gig - Logic Magazine

A deep worker-first account of the San Francisco taxi industry as it was taken over by apps like Lyft and Uber. Any parallels and thematic consistency with music worker labor since the 1950s I’m sure is just a coincidence.

Sony is building a team ‘dedicated to reimagining music through immersive media’ – using Fortnite maker Epic Games’ Unreal Engine - Music Business Worldwide

I’ll comment on “live streaming” and “virtual concert” next week but I cannot repeat enough that this is clearly one of the least imaginative grifts of “future of music” that I’ve seen in a minute. Lazy, lazy grifting.

How Hip-Hop Royalty Found a New Home on Instagram Live - The New York Times

Personal bias check here. I find all of these Instagram live events essentially sub-Grammy red carpet level content. Completely uninteresting and fully resting on collective boredom/nostalgia. Even with that fact laid out upfront, these events are happening on Instagram while many live concerts are occurring on YouTube/Instagram/Twitch and not any other music platform, which I find incredibly interesting. Not surprising, but it is providing a nice real-time confirmation of the decaying of music platforms to new ideas.