The Rise of the Digital Music Distributor

Hello! Yesterday, SoundCloud announced a move to a user-centric streaming model (SoundCloud coined: Fan-Powered Royalties) for the nearly 100,000 musicians that directly release through the platform. I rarely mention my SoundCloud job here but I’ve written about user-centric streaming for years and got to work on this project, so wanted to mention it. Many folks at the company worked on the project but I wanted to shout out Mike Pelczynski since he walked me through it a couple of years ago and I never stopped bothering him about it since. I'm very curious about the industry’s reaction but let’s hop into the world of digital music distribution!

A couple of years ago in Billboard, Cherie Hu posed the question: ‘Everyone Wants to Be a Music Distributor -- But Is That Actually a Good Business Decision?’. She identified a number of music distributors (STEM, CDBaby, DistroKid, Ingrooves) and saw money entering into these companies but there was a lingering question about the sustainability of the business. My interest is far less in the viability of these businesses but I wanted to step back and understand what function they serve within music’s larger political economy.

Digital music distribution arrived in the 2000s, just as this new post-iTunes record industry was taking shape. These new distributors were not companies placing records into stores across the country or the globe, but rather commercial platforms to get music onto emerging online stores. (CDBaby, founded in 1998, just predates this trend and might be why it still offers physical distribution.) The early businesses tracked the rise of singles on the iTunes charts and with the rise of streaming, suddenly more attention was paid to Spotify’s play count. (Occasionally a release would break, see: Tunecore's release of Nine Inch Nails’ Ghosts I - IV.) Throughout the 2000s (and even into the 2010s) artists could and would directly release music onto the internet perhaps through a mixtape site or even directly through their own website without any company between them and their fans. However, in 2021, the omnipresence of streaming, and mobile devices squeezed out that market, and thus if you want music within mainstream channels, largely dominated and established by major labels, these smaller distributors are here to offer a hand.

This is still a relatively new part of the record industry so many of these companies needed money and many found it from both established and new players within the space. Tunecore, founded in 2005 during the rise of iTunes, was bought by Believe Digital, which is right now looking to IPO perhaps to the tune of $2.4 billion. (Two backers of Believe Digital, the big champion of independent artists, are Technology Crossover Ventures and Xange Private Equity.) In 2018, Spotify invested in DistroKid, which got started in 2013, alongside previous private equity investors. The British music distributor Ditto Music, also founded in 2005, is making waves with what it calls a “decentralized finance” opinion for music. In far fewer flashy terms, it’s a fund of money made for and created by artists with some ties to blockchain technology, which is how Ditto is funding it with investments from BASIC, Borderless Capital, Elastos, Kosmos Capital, Somesing, and TrustVerse; a cluster of firms, many of which are backing blockchain technologies.

Last, STEM in 2020 received $12.5 million in funding from Scooter Braun and a number of other music industry players, after its earlier funding from Aspect and Upfront Ventures and a similar cluster of artist managers. Perhaps unsurprisingly with money coming from music’s elites and some lesser-known tech funders, STEM in 2019 announced it would pull back support of the open nature of its business so that it could focus on bigger name artists for distribution. The money flowing through music distribution isn’t extraordinarily high, which I’d credit to the business’ shaky underpinning arriving at the shift from physical to digital music but within a model made by and for large-scale rights holders, not small-scale distributors. That the money arriving into this space is centered on already-established big names and other forms of new investment money can help contextualize the constituents, not customers, of these companies.

How to Escape the Music Distribution Box?

Digital music distribution, either by providing a way to upload one’s music to digital music stores like Apple and Amazon or putting one’s music onto major streaming platforms like Apple Music, Spotify, YouTube, etc is limited in paths towards sustainable revenue. CDBaby charges per single and album with a tiered system where with extra money is put towards global registration and publishing; UnitedMasters, backed by Alphabet, Andreessen Horowitz, and 20th Century Studios, claims 10% of what an artist makes on what they distribute; others (see: DistroKid / Tunecore / Ditto Music) charge a flat fee for distribution and then tack on more for other “services” like publishing or worldwide royalty collection.

