A Sweet Slice of Pie

Jan 21 2010

Alright—mark it down in the “Believe It Or Not” column. This interesting newsflash first appeared in one of my favorite industry newsletters, A&R Worldwide:

Fan-Financed UK Band Lands Multi-Album US Record Deal

Leaving aside one obvious question (isn’t every band essentially “fan-financed” to whatever degree?), the following story stood out like a flower in a mineshaft, sprouting up in the middle of news about more corporate layoffs and the ever-falling fortunes of the music industry. You don’t hear many stories like this one:

Scars on 45, a UK based band began making waves on the website Slicethepie back in 2008. The site provides an opportunity for music fans to provide ratings and reviews for unknown bands that they are passionate about, and then to take it one step further by actually getting involved. With enough positive response, a band can reach the “funding” stage, at which point they can raise funds directly from their fanbase to record an album. In return, the fans who choose to invest receive shares in the commercial success of the record. Fans can invest anything from 1 pound (GBP) on upward. Through Slicethepie, Scars on 45 managed to raise 15,000 pounds (GBP) to help record their debut album.

As it turns out, “Beauty’s Running Wild”, the fan-funded track on the album was subsequently featured on “CSI-NY”, and attracted more than 50,000 website hits within days of airing. This in turn attracted the attention of Alexandra Patsavas, a leading music supervisor best known for her work on “Twilight: New Moon”, “Gossip Girl”, and “The O.C.”. Patsavas brought the act to her label imprint, Chop Shop, which is distributed by Atlantic Records.

Great news for the band of course. But if you think this is a success story for Scars on 45, check out the even better ending to the tale:

Those who invested in the band through Slicethepie back in 2008 hit the jackpot. When the band was signed, a buyout clause was triggered and shareholders were bought out at a 50% premium to the then market-price—representing a whopping 800 percent return on their investment!!

Not too many people had investment returns like that in 2009. What’s most interesting though is that not many music companies, big or small, had returns like that. While “professional investors” like Guy Hands are going bankrupt after sinking billions of dollars into EMI; while investment bank-backed publishing companies are struggling just to stem losses, this group of music fans managed to turn a 1 pound investment into 800 pounds—without having to do any work! Slicethepie CEO David Courtier-Dutton was quoted saying, “We are delighted for both the band and their fans which, in this case, have truly been instrumental in their success. We believe that consumer-driven filtering has an increasingly influential role to play in the face of the music industry…” With an 800 percent return on investment, it certainly does. Count me in.

What’s interesting is that the success of this Slicethepie venture highlights several very useful concepts when it comes to investing in the music business—ones that seem to often slip by the more high-rolling music execs and investment bankers. If you’re looking to acquire music for your publishing company or record label, here’s a few principles to keep in mind:

1. Buy low. Sell high.

The problem with most big-bucks investors in the music industry is that all of them are looking for the same thing: hits. They want big-name artists, well-known catalogs, songs that are on the charts. In fact, most of the investment-backed publishing companies have avoided new artists all together. They focus solely on catalog purchases.

The problem is, when you’re buying hits, you’re paying the top price for something that in most cases, has only one direction to go. Established superstar artists can’t usually get much more super—they can only fade. Songs at #1 today can’t go any higher. What seems safe is actually the most risky investment you can make—you’re paying top dollar for something that is already at its peak. Whoever found Scars on 45 in 2008 was buying at a fire-sale price. That’s where you get a bargain, and it’s also where you find the big pay-off.

2. Bet what you can afford to lose.

One has to assume that no one who made the initial investment on Slicethepie.com was betting his or her grocery money on a new, unknown band. I’m confident that no one was taking out a loan just so they could buy a piece of Scars on 45. The problem with most large-scale investing in the music industry over the past five years is that the investors have taken out massive loans (and hence, have massive interest payments) or they’ve invested other people’s money, people who quickly grow impatient if the ink starts to turn red.

