by Ross Gerber, Contributor
Last year, Jimmy Kimmel Live sent a crew to Coachella, the two-weekend music festival held in the middle of the Southern California desert, to ask attendees their opinions about various bands that would ostensibly be playing during the event.
One after another, interviewees appeared on camera to say that they knew about the bands in question, enjoyed their work and were really looking forward to seeing them perform live. A few even said they had already done so.
There was one problem: The bands didn’t exist. Kimmel and his team had made them up. The segment was ingenious and uproariously funny, playing upon a common impulse among many music fans to demonstrate that they have seen or heard a great underground band that no one else has.
At the same time, though, it spoke to a larger truth about the music industry, underscoring the extent to which it has changed in recent years. In the past, the formula for success for every band, even pedestrian ones, was pretty simple: release an album, play it on the radio over and over again, sell millions of copies and then stage a tour during the summer, playing in front of sold out crowds every night.
Today, that would be a tall task for even the most successful bands. What has changed? Download services and online streaming sites that allow people to listen to whatever they want virtually whenever and wherever they want. Indeed, anyone with a smart phone has access to free music, and if we buy music, it’s invariably songs on an a la carte basis, not full albums.
As a result, consumers are not purchasing and stockpiling music like they used to, even as their tastes have become more variable and broader. This is reflected in the growing number of music festivals each year featuring multiple acts representing genres across the spectrum, including Coachella, Austin City Limits and Bonaroo.
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While free music and more variety is good for the average music fan, these developments are profoundly troubling for the bands themselves. As listener appetites become more diffuse and festivals become bigger and more numerous, bands have less power than ever before – which is somewhat ironic given that content creators in other industries like television and movies are increasingly gaining the upper hand.
That's not to say there aren't a relatively small number of artists who are capable of operating within the old business model, dishing out a series of hits and packing stadiums across the country. Virtually everyone else is at the mercy of music producers and concert promoters, which in today’s environment have nearly all the pricing power.
So what does this all mean for the average retail investor and how can you directly take advantage of this shift?
Live Nation Entertainment: Born out of a merger between Live Nation and Ticketmaster, Live Nation Entertainment is the nation’s largest ticket broker and has a vested interest in over 100 prominent concert venues across the country, including The Gorge Amphitheatre (George, Washington) and Verizon Wireless Amphitheatre (Irvine, California). More importantly, it partnered with Yahoo YHOO +0.14%this month to stream concerts live, tapping even further into to the shift in consumer sentiment toward experiencing live events rather than listening to recorded songs from an album. Live Nation is in a great position as concerts become more profitable and bands have less pricing power and need to participate in the big festivals.
Apple AAPL -0.04%: It’s not a stretch to say that one of the seminal moments in the history of music was the day Apple launched iTunes. As alluded to above, it killed albums sales and transformed the way an entire generation consumed music, not to mention the generations that will follow. While the service’s clout has been diminished by streaming services such as Pandora and Spotify, Apple’s recent agreement to purchase Beats not only will add to its list of attractive hardware offerings (high-end headphones) but also bolsters its online streaming capabilities, an important step as downloads continue to fall across the industry. Apple makes much of the hardware we use to consume music but they also have a huge library of songs for purchasing or streaming. Apple is also promoting its own concerts and content. Expect a lot more interesting things from Apple with Jimmy Iovine and Dr. Dre on the payroll.
Soundcloud: Created as a way for indie musicians to share music and build audiences, Soundcloud has grown to be a formidable force in music with over 250 million monthly users. Even though it is still a private company, it boasts a reported $700 million valuation. Look for this company to be acquired by a major technology or music company. Soundcloud is a great place to enjoy and discover new music and artists. It has global reach and has built a huge, engaged music community. The best part is that the music is free. This is the future of music where recorded music is losing its economic value while building an audience has become paramount for success. Give away the music and the fans will pay for live shows, a la Grateful Dead.
Sirius XM Holdings Inc.: Over 25 million people pay Sirius for satellite radio, which has its similarities to streaming. Sirius became big from the days when Howard Stern was popular and came to Sirius from traditional radio, foreshadowing the demise of radio. Sirius is still a standard offering in most cars but there is more competition now from Pandora and Spotify. What the other players don’t have is unique, exclusive content. Sirius has worked hard not to be another music company that just offers music content in an algorithm. The big issue today is content curation, which is having someone pick and introduce you to new music. Sirius has a deep bench of DJ’s and a huge variety of content choices including exclusive artist content, shows and interviews, all without commercials. Even with all the competition, Sirius still has the best content of them all. Sirius is here to stay even though they have to work harder for every listener. Between Sirius, Apple and Soundcloud you have the world of music at your fingertips.
Given the way download services and online streaming sites have effectively neutered the earning power of most bands, the music industry’s business model of the past has been put to the grave. As technology evolves and summer festivals become even more ubiquitous, the obstacles toward achieving true financial independence from music producers and concert promoters will only increase.
Still, all of this doesn't mean that investors looking for opportunities in the music industry need to suffer the same fate. There’s money to be made. But unfortunately for most bands, it won’t be for any of them.
Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki, an independent investment advisory and wealth management firm with approximately $280 million in assets under advisement. Gerber Kawasaki clients and employees may own positions in various companies mentioned here.
Making Money In The Music Industry-by Forbes