Why investors should tune into the potential returns of independent music

MUSIC: Artists need not be sold-out stadium superstars to make a profitable return for investors, declares Paul Pacifico, CEO of UK indie-labels organisation AIM. And it is about time tech-obsessed financiers opened their ears to hear why.

Pacifico (pictured, below) is on a mission to adjust a contemporary trend that has seen funds being used to back innovative-tech start-ups while shunning the very entertainment content needed to fuel those ventures’ digital engines.

“The music market has changed. We are no longer relying on a business with physical recordings sold on limited retail shelf space,” he tells MediaTainment Finance.

“But access to funding is still a problem. Debt financing is still a problem. We need to lobby the government for the concessions that tech sectors benefit from.”

Traditionally, banks and other financial institutions have avoided independent music, regarding it as an expensive hobby. Yet, thanks to indie labels and management, the music industry discovered money-making legends like Adele (pictured, below, right), Sex Pistols, Jay-Z and Elvis Presley (pictured, below, left).

The love-hate tech enigma
On the other hand, the past 20 years have seen digital-tech ventures gain from the lavish investments and generous government policies that made Silicon Valley and its overseas counterparts the multi billion-dollar hubs they are today.

What would Spotify’s ingenious streaming tech be without the 30 million-plus songs delivered to its 140 million active users? The streaming music giant might be worth an estimated US$20bn but it is still losing money after almost 10 years.

Yet, a new band armed with finely crafted tunes and killer instrument-playing skills will struggle to access capital, Pacifico reiterates.

“And where that capital is available, it is disproportionately expensive,” he adds. “In the long term, however, music is better monetised and accessible in a global market. And the way digital revenue has started to flow gives us room to be optimistic.”

In August, Merlin, the global digital-rights agency representing thousands of indie labels and distributors, announced it had paid out US$1bn in royalties to its members less than 10 years since its launch in 2008.

A recent report from Worldwide Independent Network (WIN), the trade organisation for the global independent-music community, concluded that indie labels combined represented the single biggest market share compared to each of the three multinational major record labels (Universal Music Group; Sony Music Entertainment and Warner Music Group).

Based on copyright ownership, indies accounted for 38.4% of the global recorded music in 2016, generating £6bn-plus (US$7.9bn) in revenue.

Spreading the indie gospel
Pacifico encourages investors considering adding independent music to their assets to bear the following in mind.

While any tech product either works or doesn’t, indie music has better risk mitigation for the following reasons. It creates long-term copyright assets. You can make high-quality music at home on your laptop. You don’t need a massive billion-dollar recording studio and can collaborate with other artists worldwide without the travel costs.

The cost of bringing the music to market is cheaper; you don’t need to press millions of bits of plastic that need to be shipped.

“There is always an upside potential and, in most circumstances, that balances the books every time. Also, the buy-in for the investor is very low, and any downside is mitigated because it is not costly to get to market.”

Now Pacifico, a former banking executive in London’s financial district and ex-CEO at The Featured Artists Coalition organisation, wants to tell that story to the wider world.

He has been appointed chair of the UK Music Fiscal Incentive Committee, part of the umbrella organisation called UK Music, which is taking the sector’s case to the government to make a strong argument on its behalf.

Ending the money merry dance
In 2014, the British music industry had welcomed the government’s introduction of SEIS (Seed Enterprise Investment Scheme), which offered tax relief to investors in start-ups, including up-and-coming record labels.

But SEIS critics say the scheme has underperformed because participants included many who were not prepared to take on the music business’ unique complexities.

Many independent acts and enterprises are consequently still forced to rely on limited government grants promoting talent, especially overseas, or the major labels, which are de facto competitors.

Pacifico also points out that the UK cannot request the tax subsidies common in countries like France and Canada, where there is the argument to preserve local-language works from the dominance of English-language global hits.

After all, five out of the Top 10 global albums in 2015 and four in 2016 came from the UK, according to figures published by IFPI, the global recorded-music industry trade body.

Additionally, the indie sector brings more to the table, Pacifico says. “We know that indie tracks are skipped less often on streaming platforms, and that the people who pay for music listen more to indie recordings,” he insists. “Indies run a tighter ship, which is why they are gaining market share at a cheaper rate compared to the majors.”