The Financialization of Music

Maria do Rosário Andrade| January 2024 | 15 min read

Introduction

The world we live in nowadays has many distinctive features and is evolving at a very rapid pace. We can attribute many characteristics to the environment that surrounds us but is undeniable the role that both music and finance play in our everyday lives. In a more or less explicit way we are constantly being bombarded with melodies and sounds either from social media platforms or from radio or television commercials. In a different but still very relevant way we are also constantly being exposed to financial activities, concepts and paths through which we can engage in such activities. But how, where and why do these two distinct worlds collide or cross lanes? In this essay, my goal is to provide insights into the relation between financialization and the music industry through discussing the role of financialization in cultural production, the role of private equity in the music industry and the finance inputs in two major players in the industry: Spotify and YouTube. This essay will begin with a brief definition of key concepts, followed by the discussion on the impact of financialization on cultural production. After that, the influence of private equity in the music industry will be presented as well as the impacts on two major actors of this market and industry. Then, to complete the task of this essay, a conclusion will be made where the main argument will be summarized.

Definition of key concepts

To establish the relation between financialization and the music industry, is important to dive deep into the world of possible definitions of the first concept. Throughout time and with the constant evolution of the financial world, many definitions of financialization can be found and discussed. In the 21st century there are many ways to define the word, but for the current essay are worth highlighting the ones by Epstein and Palley. Epstein, in 2001, defined financialization as the “increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions, both at the national and international level”. Thomas Palley, in 2008, gave a more concise phrasing but retained the main ideas of the previously presented definition “Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes.”. In the same paper, Palley also gave a more detailed definition which gives a further glimpse into the potential possibilities to examine financialization through its impacts “(1) elevate the significance of the financial sector relative to the real sector, (2) transfer income from the real sector to the financial sector, and (3) increase income inequality and contribute to wage stagnation”.

After financialization, the other concept that is important to define is private equity. To fully understand the discussion that will be made on the relation between private equity and the music industry, is important to clarify this concept. The expression private equity brings into evidence two separate words: private and equity. Private can be defined in this context as not being public, for example, a private market and a public market have different regulations. Equity can be defined as “a package of financial instruments”. The two terms brought together and combined incorporates “venture, growth, and buyout capital.” but also represents “the market for institutional private equity funds that target buyouts and growth capital.” (Gilligan & Wright, 2020).

Financialization of cultural production

Before looking at the music industry in specific, this essay will discuss the influence of financialization on cultural production to learn about markets that involve creativity: creative industries and creative workers. There are a lot of industries that involve cultural production other than the music one: the movie industry, the photography industry and the art industry, for example. The presence of financial activities, financial actors and the financial world in their day-to-day operations has been notably increasing.

One common thing to many countries recently is the fact that public subsidies for arts are decreasing (and too many times insufficient). When public funds are reduced there is the obvious need to search for alternative methods to maintain the financial sustainability of the art production. This turns galleries, art schools, institutions and artists more dependent of art investments funds and collectors, meaning that the production of art becomes increasingly biased towards the interests of the financial world. One other important aspect of the cultural production is that not only the production but also the distribution of contents is now associated and more consolidated with global empires. These financialized global empires are highly associated with giant high-tech and internet-oriented firms like Apple with the product Apple Music, Alphabet owner of Google, YouTube and YouTube Music and many others that are also companies listed on the stock exchange market (Haiven, 2020).

The expanding range of prices of art works and music catalogues is also a consequence of the financialization of the cultural production. Art investment funds are providing liquidity to buy pieces of art even through ventures or start-ups at a rhythm never seen before (Haiven, 2020). According to a news article on Billboard Magazine, Iggy Azalea (an Australian singer and rapper) sold her music catalogue for more than an eight-figure sum of about seven hundred million dollars to Domain Capital (that has a commingle entertainment fund). Something that was once produced and owned by the creator of the art is now in possession of “a private entertainment royalty fund”.

So, it can be stated that, there is an increasing role of the finance world in the art production due to the lack of public funding, the importance of high-tech companies in products that create and distribute contents and also, due to the existence of art investments funds that allow for the purchase of art at never-before-seen prices.

Private equity in the music industry

After looking at cultural production and how it is influenced by the financial market and stock exchange market evaluated companies, is time to discuss more specifically the effects in the music industry. The role of private equity in the music business will allow illustrating and further investigating the relation between financialization and music.

