Hi, it’s Nicolas from The Family. Here’s a deep dive with a company that’s been in the news a lot recently: Warner Music. Then on Friday there’ll be a focus on the music industry for paying subscribers.
⚠️ First of all, I have a new article out in Sifted—one that I’ve been wanting to write for a long time: it’s about ‘social entrepreneurship’ and why we should be wary of that label. My view is that most challenges are best tackled by scaling up capitalist enterprises, and we should curb the current enthusiasm for things such as ‘social entrepreneurship’, ‘tech for good’, or ‘conscious capitalism’:
It’s not anti-social to solve real problems at scale using capitalism if that is the best approach to do so. Likewise, it’s not particularly social to decide to stay small by principle when you could insert more capital into your production process, generate those increasing returns to scale, and thus solve the problem for more and more people. Sure, it’s OK to renounce scale if that’s how you’d prefer to build your business, but don’t call yourself ‘social’ and patronise others just because that’s your decision.
Read the whole article here 👉 Capitalists aren’t always the bad guys, and social entrepreneurs aren’t always the good guys 🔥 And let me know what you think: What’s your view on social entrepreneurship?
1/ Studying the music industry taught me almost everything I know about a legacy industry shifting to the Entrepreneurial Age. It all started in 2009. At the time, I was working in Paris in the French ministry of finance. My boss at the Inspection générale des finances (a kind of in-house consulting firm that works exclusively for ministers), knowing that I was interested in technology, offered me a position as the co-chief of staff of a task force formed to ‘save’ the music industry in the face of online piracy.
It was a long time ago, and a very different world:
Record companies still dominated the industry, battling and suing every tech startup in sight just as they’d done with Napster a few years before.
Nonetheless, industry revenues were collapsing. Record labels were firing lots of employees in a desperate move to preserve executive bonuses. These graphs were in everyone’s heads.
In reaction to the crisis, the industry was consolidating. Sony had swallowed BMG a few years before, and both Universal Music and Warner Music were considering an acquisition of EMI.
Apple had launched iTunes a few years before, making the case that users were willing to pay to access music online. But it was still a tiny part of the pie.
The main problem (as the industry perceived it) was widespread piracy. It was so frightening for record executives that they were lobbying governments worldwide to have them do something.
In France, President Nicolas Sarkozy had decided to take the matter into his own hands. After all, he had just remarried Carla Bruni, a French-Italian model and pop singer, and now took the interests of the music industry to heart (all the more so because Universal Music Group is owned by the French conglomerate Vivendi, meaning the music industry is quite big in the Parisian microcosm).
The task force Sarkozy formed was chaired by Patrick Zelnik, Bruni’s producer, but also a respected industry veteran who had once built Virgin Records in France for Richard Branson. Other members were Jacques Toubon, a former cabinet minister, and Guillaume Cerutti, then a top executive at Sotheby’s. Guillaume himself was a former inspecteur des finances, and so he asked his former department to send a young colleague who could help the big guys draft the report. Off I went!
2/ I didn’t know much about the music industry at the time, but I wasn’t completely ignorant either. Both of my parents are musicians and educators. My siblings and I all learned to play several instruments at a young age. Borrowing records from the public library and listening to them was my main occupation for most of my teenage years, and I made a point of reading the whole cover of each of them, trying to decipher the jargon. This is how I became familiar with what the music industry is all about: publishing, recording, producing, record labels, authors’ societies, rights, credits, etc.
I was especially interested in jazz and read all I could about the world of jazz musicians. I think the first time I read about Warner Music was in Miles Davis’s autobiography (in 1989, and in French):
When the opportunity came to move over to Warner Bros. Records, I told my new manager, David Franklin, to do it... But David fucked up the negotiations by giving up too much to Warner, like the rights to all my publishing. They gave us a lot of money to come over to Warner Bros., in the seven figures, just to sign. But I didn’t like the idea of giving my publishing rights to them. That’s why you don’t see my own songs on my new albums; Warner Bros. would get the rights to use those tunes, not me. So until we renegotiate that point you’re always going to see someone else’s tunes on my albums.
(As an aside, Miles died two years after that, and needless to say they never renegotiated. Most of his music recorded with Warner Bros. was written by my idol, bass player Marcus Miller, who assisted Miles in giving us the two masterpieces that are Tutu and Amandla.)
