Vienna Music Business Research Days September 13, 2017

Conceptualizing an Entrepreneurial Growth Model of the 21st Century Music Industry

By Jason BurchardThe London School of Economics and Political Science

jason@rootnote.co

Contents

2

• Introduction

• Research Questions

• Relevant Literature

• Methodology

• Data and Results

• Findings

• Concluding Remarks

• Q&A

• Appendix

Introduction

3

5,597• The number of companies reported as “music

and audio” related in crunchbase’s database ofcompanies (as of September 5, 2017)

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Introduction

4

$103.9 Billion• Goldman Sachs projected global recorded,

publishing, and live music revenues by 2030

$23.8

$5.4

$24.7

2015 Global Industry Revenue (Billion USD)

RecorededMusic

Publishing

Live Music

$53.9 bn

$56.3

$9.3

$38.3

2030E Global Industry Revenue (Billion USD)

RecorededMusic

Publishing

Live Music

$103.9 bn

Numbers sourced to Music in the Air: Stairway to Heaven – The Goldman Sachs Group, Inc.

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Introduction

5

45• Number of revenue streams available to artists

Revenue stream opportunities sourced to Future of Music Coalition

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Introduction

6

This is Exciting!• New technologies and organizations are

challenging traditional roles and functionswithin the industry

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

• Music industry entrepreneurs are redefiningboundaries and creating new business models

• Artists are working with intermediaries in newways and reaching new levels of success

Research Questions

7

What kind of model could be used to describe thetypes of entrepreneurial activity that we areseeing?

What types of activities are independent musiciansand music industry entrepreneurs performing?1

Why are independent artists and music industryentrepreneurs doing what they do?2

What kind of industry structure could support thetypes of entrepreneurial activities being observed?3

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Relevant Literature

8

Scope of literature review focused on literaturethat might help explain entrepreneurial activitywithin the music industry

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

• Academic work around music industry models

• Theories regarding firm formation

• Research on new ventures & entrepreneurialgrowth

Relevant Literature

9

Music industry models

Music Industry Models Authors Phase Characteristics

Top 40’s Radio

Loosely Coupled

Systems

(Hirsch, 1970)

(Burnett and

Weber, 1989)

Pre-

digitalization

-aggregate of subsystems that are part of a “pre-

selection process” where a significant amount of

filtering occurs between each stage

-interaction between two subsystems – the

production system and the consumption system

Musical Network

Model

(Leyshon,

2001) Concurrent

-network of sequential processes with four key

networks: creativity, reproduction, distribution, and

consumption

DIY

Contemporary

Manager

(Kusek, 2014)

(Hracs, 2015)

Post-

digitalization

-characterized by artistic choice and ability to self-

perform

-intermediary guided industry; intermediary

functions include coordination, co-production, co-

promotion, curation, consultation, and connection

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Relevant Literature

10

Theories regarding firm formation

• Transaction Costs Economics (TCE)

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

– Firm boundary equilibrium (Coase, 1937)

• Occurs where internal costs = external market costs

• Costs include organizing, negotiating, and contracting

– Asset specificity (Williamson, 1981)

• Market contracting occurs when assets non-specific

• Creativity networks have high asset specificity (Leyshon,2001)

Relevant Literature

11

Theories regarding firm formation

• Entrepreneurial Theories

– Means / ends models

• Artists conduct entrepreneurial activities through theirmeans to achieve desired ends (Essig, 2015)

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

– Risk and likelihood of becoming an entrepreneur

• Choice to operate risky firm or work for riskless wage(Kihlstrom and Laffont, 1979)

• Risk neutral with variable “productive efficiencies” (Laussel

and Le Breton, 1995)

Relevant Literature

12

Theories regarding firm formation

• Entrepreneurial Theories

– “Creative destruction” (Schumpeter, 1942)

• New products, production methods, markets, productinputs, and forms of organizations replace the old

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Relevant Literature

13

New ventures and entrepreneurial growth

• Entrepreneurial life cycles (Johnson et al, 2011)

The Entrepreneurial Life Cycle as adopted from Johnson et al, 2011

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Relevant Literature

14

New ventures and entrepreneurial growth

• Artist taxonomies (Next Big Sound, 2016)

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Methodology

15

Based on the scope of research and nature of thequestion, an exploratory and qualitativeresearch methodology was employed.