Drawing on the definition of private equity previously presented, we can describe the concept as a representation and connection to financialization. The actions of private equity companies include “enormous levels of debt against the assets of the target company (referred to as ‘leverage’), restructure the company to maximize efficiency, then sell the streamlined properties at high profit margins.” (Dewaard, 2017). All these actions are involved with financial market operations, and they influence economic outcomes, so private equity can be considered a symptom and form of financialization.

According to Andrew Dewaard’s work from 2021, there were two major signs of financialization in the music industry in the 21st century. The first one occurred in 2004 and the second in 2007, even though these are the years when the major events happened, their effects are still being felt in the present year and the everyday life of some of these companies. In 2004, Warner Music Group was bought/acquired by Bain Capital, Providence Equity Partners Thomas H. Lee Partners (THL Partners) and Edgar Bronfman. The company was sold in a deal worth around 2.6 billion dollars. After this acquisition, the new group of owners of Warner Music Group fired almost 31% of the workforce, fired an undisclosed number of executives, reduced the number of artists signed to the music label and reduced a significant part of the company’s worldwide operations. One other measure that they took was the merger and combination of several of the international music labels of the group. These measures only further enhance the private equity’s strategies of profit extraction and labour reduction. In 2005, the company went public and by that time the buyers had already accumulated enough debt and paid themselves enough dividends to more than double their initial investment in the company. They recovered their investment on the backs of the livelihood of many artists, producers and executives.

The second major sign of financialization of the music industry came to life in 2007. In this particular year, a private equity firm named Terra Firma Capital Partners acquired the British company EMI. In a somehow similar strategy to Bain Capital in 2004, Terra Firma Capital Partners tried to sell off the revenues streams to investors but encountered a worldwide scenario of financial crisis that ruined their strategy and future. As a consequence of the occurring crisis, they changed the course of action and started a company rebuilding that included the firing of 45% of the workforce and taking control away from creatives to make the firm more predictable. Because of the last measure some important (creative) artists walked away from the enterprise claiming they deserved more control over the creative process, some of these names include Paul McCartney, Radiohead and The Rolling Stones. Terra Firma Capital Partners was unable to take the situation under control and had to give up the control of the company in 2011. “Its losses on the investment totaled $2.7 billion, considered to be the largest known private equity investment write-off in history” (Dewaard, 2021).

It can be concluded that, in the name of increasing efficiency and maximizing profits, private equity companies entered the music industry altering forever its features and its way of functioning. Their actions caused unemployment for a significant percentage of their workforce, caused the reduction of the number of artists signed to the labels (either through dismissal or through artists walking away to regain some creative control) and involved hundreds of millions of dollars that were not used to improve work conditions and benefit people apart from the investors.

Spotify: a case study for the financialization of music

After having analysed the relation and role of private equity in the music industry, it is important to check if this relation, of financialization and music, is also present in other parts of the music world: the platforms that allow the users to connect with thousands of songs.

One of the most important music platforms that provides access to multiple genres and artists from different record labels is Spotify. Spotify was founded in 2006 in Stockholm (Sweden) by Dani Ek and Martin Lorentzon and currently is used by more than five hundred million monthly users all over the world. It can be used in different devices from smartphones to computers and in devices with different operative systems like iOS, Android and Windows. This music service has a key role in cultural life as it can be considered a “broker situated between advertisers, users, and the music industry in a multi-sided market of its own creation” (Arcand II, 2019). Thus, Spotify has the particular characteristic of being a place to encounter and mediate different interested parts: users, music artists, advertisers, producers and record labels.

According to Vonderau (2017), between 2008 and 2015 a series of operations can be considered a process of financialization of this music platform. Within this period of time, the company raised 1.6 billion dollars across seven rounds of investments. Many different investors took part in these several rounds of investment such as Goldman Sachs, Palo-Alto based Technology Crossover Ventures, Coca-Cola and twenty-three others. Technology Crossover Venture’s partner Barry McCarthy was chosen to be Spotify’s Chief Financial Officer in 2015 in a move also considered of further entanglement between financial capital and a music company. Three important actions to enhance and highlight from this period had a vital role in increasing the preponderance of finance in the day-to-day operations of Spotify. In 2012, the company was trading securities in the US financial market and in 2015, the company “raised $500 million in the form of a loan convertible into Spotify shares” (Vonderau, 2017). In 2016, the company raised one billion dollars in convertible debt once again closing ties with financial actors and market. Through looking at the kind of actions taken by Spotify, in this particular period of time, one could think of a resemblance towards a financial company instead of a music corporate.