There is an endless trove of YouTube videos that litigate what is the best distributor for artists because of new players in the space and the chameleon-like nature of these businesses. More are looking into incorporating publishing, locally or globally; DistroKid may charge more for YouTube Content IDs, and others like STEM just recentered on higher-tier artists for distribution. The range of options being floated by these companies in a way illustrates that music distribution exists at the mercy of streaming. Either keep costs low and aim for scale or increase them and hope for more success for artists. Suddenly this starts to sound like the math of a record label.

This can be best seen in a recent op-ed by Lee Parsons, CEO of Ditto Music, who wrote in Music Business Worldwide a defense of music streaming from the #brokenrecord campaign and the tone of critiquing the streaming model. Parsons supports user-centric streaming (he and Mr. Gray, the man who started the #brokenrecord campaign agree here) and appears fine with poking the major labels, which he’s in direct competition with, so what exactly is the problem? Shawn Reynaldo in his newsletter First Floor offered an explanation:

Parsons isn’t alone either; in recent years, a whole cottage industry of Ditto-like companies has arisen, many of them glorified middlemen offering to “help” artists get their music on streaming platforms—for a small fee and/or a cut of the profits of course. These companies rely on volume, as bringing in $100 of revenue for a single artist isn’t much, but when that increases to 1000 or 10000 artists, it quickly starts to become real money.

The issue for Parsons or potentially other music distributors is that any change that could undermine the current streaming set-up is a concern for them. That could be why you see DistroKid named Republic Records, owned by Universal Music Group, as its first label partner where it’ll help Republic identify emerging artists for a small cut of that future artist’s success. STEM and Ditto are both interested in unique flavors of financial backing, the former going for more traditional advances and the latter blockchain-centered. The viability of these various strategies is a bit immaterial because the way they’ll be making money is ultimately through streaming revenue, which is a space dominated and negotiated by major labels.

Sony’s recent purchase of AWAL, a formally “independent” music distribution company, may help explain this web. The company’s aim wasn’t sheer scale but rather more closely mimicked a record label, not unlike EMPIRE or UMG’s recently renamed Virgin Music Label & Artist Services that was once Caroline Distribution. AWAL, again financed by Google Ventures and MSD Capital, points out that these firms often function as the tech and music elite’s farm team for the major label system. Though many of these companies are still privately held, unless there is a massive breakup of the major labels, they’ll remain subservient to them, which is why many are looking into new revenue streams (publishing, international royalties, blockchain, etc.). Suddenly, music distributors start to mirror major labels, and again, who are artists to trust: major labels or music distributors backed by private equity and venture capital? Hard to see how the best interests of artists can be served.

A Note of Financialization

Last month, a new song rights firm appeared on the scene. Michael McCarty, formally of EMI Music Publishing Canada and SOCAN (Society of Composers, Authors and Music Publishers of Canada), announced the Kilometre Music Group with the backing of Barometer Capital Management Inc. hoped to raise $200 million with the marketing angle of focusing investments in Canadian artists versus the wide net cast by the Hipgnosis Songs Fund, Round Hill Music, and Primary Wave. McCarthy prior to working at SOCAN was the president of ole, a Canadian publisher and rights management company, which received backing from the Ontario Teachers’ Pension Fund. ole’s founder Robert Ott in 2018 sold his share to the fund, so it makes sense that Billboard asked McCarthy if those previous business relationships might boost this new venture. My last note on this topic is that Toronto-based Barometer Capital Management is the result of a merger between Barometer Capital Management Inc. and Roundtable Capital Partners, whose previous investments were pretty far from the world of song rights. I’m sure they’re big music fans now though!

In non-Canadian news, Primary Wave picked up the publishing rights of Chynna Phillips, which follows news of them collecting the mastering recordings and publishing from the other two members of Wilson Phillips. Round Hill Music announced Song Hill, a new division within the company that’ll focus on getting songs registered in international rights societies and offering advances and deals to accommodate those who want to invest more in those royalties. The immediate trend of music finance firms continuing to peel back the onion of what potential rights to own, so why not look across the globe? Certainly welcome news for international PROs, who might see more business flow their way.