3/ Why am I writing about Warner Music today? Two things:
Warner Music might not be the most prominent record company, sure. Universal Music is bigger, as is Sony (which, in addition, is part of a much more interesting conglomerate than the practically empty shell that is Vivendi). But the story of Warner Music tells a lot about what the industry has gone through over the past three decades. It was the first to tackle the challenge of taking hip hop into the mainstream, paying a high price. Then, under Edgar Bronfman Jr.'s stewardship, it pioneered trying to reposition for the digital age.
And Warner Music just went public, which is an important signal. In part, they did it to surf the wave of the booming stock market while it lasts. But it also reveals that the music industry has made its peace with technology, becoming more confident in its ability to make money in the Entrepreneurial Age. It’s better to be private (or part of a conglomerate) when there’s uncertainty. Warner Music going public signals that the uncertainty is over, and that a new, upgraded music industry is reaching its maturity phase.
4/ Today Warner is one of the three major record label conglomerates. Each major is best understood through the big artists it has under contract. Universal has a lot of hip hop (a VERY large chunk of the market), as well as Taylor Swift and Lady Gaga. Sony Music has the likes of Beyoncé and Michael Jackson. My habit has long been to say that Warner Music has Madonna, but apparently these days it’s more notable that they have Ed Sheeran 😮 (all the articles about the IPO feature his picture 😉).
Like its peers, the story of Warner Music is one of integration and consolidation:
Integration has been horizontal, with many, many previously independent record labels merging over the years to pool their resources and market power and force other sectors in the value chain (record dealers down the stream and artists & music publishers up the stream) to leave a higher share of the value added on the table. Familiar label names that are still part of the Warner empire these days are Elektra Records, Warner Records (formerly Warner Bros.—the bad guys in the Miles Davis quote above), Parlophone, and Atlantic Records.
Integration has also been vertical. Again, music majors these days are huge conglomerates that excel at playing the capitalist game at a very large scale. That includes pursuing economies of scale, but also controlling several links within the industry value chain so as to secure a larger share of the total value added. The historical ‘grip’ in the music industry has always been about being both a record company and a music publisher (again, see that Miles Davis quote). More recently, record companies have been integrating down the stream so as to capture a larger share of the revenue streams derived from live performances and other things (see below 👇).
By the way, if you want to read more about that concept of the ‘grip’ over a value chain, subscribe to European Straits and read my recent “Work in Progress” essay on the topic 👉 Thoughts on Value Chains, and Why You Really Need To Get a 'Grip' 👀
5/ Now, let’s talk a bit about hip hop. I mentioned it was an important part of the industry’s business:
I’ll expand more on Friday, but let’s say here that the explosion of hip hop at the end of the 1980s saved the music industry. In short, it helped the industry reconnect with an engaged audience. Before hip hop, most of what the industry produced was over-engineered in expensive studios and was so optimized to please the masses that it lacked soul, ultimately failing to strike a chord with the public. Dollars flowed in because people were buying every record a second time to replace their vinyl collection with CDs. But the industry was in crisis nonetheless.
Enter hip hop, with its (mostly Black) artists who were effectively crafting their own music on the street and had a very strong connection with their earliest fans. This turned into a lot of money 💰 Even when record labels were ignoring these artists, fans were already paying for homemade recordings (on cassette). Bootlegging was tracked down by very effective enforcers who made your life miserable if you made any money off the back of the artists. And there was a thriving scene of live performances that people attended for the dancing, the energy, and the proximity with these demi-gods that were the first rappers.
6/ Warner Music experimented with hip hop quite early. I’ll save you the many intricacies of what happened over the 1990s, but let’s say it didn’t end well for Warner:
One of the most prominent Warner hip hop artists at the time was Ice-T, who was venturing into metal with his new band Body Count. In 1992, in the wake of Rodney King, a Black man, being beaten by white police officers who would eventually be acquitted, Body Count released the song “Cop Killer”. It triggered such a controversy on all sides of the political spectrum (and abroad) that, per Wikipedia, “in January 1993 the label made an undisclosed deal releasing Ice-T from his contract and returning the Body Count master tapes to him” (I must say listening to “Cop Killer” in the wake of George Floyd’s murder is quite an experience.)