In conclusion, the increasing entanglements and influence (by even appointing people for certain job positions) of the financial market on the day-to-day operations of Spotify has driven its mode of operation towards more of a financial kind than of a musical one.

YouTube: a case study for the financialization of music

After analysing the linkage between Spotify and the financial market operations, it is important to look at another big player of the industry: YouTube. Even though YouTube is a video platform is still particularly important to the music industry, its artists and the respective recording companies. According to statistics published on a review about the company (Iqbal, 2022), 82% of average users access music primarily and this number is bigger for younger people between the ages of 16 and 24, with this value being around 93%.

YouTube was created in 2005 by three co-workers in California and its rise to fame was so sudden that the company was bought in the following year by Google for 1.65 billion dollars. The company in 2006 was bought as a start-up for an unusual value for such type of company and with very few proof that it could generate profits. YouTube suffered many changes in its features throughout the years in order to embrace the constant development of technology: the creation of comment sections, live streaming and short videos content as examples. There was also the creation of YouTube Music in order to try to stop the declining revenues of the platform.

Since YouTube was sold to Google it means that its current owner is Alphabet- a technology related company. Alphabet is a company listed in the stock exchange market and is a holding company with the purpose of owning shares of other companies to control a diverse number of businesses. The operations of Alphabet are obviously dependent on financial markets and financial actors but there is one other aspect of its actions that prove the connection between YouTube and financialization. According to Palley’s definition one of the dimensions of this phenomenon is that it leads to an “increase income inequality”. YouTube’s system to calculate the value of each view or the value of a specific video is contributing and promoting an increasing income inequality among artists. The algorithm that defines the amount of payment attributed to an artist is extremely unreliable and volatile making producers do enormous efforts to generate videos and content for the platform without knowing the exact return (De Marchi, 2018). Only big artists and youtubers with massive structure and sponsors are able to live with such uncertainty, creating a clear cleavage between what is being earned by mega super stars of pop music and an amateur artist that just started his/her career. The way the algorithm is designed only further creates a difference between the per view revenue of an artist very well-known or a as talented but less known musician.

In conclusion, not only the parent company of YouTube but the way its valuing mechanism is designed are living proof of how financialization is entering the music world.

Conclusion

The music industry as an industry of cultural production involves many dimensions that certainly include artists, recording labels and music platforms and the relations between all of them. During recent years, all these musical dimensions have encountered the financial world, financial actors and its instruments.

The lack of public funding opens up the possibility for big technological companies and art investment funds to enter the art world and trade and buy art pieces at never-before-seen prices. These corporations also influence and sometimes own the channels through which art is distributed and shared.

One dimension of the financialized way of doing business is the role of private equity companies. Some of these companies bought, sold and owned recording companies and labels. Through a few actions with the goal of increasing efficiency, private equity companies generated unemployment, profits that were not invested in improving working conditions and generated a decrease in the number of artists signed to them.

The music platforms Spotify and YouTube only further prove that financial companies influence the way other companies work and that financialization is a force to be reckon with and should not be underestimated.

To summarize, financialization and the music industry are deeply intertwined, with the first influencing artists, labels and the platforms through which they share their work.

References

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De Marchi, L. (2018). Como os algoritmos do YouTube calculam valor? MATRIZes, 12(2), 193–215. https://doi.org/10.11606/issn.1982-8160.v12i2p193-215

Dewaard, A. (2017). Derivative Media: The Financialization of Film, Television, and Popular Music, 2004-2016.

Dewaard, A. (2021). Wall Street’s Content Wars: Financing Media Consolidation. UC San Diego. Retrieved from https://escholarship.org/uc/item/7m6819ch

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Robinson, K. (2022, November 21). Iggy Azalea Sells Catalog to Domain Capital in 8- Figure Deal. Billboard. https://www.billboard.com/pro/iggy-azalea-sells-catalog-domain-capital-price/

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