Risky Business

Aug 22 2009

In the past nine months, we’ve all learned a great deal about risk. As soon as the mortgage crisis struck, and the stock market plummeted, the realities of risk became starkly evident. Lenders and borrowers learned that an acceptable level of risk in one environment can become extremely dangerous should that environment change. Stockholders learned that risks have real consequences, and that risks can turn sour in an instant, without warning– that’s what makes them so, well, risky. The government learned that even very smart people, when lulled into over-confidence by a run of success, will usually take on far more risk than they can handle, or even understand. Without risk, there is no reward. This is true. This does not mean that risk usually leads to rewards. More often than not, risk leads to failure. Even the best hitters in baseball make an out 70 percent of the time. It’s worth keeping in mind.

It’s especially worth keeping in mind if you’re in the entertainment business. Most of us in the music business, or show business in general, have more than enough personal experience to understand that ours is not the most secure existence in the world. Even those who have not had a great deal of music industry experience are usually blessed with family members and friends who are more than willing to point out what a “risky” business it is to try to carve out a career in music. In fact, many successful music weasels cultivate a certain swashbuckling, riverboat gambler persona, making sure their colleagues and competitors understand just how ready they are to put the big chips on the table and roll the dice.

In a slightly different way, many musicians and songwriters take a similar approach, affecting a sort of rock ‘n’ roll nonchalance that says “I don’t really care about success, or making back the record label’s investment, or even paying my own bills. I don’t even care if anyone buys my record.” And neither pose is all that different from many of the top figures on Wall Street, including the head of Goldman Sachs, who are now busy telling the media that they were never really that worried about September’s meltdown, that it’s just the ups and downs of the marketplace, and that they’re not the kind of weak-willed softies that lose sleep at night about a few bets that go wrong.

It’s interesting that in any business in which you tend to lose as often as you win (or in the case of the music biz, where you lose FAR more often than you win), there emerges a certain honor in fearlessness, and a willingness to lose big without breaking a sweat. There’s also a certain business strategy that cultivates big gambles– the large record labels and publishers actually profit from a risk-taking culture, as it forces alot of the smaller companies, who can’t afford to lose, to stay out of the game entirely. Amidst all the bravado and posturing, there’s something that’s often overlooked:

The music business doesn’t need to be nearly as risky as most people make it.

Let’s take music publishing for instance. For those of you who may be operating their own music publishing venture, or thinking of starting one, the gut-turning excitement of wagering a six figure advance on an unproven rock band about to release their first album is probably not the kind of thrill that you’re seeking. That’s the business of the large major publishers, so leave them to it. The truth is, they’re wrong about eight out of ten times. For most major record labels, less than ten percent of the acts on the roster pay (or try to pay) for the other ninety percent of money-losing artists. As Tom Sturges at Universal Music Publishing once told me, an A&R person could say “No” to everything that came across his or her desk and only be wrong about ten percent of the time.

Instead, what if you were to seek out the low-risk opportunities that are usually not sexy enough or profitable enough to interest the big gamblers? Trust me, they’re out there:

1. Evey week, a simple reading of the Billboard charts will reveal dozens of songs already having at least some success and activity in which some or all of the publishing is available. Some of those unpublished writers are of course holding out for a big check. But others may be very happy to make a limited administration deal with a small advance, or even no advance, simply to have someone else on their team to help them collect their income.

2. Focusing on genres outside of the musical mainstream, like jazz, modern classical, folk, dance, or world music will immediately open up inexpensive, low-risk opportunities. If you can seek out leading composers or artists in these less competitive environments, you’ll find someone with a steady, if small income, a loyal fanbase, and probably a long-term career. And you won’t be trying to outbid a dozen other publishers to get into the game.

3. Why not seek out moderately successful small publishers in foreign markets and offer to be their sub-publisher in your territory? Sub-publishing has one of the best risk/reward ratios of anything in the music world. You try to work the other company’s catalog in your part of the world, helping their writers to find new opportunities, and collecting whatever money is generated by their music in your territory. Sometimes, you’ll need to pay a small advance in order to persuade a company to let you sub-publish them, but often you won’t. To put it bluntly, if you don’t manage to have any success with the catalog in your territory, it means that there’s not much collection work to be done. If you hit the jackpot and create a success story, then you’ll collect a percentage fee for all the money you generate. Hard to lose in that game.

4. Look into the library music business. This is a world in which you can take all of the instrumental tracks in your catalog, and make them available for low-cost, one-stop licensing to production companies and ad agencies looking for inexpensive, non-exclusive music for their indie films, local ad campaigns, or television shows. If you’ve already got the music on hand, it’s pretty easy to create a library. Then it becomes a matter of selling it to music supervisors and producers, and collecting the performance payments. You won’t get rich. But you can’t lose much more than your time itself.

Of course, this is an inescapable aspect of low-risk investing of any kind. Risk does not equal reward. But it does usually run proportionally. Big risks get big losses or big rewards. Little risks are a nickel and dime business. But if you can string together a lot of small profits, with very few losing ventures, you’ll start to make money. Best of all, sooner or later, one of those things that started small will somehow turn out to be something bigger than anyone anticipated.

To return to the baseball analogy– if you’re a big-market team, you stock your roster with big hitters and let them swing away. But if you’re a small-market team, you try to hit singles, steal bases, bunt, hit and run and somehow manufacture enough runs to keep the game close. Then, you hope that a few lucky breaks at a crucial moment will get you a win. Certainly it’s a harder road that requires more work. But you won’t wake up every morning wondering if you still have a business, either.

I remember Tom Silverman, the legendary founder of Tommy Boy Records, telling me once about an older icon of the music business. This original music weasel had hit it big at least four times in his long career, only to gamble it all away each time on the horse races. Silverman was incredulous. “I always thought to myself, why? The music business isn’t gambling enough for one lifetime? You need to go to the horse races or Vegas to get your fill of risk-taking?”

Don’t buy into the show-biz myth that equates risk with courage. There is valor in a reasonable amount of caution. There’s also a pretty solid business in taking the money that everyone else is willing to leave sitting on the table. Look for the sure things- or almost sure things- that everyone else is missing, then build your business on those.