Meanwhile, other controversies arose around other Warner artists in the realm of the rising hip hop label Interscope Records. Unable to bear the pressure, Warner Music decided to divest Interscope altogether, letting it eventually be acquired by Universal. Slice by slice, most of Warner’s prestigious (and lucrative) roster of hip hop artists was let go by way of either neglect or divestment—a list that includes prominent names such as Ice-T, Dr. Dre and Snoop Dogg. An independent label might have been able to withstand the pressure of promoting those artists, but a large conglomerate like Time Warner (the parent of Warner Music at the time) simply had too much to lose on other fronts.
In addition, Warner Music and its parent company were ridden with brutal power struggles, which led to the departure of many prominent executives. One of them, Doug Morris, had seen the potential of hip hop, and had lamented his employer’s failure to make the most of it in the face of controversy. When he eventually ascended to the position of CEO at competitor Universal Music Group, he made sure to secure leadership on that fastest-growing segment of the market, cementing Universal’s position as the unchallenged leader for years to come.
7/ All in all, Warner Music ended up in pretty bad shape at the end of the 1990s—owned by a conglomerate that was unravelling and lacked focus; having lost its early lead in hip hop due to numerous controversies and weak leadership; and not ready (that’s an understatement) to tackle the challenge of music shifting online.
But then two things happened, both related to Edgar Bronfman Jr., the heir to the Seagram business empire. Bronfman had the fantasy of redeploying his family fortune in entertainment:
The first iteration was a partnership with French former investment banker Jean-Marie Messier to build up the Vivendi Universal empire. It all ended in pain and rancor, in part due to the bursting of the dotcom bubble and in part due to mismanagement (there was a trial and several convictions, then the French Vivendi conglomerate was dismantled and brought down to just a few holdings, including Universal Music Group—and later the advertising giant Havas).
This was a major blow for Bronfman and his family. They didn’t lose everything, far from it. But the younger Bronfman was out for revenge. In 2004, he decided to act by buying the wayward Warner Music and turning it into a testbed for inventing the recording company of the future. To help him tackle this challenge, he brought along Lyor Cohen, a seasoned record executive who had previously been the third pillar, along with Rick Rubin and Russell Simmons, of the legendary hip hop label Def Jam.
8/ Lyor Cohen is quite a character. His depiction in Fred Goodman’s Fortune’s Fool, a great book about the music industry, is worth a quote because it reveals so much about what a good record executive is all about—getting artists paid 💵💵💵
Lyor became Run-DMC’s road manager on the eve of the group’s first overseas trip when a friend of the rappers handling those duties went AWOL. Cohen got the passports together, ferried them to their show in London, and—miracle of miracles—got them paid. “He’ll get it done,” says Adler. “He assumes responsibility and executes. He will get it done.” Adds Santoro: “Lyor didn’t know how to be a road manager. But he did know how to go in there like an Israeli tank commander and say, ‘I’m here to get paid.’”.
Bronfman and Cohen, one the visionary bankrolling the new venture and the other the industry insider who knew how to work with artists, led quite an effort to reposition Warner Music to surf the wave of online music:
Bronfman had been previously active in the industry’s early efforts to sue tech startups like Napster, and even individuals who were guilty of copyright infringement. But he had learned from the failure of those efforts and realized it was up to the record companies to adapt to the new techno-economic paradigm. You simply couldn’t force people to buy records if they wanted to listen to music over their computer or smartphone.
One of the key realizations for the duo was that the music industry had to let go of the idea of a single revenue stream. In the past, selling records (vinyls, then cassettes and CDs) represented most of the industry’s revenue. But with the Internet accelerating the pace of innovation, it had become impossible to count on one stable business model generating revenue over the course of decades. You needed to track new channels and deal with new ventures fast enough so as to make the most of opportunities at every given moment (remember, this was all before Spotify).
An example of this is the early efforts at the new Warner Music Group to have artists sign so-called “360 deals”. Since the public wasn’t buying records anymore, most artists had to intensify their touring to derive more revenue from live performances. This was the pie that the would-be innovators at Warner Music thought they should have a larger share of.
Here’s Fred Goodman about the “360 deals” that Warner Music was experimenting with back in 2007, quoting attorney Kendall Minter:
We don’t want to be limited anymore to just getting revenue from sales of records. You [the artist] are going out as a result of our risk, our investment, and you are having a career that can bring you great financial rewards from touring, publishing, merchandising, film, and book deals. What the record companies did slowly but surely was say, ‘Now we want a piece of the pie that you’re enjoying from our risk capital.’
9/ Bronfman and Cohen did all the right things considering the direction the industry was headed in, yet they still fell short. I think it was for one main reason: they were too early ⏰ (It never pays off to be the first mover.)