The sad, ironic and inescapable truth of the speculative bets made in the music business every day is that the worse you need the gamble to work out, the more likely it is to fail. Maybe it’s because investors who can’t afford to lose tend to over-think, throw good money after bad, or chase the popular trend a little too late. Maybe it’s just the way the world works. But don’t put your money in the game if you can’t afford to lose it. Better to bet one pound if that’s all you can afford, than to take out loans to bet a hundred thousand pounds. Ask the guys at Terra Firma.

3. Bet on things that people like.

This has always been a pretty good formula for success in the music industry. It’s amazing how few people do it. Clever as it is, the concept of Slicethepie and “fan filtering” is really not that much different than old-school music entrepreneurs who would check out their songs with local audiences, get a DJ to spin their records in the clubs, ask the local retailer what people were buying, or see who was getting the most applause at the talent show. In my book, “The Billboard Guide To Writing and Producing Songs that Sell”, Daniel Glass, the president of Glassnote Records talks about being a young DJ, and seeing Prince, Barry White and others in the DJ booth, watching the dance-floor reaction as they tried out new mixes they were still working on in the studio. Daniel himself uses web activity as a major gauge for his own signings at Glassnote, which led him to artists like Secondhand Serenade.

It’s always easier and safer to give the audience what they want than to create something and then convince the audience that they should give it a chance. Certainly, great art has been created with either approach. But the average hit rate is a lot higher with an approach that watches what audiences are responding to, and then puts money into giving those audiences what they like.

4. Bet with your ears.

Most professional investors in entertainment, and even a lot of music executives, bet more with their eyes than with their ears. They watch sales chart action, or look at past financial records, or watch what others in the industry are doing, but they never really listen to the music. Clearly, part of knowing what the audience wants (concept #3) is watching reactions and tracking audience response. But once you see what’s happening, you still have to listen.

Some things look good on paper for reasons that have nothing to do with the music itself. Perhaps the appeal of an act is not really rooted in their music, but in some other social phenomenon. That’s okay if you’re the record label, but you wouldn’t want to buy that song catalog. Maybe something is flying up the charts because a savvy manager is spending a fortune on radio promotion to make a stiff look like a hit. It’s been done. You can use your eyes to do initial research. But if your ears tell you differently, trust ‘em. In this business, they’re the only real friends you have.

5. Don’t be afraid to cash out.

As every gambler knows, there is a time to hold ‘em’ and a time to fold ‘em. The great thing about the Slicethepie venture is that if a band is signed, the initial investors are in a sense, forced to fold up and cash out. It’s likely the biggest favor they’ve ever received. The truth is, the odds are stacked against a band like Scars on 45, as talented as they are. It is entirely within the realm of possibility that Atlantic will never make money on the band—it happens with alarming frequency. But for the initial investors, the game is over, and they’ve won.

If you’re running a small publishing company, there will be instances where you will build a writer up from nothing, only to see a larger company swoop in and woo him or her away with the promise of untold riches, the moment that writer has his or her first big record.

Most of the time, that’s just fine. You will have that writer’s first big record, for which you probably paid relatively little. On the other hand, the big company will have spent far more than they should, and will usually wind up with a songwriter who never has another song as big as that first hit. In many cases, you’ll get a call a few years later from that same writer, now dropped from his or her big publishing company, and eager to come back to where his or her first success originated. When you’re a small player, you play for small victories. When you get one, take it and don’t look back. Put your energy into finding the next undiscovered jewel.

And somebody, pass that pie!

    good article. keep it coming. thanks

    Hi Eric, been awhile! Going to have to read back through some of the old stuff while I am on here :)

    This is a very cool concept and good thing for that buyout clause. Sage advice on the gambling. Whenever I go into a casino I consider the money gone, I will never see it again… I do that to a point with stocks (which I have a weak stomach for…).

    Nice to be reading your jazz again :)

    Thanks for posting this sweet slice of pie. I enjoy each “bite” and must say that every input you had has been some useful realizations. I’d love to pass that pie on to others music teachers out there. You’ve got a very nice and interesting post here. I always feel glad whenever I encounter people who have the same passion and love for music like what I actually have. I also admire your efforts in sharing your bright ideas on creative music teaching resources – lending a hand to make a difference.

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