Focused on two groups of key actors:

• Independent Musicians and Songwriters

• Music industry entrepreneurs and professionals

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Methodology – Independent Musicians and Songwriters

16

Independent Musicians and Songwriters

• Multiple genres; based in Nashville and London

• “Independent” not currently signed to label

or publishing deal

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Methodology – Music Industry Entrepreneurs and Professionals

17

Music Industry Entrepreneurs and Professionals

• Based in Nashville and London; seniormanagement and founder level personnel

• Interviewees included those in more traditionalroles and emerging music technologist

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Data and Results

18

Data

• Conducted and recorded semi-structuredinterviews that followed organized topic guide

• Analyzed transcripts by thematic analysis, usingLeyshon’s Musical Network Model as a baseline

• Grouped by industry function (18 identified)and summarized by emergent themes,perceived challenges, and new combinations

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Data and Results

19

Results

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Data and Results

20

Results: Artists are feeling pressures of anexpanded market

• Capital vs. control trade-off

– Accepting more business risk at early stages inexchange for more ownership of anticipated futurerevenue streams

– Facing operational challenges associated with moreresponsibility, choice, and selectivity

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Data and Results

21

Results: Artists are feeling pressures of anexpanded market

• Low Entry Barriers

– Focusing high quality content as mechanism to helpovercome low market entry barriers

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

• Exposure vs. revenue paradox

– Incurring costs for the opportunity to buildreputation and fan base in competitive market

Data and Results

22

Results: Artists are being entrepreneurial

• Taking more active roles in management

– management team helping to source connectionswhile artists are maintaining relationships

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

• Experimenting with branding and marketing

– Using technology to market to “evangelist”consumers

– Promoting content of entire brand, not just themusic

Data and Results

23

Results: Artists are being entrepreneurial

• Networking: “Service for service” collaboration

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

• Acquiring analytical skill sets

• Shopping around in low “asset specific”networks (reproduction and distribution)

Data and Results

24

Results: Music industry entrepreneurs arecreating new markets, processes, and products

• Markets

– new markets for live booking and capital allocation

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

• Processes

– new processes that facilitate networking,collaboration, and fan interaction platforms

• Products

– new products that enable virtual management andeducate artists on business aspects of career

Data and Results

25

Results: The “old” industry is not dead

• Record labels and music publishing

– Artists viewed networks of resources as valuableofferings from labels and publishers

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

• Gatekeepers

– New tastemakers entering the promotion anddistribution world, especially in streaming

Findings

26

Interpreting the results

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Discovery of additional industry functions1

• Key findings:

Conceptualization of Entrepreneurial Growth Model2

Findings

27

Additional industry functions

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Industry Function Description

NewCombinations

Alternative Finance Providers

Alternative funding from traditional based systems. Includes raising money through crowdfunding and allocation of private investment

-New markets

Fan and consumer orientedservices

Next generation platforms that encourage fan-fan and fan-artist interaction. Provide new ways for fans to engage with artists, artist content and other fans

-New products

Findings

28

The Entrepreneurial Growth Model

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

• A dynamic system of staged networks

• Key Components

– Growth curve

– Musical networks

– Stall points

– Intermediaries

N1

N2

N3

N4

N5

Scal

e a

nd

Sco

pe

of

Mu

sici

an N

etw

ork

Dim

en

sio

ns

Cumulative musical network

Findings

29

The Entrepreneurial Growth Model

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Artist Stage Progression

Size of Artist Following

Undiscovered Promising Mainstream EpicEstablished

Intermediary 2-Growth phase catalyst

Intermediary 1-Scale up Phase Catalyst

Intermediary 3-Traditional Music Label

X

X

X

X

Findings

30

The Entrepreneurial Growth Model

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

• A few more thoughts:

– Entrepreneur benefit Value of network creation:

N1+N2+N3+N4 > N4

– Incumbent benefit Reduced risk and uncertainty:

More information and non-traditional resources toreduce downside of investment

Concluding remarks

31

Conclusion

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

• Industry is dynamic continued study required

• More entrepreneurs and service providers willenter marketplace networks will grow and

become increasingly complex

• Qualitative study of independent musicians,entrepreneurs, and industry professionals new industry functions and growth model

• New forms of intermediaries new industry

players

Q&A?