Last, Iconic Artists Group, backed by industry veteran Irving Azoff, reportedly paid $100 million for a controlling share of the Beach Boys master recordings, imagery, and some of their publishing. The Rolling Stone story on the sale is fairly glowing but downplays that most of the band’s iconic music is still owned by Universal Music Group. Thus, the task of Azoff’s company is to make the Beach Boys a global brand without their most beloved tunes. Good luck!

Unheard Labor

Last week the Music Workers Alliance, along with a number of New York City arts groups, rallied in front of New York governor Andrew Cuomo’s office. The demonstration was in support of the Invest in Our New York Act that was aimed to raise taxes on the wealthy, along with a bill to create state-funded works programs for artists. My own state senator Jabari Brisport even appeared at the action! (Watch a recording of the action here, if curious.)

6 Links 2 Read

Financialization Feeding Frenzy with Cherie Hu and David Turner - Money 4 Nothing / Music and Labor 2 with Liz Pelly and David Turner - Art and Labor

Big week for podcasts in the Penny Fractions world! First up, I returned to Money 4 Nothing this time with Cherie Hu to discuss music financialization and the incredibly messy web it's created in the publishing world. Then, Liz Pelly made her Art and Labor debut, where we discussed her recent work on music alternatives, high school mix CDs, and many jokes about local New York politics.

Spotify, Apple and Amazon at the UK streaming economics inquiry - Music Ally / What the Major Record Companies Really Think About Economics of Music Streaming - Music Business Worldwide

Again, the written statements of multinational firms at the behest of a government is a trove of interesting notes. That most record labels begrudgingly accepted looking into user-centric streaming is interesting when Spotify and Apple questioned by Parliament kicked that question back to the labels. Still, it seems some form of reform is coming down the pipe for the record industry in the UK with a potential longer shadow to cast.

Slowly But Surely, The Major Labels' Dominance of Spotify is Declining - Music Business Worldwide

Here is why my last newsletter was devoted to the topic of “independent” music. Even if the share of major label content is decreasing on Spotify, what is the value if it’s mostly all backed by venture capital cash? These are not artist-owned labels or co-ops but rather large aggregate services that dump endless tracks onto Spotify’s servers. Hard to not see how that wouldn’t eventually eat into the major label pie. Labels still sign people, distributors can skip that step.

Big Hit and Universal 'Rewrite Global Music History' with Joint K-Pop Label Partnership - Music Business Worldwide

The press release for this partnership is certainly hyperbolic. However, I did not want to pass up highlighting that the South Korean industry is continuing to further interlock with the Western record industry. Even if the concept of globalization is facing questions within other political contexts, recording music’s new political economy is being shaped with global audiences taken as a given.

Hundreds of K-pop songs disappear from Spotify - BBC News

Reportedly, the domestic contract between the entertainment company Kakao M, which owns the popular Korean streaming platform MelOn, and Spotify lapsed. This caused Kakao M to remove all of its music from Spotify in South Korea, but the company then took the extra step of pulling it from Spotify globally. Kakao M’s motivations for playing hardball are a bit unclear, perhaps it’s that Naver, another Korean tech company, recently invested over $300 million in Big Hit Entertainment, a label rival of Kakao M, via a joint venture. So, this could be an effort to undercut a potential rival since the industry is already so consolidated, perhaps. That’s largely conjecture, so watch this space!

Facebook Strikes Deal to Restore News Sharing in Australia - The New York Times / The Deal Between Facebook and Australian News Media Won’t Help Journalists - Jacobin

This is completely unrelated to music but I find it very interesting that the Australian media industry was basically about to strongarm Facebook and Google to pay them, in a way not too dissimilar to how record labels currently work with Apple, Amazon, Google, etc. The analogy isn’t exact but I do find this outcome fairly indicative that certain big players within various industries have given up the direct fight against tech and instead are just asking for a share of its profits. Now, this will likely only help the bigger publishers, much like in music, but (also similar to music) it gives a blueprint for challenging tech and makes clear that their success comes from the industry it “disrupted” and is now being clawed back.