12/04/11

By Paul-Rene Albertini, CEO of My Major Company http://www.mymajorcompany.co.uk/

‘Crowd-funding’ is becoming increasingly well known in the music and film industries for providing platforms for artists to receive financial backing. It is a significant development for the music industry in particular, at a time when traditional financing methods are drying up and many are struggling to deal with how the market has changed as a result of the internet.

Increasingly, it’s not just the music and film industries that are embracing the opportunities offered by crowd-funding: even retailers such as John Lewis are now looking at how loyal customers can contribute to the financing of a business. So what can the wider business community learn from those already adopting this model in the music sector? And how can you incentivise fans and customers to invest?

When Billy Bragg summed up the music industry’s woes saying “the record industry is in trouble, but the music industry is thriving”, he had a point. The profits that were once enjoyed by record labels — making a significant mark up on cheaply produced CDs selling for £12 each — are now seen as a thing of the past. It’s been well documented that buying habits have changed with the onset of the internet, with growing numbers of music fans either downloading music illegally or streaming music online. Indeed, whilst there is no shortage of talented artists looking for a recording deal, less and less labels are inclined, or even in a position, to take the risk of investing in up and coming talent. However, despite the gloomy figures - the International Federation of the Phonographic Industry (IFPI) recently indicated that digital piracy makes up 95 per cent of the global music download — with the challenges posed by the digital age also comes opportunity, and one of these areas of opportunity is crowdfunding.

Often referred to as ‘fan-funding’, crowdfunding essentially means funding a business line, in our case an artist, through financial contributions from fans/customers. It’s not something that is exclusive to the music industry — as I mentioned, it was recently reported that John Lewis has asked customers and staff to pledge money (in the form of a corporate savings bond) to help it raise £50m for expansion of the business — however for the music industry this is a particularly interesting development as it deals specifically with two of the key challenges we have been facing in recent years: the financial risk of finding and launching new artists; and adapting to internet-led changes to buying patterns and the digital music revolution.
So how does it work in practice? There are a number of fan funding models, which vary due to differing ideas as to what is best for the artist and what it is that incentivizes fans to invest. With the MMC model, fans who invest are essentially buying shares in any future profits made from the artist’s launch campaign as a whole (physical and digital music sales, merchandise, tours etc.). So, much like the John Lewis concept, MMC offers potential financial returns, whereas many companies operating in a similar space to MMC are only focussed on offering perks such as advanced gig tickets, signed t-shirts etc. MMC actually launched in France in 2008, and has launched a number of acts with considerable success, including Gregoire who has since gone on to sell one million copies of his debut album. Those who initially invested in him saw a return of over 20 times their initial investment!

But it’s certainly not just money that is the incentive for fan funding. One of the major reasons that fan funding in music has come about is due to the fact that in the digital age it is much easier for fans to get directly involved in the career of their favourite bands. Whether you are a compulsive music fan, or just someone who likes music, the chances are that nowadays you will check out your favourite artists online. Moreover, years of TV talent shows mean that more and more fans are interested in sharing and supporting their favourite artists — taking a much more active role in the A&R process that has been traditionally confined to the record labels. With this in mind, it’s crucial that fans feel like they can take ownership of the artists and their music — rather than having their relationship exclusively mediated by multi-national corporations, artists can now leverage the web and enable a more direct connection and we would not want to get in the way of that. From a marketing perspective, this can be a very powerful force, as often fans will help market an artist themselves, through social media and even calling radio stations to complain if their act is not played. When you have a few hundred or a few thousand people investing and buying shares in a recording contract, by nature they become agents for the artist - they become field promotion.

Unsurprisingly, the growth of fan funding in music has led many to question whether artists can take the DIY ethic a step further and cut record companies from the picture all together, however we still see an important role for the A&R structure that is offered by traditional record labels. The fact is that there is still a need for help and professional support at a certain stage to make a difference in the "monetization " of art, whether that be implementing a global digital strategy, or providing the appropriate infrastructure and administrative support for things such royalty collection — all of this is an important part of the business model.

Recent figures published indicate that global recorded music sales are down by $1.5bn in the past year, and this will no doubt have a direct impact on the ability and appetite for labels to invest and break new acts — the lifeblood of the industry. Crowdfunding goes someway towards plugging this gap, incorporating social networking directly into the business model; placing a greater emphasis on tapping into the fans who are willing to ‘go the extra mile’ in terms of buying/investing in their favorite artists; and taking a collective approach to the financial risk associated with launching new artists.