32

Questions

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Appendix

33

Questions

∙ Introduction ∙ Research Questions ∙ Relevant Literature ∙ Methodology ∙ Data and Results ∙ Findings ∙ Concluding Remarks ∙ Q&A

Relevant Literature

34

“The Organization of the Pop Music Industry” (Adopted from Hirsch1970)

Artists

Producer (A&R)

Record Company Executives

Promoter Distributer

Sponsors

Advertising Agencies

“Top 40” Radio Programming

Radio Station Personnel

The Audience

Record Consumption

Sponsor Sales

Process of the Industry (Hirsch, 1970):

1). Artist must be discovered byProducers (A&R)

2). Producers (A&R) must obtainapproval and support of RecordCompany Executives

3). Record Company Executives seekmaximum sales through the PromoterDistributer

4). The Promoter Distributer promotenew releases to get as much airplay aspossible

5). Radio Station personnel sell bothrecords and sponsors’ products to theaudience

Relevant Literature

35

“The Loosely Coupled Systems Model” (Adopted from Burnett andWeber, 1989, as represented in Wikstrom, 2009)

Artists Studio Engineers

Songwriters Musicians

Aesthetic production

IndependentProducers

Advertising / Promotion

Major Companies

Concert Production

Production Wholesale Distributors

RetailSales

Exposure via Media

Peer opinionLeadership

AttendingConcerts

Listening

Differentiat-ion/rebellion

Purchase Decision

Gratification

Repetition of the old

LinksWeak LinksConditional LinkProduction SystemConsumption System

Relevant Literature

36

Musical Network Model (Leyshon, 2001)

Musical instruments and supplies

Studio musicians

Sound engineers

Producers

Artists

Song writing

Performance venues

Recording studios

Manufacturing

Promotion and distribution

Retail Outlets

Recording Companies

Artists’ management

/ talent agencies

Legal services

Music publishing Shops /

Stores

Mail order

Electronic delivery channels

Consumption

Distribution

Reproduction

Creativity

Musical Network Model adopted from Leyshon, 2001

Relevant Literature

37

“The New Music Business Model” (Adopted and modified from Kusek,2014)

Record Label

Producer

Manger

Business Manger

Attorney

Online Stores

Artist Platforms

Artist / Writer

Marketing and Social

Radio

Publishers

Rights Organization

Venues

Money FlowReciprocal Flow

Merchandise

Fans

Artist Team

Relevant Literature

38

“The Contemporary Manger as an Intermediary Model” (Adoptedfrom Hracs, 2015)

Manager

Coordinator• Manage relationships between

musicians and their collaborators and contractors

• Monitor and Manage the progress and completion of specific tasks by musicians, collaborators and contractors

Connector• Connect musicians to “Helpers”

(fashion designers, grant writers, photographers)

• Connect musicians to local resources (equipment and spaces for rehearsing, recording and performing)

Consultant• Explain how the contemporary

music industry works• Translate a musician’s creative

vision and career goals into an operational plan

Curator• Identify and select music clients• Identify and select appropriate

collaborators and/or contractors for specific tasks

Co-Promoter• Use knowledge of market

dynamics, successful retail and promotional strategies to help develop unique products, marketing campaigns, distribution channels and revenue streams

Co-Producer• Use knowledge of market trends

to help develop a sonic style• Provide feedback on songs and

content• Use knowledge of market trends

to help develop a corresponding visual style and overall persona

• Help develop a unique live show and range of integrated merchandise