Pop duo LANY released their first four albums on a major label. But when they finished their contract, they decided to look for a different kind of business partner, one that would give them more control over their operations. “Autonomy is the future,” manager Rupert Lincoln he said Bulletin board. LANY eventually chose to partner with Stem, a distribution company.
For decades, major labels demanded long-term contracts, getting multiple albums from the acts they signed and making the most money from those acts' sales. However, the balance of power has shifted dramatically in the modern music industry, as have artist contracts. More and more acts want distribution deals — short-term deals where they retain ownership of their work and keep most of the income their music generates.
As these have become more desirable, competition for high-profile artists seeking distribution deals has become fierce, according to a pitch deck Stem sent to potential investors, obtained by Bulletin board. Stem “has lost a lot of deals historically because it has not been able to be competitive with advances,” the deck says.
Other companies also saw price increases. “It's a much more competitive market” than it used to be, he says Jorge Breafounder and CEO of distributor Symphonic. “All distributions need to be well funded to ensure they can raise money for bids.”
Historically, digital distributors haven't helped artists much with marketing or radio promotion. they were basically tech companies that made music widely available on places like iTunes and Spotify in exchange for a small percentage of sales. These low-overhead jobs were a world away from a big, old-school label that had a lot of manpower to push artists around the world.
But ironically, as the distribution landscape has gotten sexier—“There have been more new entrants,” Brea notes—many of these companies are starting to look like labels. Increasingly, they are trying to differentiate themselves from their rivals by offering bigger advances to artists and more label-like services: help with digital marketing, playlist promotion to streaming services or radio promotion.
Concerns about upfront payments and services feature prominently in Stem's pitch deck. The company estimates it lost $45.6 million in business in 2022: $19.2 million in scenarios where Stem couldn't meet an artist's ideal “check size” and $26.4 million in cases where it couldn't compete in “check size + other services (Intn'l, radio)”.
By Stem's count, the number of lost business opportunities increased in 2023, tripling to $134 million. (If accurate, that number helps show how popular distribution deals have become recently.) “We track all the lost deals that we've actually been in the conversation on,” he says. Kristin GrazianiPresident of Stem.
The pitch deck zooms in on two artists in particular that Stem lost to rivals: Aaron May, a rapper with a loose delivery who got a $2.2 million advance elsewhere, according to the deck; and 6arelyhuman, an electronic act specializing in choppy, wobbly tracks that took a $1 million advance. (A source close to May claims the number listed on the pitch deck is not accurate.) In both of those cases, Stem couldn't match the final check, though the presentation doesn't say whether those artists also wanted services that the company couldn't deliver — or chose a rival distribution outfit for another reason entirely.
In July 2023, Stem announced that it had established a $250 million credit facility from Victory Park Capital to provide artists with advances. But “some of the dynamics of our Victory Park deal were still a bit limiting in terms of allowing us to win the kind of deals we were seeing,” says Stem CEO Milana Rabkin-Lewis. “There are a lot of other types of funds out there that have less restrictions,” he continues, “and those are the conversations we're having now.”
So do other companies — Bulletin board reported in August that at least half a dozen independent music distributors are raising money or exploring a sale. That said, investors may be wary of giving some of these companies additional money to help them win the bidding wars for talent, according to Eric Gordonclinical assistant professor at the University of Michigan Ross School of Business.
Stem's adjusted EBITDA — earnings before interest, taxes, depreciation and amortization — was -$5.2 million in 2022 and -$4 million in 2023, according to the company's presentation. it's projected to be -$3.8 million in 2024. In Gordon's view, “investors are likely to take three consecutive years of negative EBITDA, even after management adjusts, as a sign of trouble.”
Rabkin-Lewis says that while “the distribution business is profitable, the overall Stem company is not because we've invested heavily in Tone, which is a newer product.” (Adjusted EBITDA for the distribution portion of Stem's business was -$1.3 million in 2022 and $400,000 in 2023, according to Deck.) “We've prioritized gross revenue growth,” Rabkin-Lewis adds. The deck shows gross revenue rising by just over 4%, from nearly $88 million in 2023 to a projected number of around $92 million in 2024.
Meanwhile, distribution deals for established artists continue to get more expensive. “A lot of companies are turning down high-cash distribution deals that we haven't seen before,” he says Karl Fowlkesentertainment lawyer. At Symphonic, Brea has watched some of his competitors strike deals he thinks are “ridiculous.” “We're aggressive in pursuing deals,” he adds, “but not to the point where he's not going to do it [economic] sense.”
Distributors have to be extra careful when it comes to chasing expensive deals because the short-term nature of their contracts gives them little time to make their money back. And successful artists often defect to a rival company, lured by a bigger paycheck or the promise of a more powerful services division that can propel them to even greater heights. Brent Faiyaz, who worked with Stem among other companies in the past, then worked with UnitedMasters, for example.
On October 4, Stem updated its Terms of Service, saying it has a guaranteed five-year license for any new music uploaded through its system. (As always, artists with more leverage can negotiate shorter deals.) This change has raised eyebrows in some corners of the music industry, because artists' ability to break even relatively quickly is a big part of why they choose to work with companies like Stem. “We feel like we're finally at a point, service-wise, where we can demand bigger licenses,” Graziani says. A five-year term is more in line with what a major label distributor like AWAL would ask for in negotiations with an artist.
This leads to another lane for competition — not only check the size and services offered, but also the length of the license. Independent distribution companies face an ongoing challenge: It can be difficult to keep artists from heading elsewhere without offering deals that more closely resemble those shared by major label ecosystems.
“The distribution offering is now almost infinite — you can get it anywhere,” he says Emmanuel Zunzfounder of independent company OneRPM. “To make money in distribution, you have to create value elsewhere. If you can't add value, you're stuck.”
from our partners at https://www.billboard.com/pro/distribution-deal-prices-soaring-stem/