Following our last post we encounter the flip side of the equation: in this SOTX panel the conversation focused on how businesses in the music industry interpret the need for investment, and what they do exactly with the money once it finally begins to flow.
Speaking on the panel were those at the helm of music businesses that have successfully secured substantial investments (relative to the other businesses which are self-funded / operator owned for the most part). Song Ke (Chairman, Evergrande Music Co., Ltd) transitioned from Taihe Rye Music to Evergrande Music in 2012. At the time Evergrande was a new startup, owned by property developer Evergrande Real Estate Group Ltd. The real estate group invested 850 million Yuan (USD$134 million) and laid out a grand plan for the company’s future development. Of course Shen Li Hui (General Manager, Modernsky Entertainment Co. Ltd.; Founder, Strawberry Music Festival) was in attendance, and we have commented numerous times on the business’ developments. At the panel he said investors where quite courageous as their first round of 10 million Yuan came at a time when the business was still fairly unstructured. Finally there was Billy Koh (Founder, Amusic Rights Management) who claimed there was interest from investors in 2006, but nothing came through until some time later when IDG invested about USD$10 million. The shares were then liquidated and sold on to another company.
The first thing most of us want to know is how a growing business makes use of an injection of capital. Li Hui explained that Modernsky used the money to develop the careers of its roster of acts, as expected, and also developed the business’ festival properties. Record labels have long been hailed, in IFPI’s words, as being the “engine room” of the global music industry. According to IFPI’s latest Investing in Music report, record companies’ total investment in A&R and marketing tops US$4.3 billion annually (about 27% of their annual revenue). Investing in the future is a big burden on most labels, and as you can imagine not every artist is successful (though smaller labels may have more patience and be willing to develop acts over a longer term).
One of the challenges faced by music startups according to Koh, is being able to communicate continuously evolving business models to investors. In Amusic’s case they envisage the business as being more of a service platform – like Taobao – where artists can sign up and benefit from a range of services that allow them to express what they want. Modernsky was arguably from day one a ‘360-model’ label, servicing their small roster in numerous ways in a hybrid label/management/live event enterprise.
Siding with the artists now, how exactly do these investors value a business built from the love and graft that’s gone into music? Try as we might, the worth of an intangible work of the heart is impossible to value (although this was a great attempt which drew on a rich historical context). Song Ke acknowledged this, saying it’s nearly impossible to calculate returns in the way investors want them. Sound recording copyrights can be used as a basis as there is a sound carrier being shifted, but song rights are another animal. A dormant catalogue can become active overnight if a reference to an artist is included in a hit movie, a big-name act decides to cover an underground band, or a brand goes for an obscure sync to drive home a special message (these things are indeed rare at best, but are possibilities). At any rate, copyrights tend to be undervalued.
Some of the best advice we get comes from Li Hui, who tells us that most music companies are tempted to dip into a disruptive Internet-based venture (say, an app like Pogo). He says it’s important to resist this temptation and to ensure the business has a solid foundation first. Invest in quality production and content; in essential infrastructure that will live on after all the fancy tech services and solutions die off. Get the base down, then digitize.
In terms of a future outlook, Koh claims that while the macro trends driving investment in China won’t abate anytime soon, younger investors are more willing to dip into new industries. Furthermore they’re not just after results, they care about wider benefits they can get from being involved throughout the whole process. This is where the creative industries have an advantage; investment decisions for some could be guided more on lifestyle choices, or ethics that go beyond the increase in the numbers. Real estate isn’t fun. You can’t talk about it in the same way you can talk about the label you supported who signed the act that’s about to hit the stage.
We’ll end on an important point raised by Zhang Ran (Founder & Producer, Sound of the Xity; General Manager, X Impact Productions Co., Ltd.). Record labels shouldn’t be chasing IPOs. The priority – harkening back to Li Hui’s words, should be on creating (or enabling the creation and distribution of) amazing content, not on swelling coffers and providing compelling exit strategies. Money should only factor in so far as how much is needed to meet this end, while being able to invest in future talent. The majors are playing another game: their prime objective is to guzzle market share (by any means necessary), but mid-sized enterprises should be focusing on fine-tuning their services and bolstering their rosters – not on conquering the world. Conclusively, don’t just work with the moneyed, work with people who want to be a part of the world you’re creating.
Panelists:
Song Ke 宋柯 (Chairman, Evergrande Music Co., Ltd)
Shen Li Hui 沈黎晖 (General Manager, Modernsky Entertainment Co., Ltd.; Founder, Strawberry Music Festival)
Billy Koh 许环良 (Founder, Amusic Rights Management)
Host: Zhang Ran 张然 (Founder & Producer, Sound of the Xity; General Manager, X Impact Productions Co., Ltd.)