It’s not easy these days to remember what it was like back in 2004-2012, but we need to realize how much progress has been made since then:
The iTunes Music Store was launched in 2003. It was the first time that the idea of people paying to access music online was proved by a real-life experiment. Then the iPhone was launched in 2007, with the App Store going live one year later.
Spotify, arguably the down-the-stream juggernaut in today’s music industry, was founded in 2006, two years after Edgar Bronfman Jr. took over Warner Music and turned it into a giant testbed for reinventing the music industry.
YouTube itself, which has become a critical channel for promoting artists and songs, wasn’t that big yet. PSY, the first artist to emerge on YouTube at a global scale, only broke through in August 2012, when Bronfman and Cohen’s attempts to turn Warner Music around were already passé.
10/ Today, all those people have moved on. Edgar Bronfman Jr. has exited the stage at Warner Music and launched his own venture capital firm; he’s also the chairman of Endeavor, the non-profit organization dedicated to supporting entrepreneurs. Lyor Cohen also resigned from Warner in 2012 and founded his own independent label, before becoming YouTube's Global Head of Music 4 years ago!
As for Warner Music itself, well, it remained a private company as long as it needed to navigate the storm of uncertainty the music industry was going through—from widespread piracy to wondering if Apple, YouTube, Spotify, or live performances would generate the main revenue stream for the upward links in the value chain. Now that it’s become much more clear and the entire industry has recovered from the paradigm shift, it was time for Warner Public to go public.
If you want to learn more about that shift and the many lessons I’m drawing from it, it’s time to subscribe to European Straits so as to receive the forthcoming focus on the music industry 👇
11/ These go to eleven, but the 11th note is always a reading list—and the reading list on Warner Music will be sent on Friday to paying subscribers only 👇
🤓 As I mentioned, the music industry is the one I’ve been following the longest. Strangely enough, though, I have barely written or spoken about it. But I have been clipping many articles over the years about how the industry is faring and what the future of music looks like. Here are a few authors that stand out, and I’ll highlight their work in European Straits’s paid edition on Friday 👇
Steve Albini is a rare industry insider who has written about exactly how the industry works, down to the last details regarding accounting, revenue streams, the relationship between artists and record labels, and much more!
Susan Butler was one of the industry insiders guiding Guillaume Cerutti and me when we visited New York back in 2009, searching for answers. Also, she once was Steve Vai’s attorney, and she’s credited in the album Sex and Religion 🙏😮🎸
Emmanuel Legrand, just like Susan, is one of those industry insiders who shares his insights as confidential letters and blog posts. He’s been especially enlightening when it comes to understanding Bertelsmann’s strategy in music.
Ben Thompson, publisher of the landmark newsletter Stratechery, is the father of the incredibly useful “aggregation theory” and of many analyses regarding Spotify becoming the driving force determining the future of the music industry.
👉🏻 To discover their articles and many others related to today’s edition, become a paying subscriber! The package will be sent to subscribers only with the forthcoming Friday Reads edition 🤗
From Thoughts on Value Chains, and Why You Really Need To Get a 'Grip' (June 2020):
When selling music online started to become a thing, the strongest link in the value chain was the record labels. They decided on hostility toward new entrants: they sued Napster, they refused to license rights to other music startups. In the end, the record labels were so strong that they managed to strangle the entire value chain, clearing the field at the bottom: nobody was (legally) distributing music online anymore—it was all about piracy.
This lack of viable competition made it easy for Apple to counterpunch. As told by Walter Isaacson in his biography of Steve Jobs, the record labels were so desperate in the face of piracy that Jobs had no difficulty imposing on them what ultimately triggered iTunes’ ascent: the ability to sell music by the song rather than by the album. Suddenly Apple gained the upper hand in the industry, extracting more value from the record labels up the chain.
And in case you missed it:
Lessons from the Wirecard Debacle—for subscribers only.
European Tech: We Need More Controversies!—for everyone.
Climate: Startups to the Rescue?—for subscribers only.
Who's Disrupting Whom at the Global Level?—for subscribers only.
What's Happening in India?—for everyone.
Transatlantic Consolidation—for subscribers only.
Private Equity and Tech: Time to Bridge the Gap—for subscribers only.
Can Private Equity Firms Make Money in Tech? (Round 1)—for subscribers only.
From Normandy, France 🇫🇷