Money Rehab with Nicole Lapin - Drake, TikTok and the Music Biz with Troy Carter

Episode Date: September 20, 2022

Have you ever wondered how much money your favorite artist is getting from you listening to their song on repeat? This episode, Nicole talks about the monetization of music with Troy Carter.  Plus, not only can Troy pick artists to invest in, he also has an eye for emerging companies. Nicole asks him about his work as an angel investor, and what lessons he’s learned that we can apply to our own investments.

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Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Have you ever wondered just how much money your favorite artist is getting from her listening to their song on repeat? Today we're talking all about the monetization of music with Troy Carter. From his work at Atom Factory to Spotify, and now as the CEO of the technology and media company

Venice Music Collective, Troy is an expert on the biz. Plus, not only can Troy pick artists to invest in, he also has an awesome eye for emerging companies. So I wanted to ask him about his work as an angel investor and what lessons he's learned that we can apply to our own investments. Let's get started. Troy, welcome to Money Rehab. Thank you for having me. I'm so excited that you're here. You are a music industry king and queen maker. Your latest contribution to the business is your company, Venice Music. Can you explain what that company does and how it's different from other players in the space for those who don't know?

Yeah, we're we're a community and distribution company for independent music artists. You know, I spent a lot of my career sort of focused around major label artists and this cross section between music and technology and saw this gap in the independent market where it was kind of being underserved and underappreciated and undercompensated and decided to try to do something about it. And let's take a step back for listeners who might not know much about the music industry. You've been part of the music industry during the streaming revolution. For those outside the biz, can you explain how monetization worked in the pre-streaming area for both artists and labels, I suppose, and then how it works now? Not to take you too far back, but, you know, the music industry has always been impacted by

technological changes, for better or worse, by the way. You know, so some technology that's come in has driven massive amount of audience and revenue, and then other technology has like, you know, evaporated value. And so, you know, when we look at the CD era, when people were collecting CDs, there was a lot of money made basically from people reorganizing their collections. So people were going from like vinyl and cassettes to CDs, which had a much better quality of sound. And so people were switching over their entire collection. So the music industry saw a windfall of cash from it. Right after that, we got introduced to file sharing, which was Napster, that evaporated all of that value that was gained. And the music industry had to find new ways of making money. And so the download was introduced essentially mainstream mainstream by Apple with iTunes and people got paid ninety nine cents or a dollar twenty nine per song, which broke up the album.

But it was like ninety nine, ninety nine cents per song on average. And and then it's flipped over to streaming where it was much better for the consumer because it's basically all you can eat for a monthly price. So if people only bought two albums a year, that probably would average out to $20 spent on music on two albums versus $10 a month, essentially, for all of the music that they can listen to. So it sounds like a couple steps forward, a couple steps back, and then a few more steps forward in the monetization.

That's how it happens. But throughout that process, artists have never just generally speaking been able to capture the value as things changed and progressed. And so most of the record deals stayed essentially the same, where, you know, on average, artists would get 20%, record labels would get 80%. And any monies given up front to artists would have to be recouped back before they could make

any money. And these deals typically lasted, you know, seven, 10 years and even longer at times. So, you know, I think we're starting to shift to a place where artists are having more ownership and being able to capture more financial value from the work that they're doing. Is the most lucrative part of the industry actually the music or is it the ancillary profit from stuff like merch or touring? Or is it the ancillary profit from stuff like merch or touring? Yeah, music itself is usually the driver for the rest of an artist's business. But, you know, what we see a lot of times is music sells everything but music a lot of times. So you'll see people do 75% of their revenue on tour for certain artists. But now with streaming, what we've seen is an artist like a Drake who doesn't tour a lot

makes an incredible amount of revenue, or at least his record label does, from his streaming numbers. And the same with like Ed sheeran or an ariana grande so there are artists within a streaming age that can generate a ton of money to question them becomes are they actually receiving that money themselves and if not they got to go out on tour and make that money or where do they get screwed we just did an episode on megan the stallion uh who's awesome uh and of course all of her woes with her contract. Where do you see issues with new artists signing these deals?

You know, a lot of times it's a leverage thing. So, you know, you have somebody that's willing to take a chance on a young artist. And with them taking that chance, you know, it's almost like a hard money loan, essentially. You know, when you look at some of the terms that show up in a lot of those deals. And and so artists don't have a lot of leverage in the beginning. They a lot of them don't have money to or anything like that or whatever. And they've always wanted a record deal. So they sign what's ever in front of them, not really planning for long term future. And so we see, you know, these deals, you know, as a manager over the years,

I would see them all the time. And, you know, our jobs would be to go back in and, you know, get as much leverage as we can get and then renegotiate those deals. I've heard that music labels are pushing artists to create music that's TikTokable, I guess. Is that true? Does TikTok actually move the needle for music popularity? Have you seen? TikTok is huge for music popularity. You know, I'm a firm believer in the art and the music actually comes first. And, you know, when you look at great songs, great songs, they don't matter. They transcend platforms. So it could be TikTok today.

It could be another platform tomorrow. Or MySpace of yesterday. Yeah, exactly. The platforms, to me, become fungible in the end. The content and the artists are the one thing that remains consistent. With that being said, TikTok has become such a firepower in terms of virality by way of how the algorithm works. And we're seeing this direct correlation between virality on TikTok and streams on Spotify or Apple Music. So, you know, we know that that combination works. I wonder how these conversations go when you're listening to these new tracks. Like, can you what I'm terrible at the TikTok to decide whether it's TikTokable? Yeah, you know, it depends. Think about it through the lens of like of context.

through the lens of like of, of context. So songs usually go viral or have big moments when there's some sort of emotional context, whether that emotional, emotional context is laughter, whether it's sadness, whether you could connect with somebody's story. So to me, like, it's no different than, you know, the Kate Bush running up that Hill record being synced and Stranger Things. And like so people have a different context to that record that's been around for decades that now makes it a hit today. So I think it's just a contextualization versus the song itself sounding like something that could work on TikTok. I think it's what's the context of that song, because it could be a lyric.

It could be, you know, a needle drop, you know, somewhere in the record. So it could be all of these different things. Yeah, or what's happening in the zeitgeist or in the world, which you can't really predict. And that's kind of this perfect storm. In this era, though, of social media and the interwebs, where artists can basically just release their own music more easily than ever before. What do you see as the role of music labels? You know, they, the music labels,

they have a, is a very, very high level of expertise to take things from let's say if an artist can get it to one to seven themselves, some of the really good major labels are able to take it to seven to 10 and make these global superstars. So, you know, so, so I don't take the infrastructure and the experience of people within these labels for granted,

because I've worked with some of the best people in the world who have been experts, you know, and whether it's publicity, whether it's radio promotions, you know, whether it's music video creation. So there's something to be said about that level of expertise. The problem that comes in, though, is that there's not enough time in the day now for labels to invest that across a wide roster that they've been signing. So a lot of these artists are kind of left to themselves to figure out how to become superstars. And then the ones that do become superstars, the economics remain lopsided. So yes, they should be compensated for their investment that they make when nobody else believes. Yes, they should be compensated when they've given advances that

haven't been recouped. But once they get the windfall and labels make, you know, a ton of money, the economics should then shift, you know, way to the artist's favor at that point. So it's just kind of figuring out, you know, what the value exchange favor at that point so it's just kind of figuring out you know um what the value exchange looks like because it's not that they don't add value is whether or not they're worth the value that they're that they end up receiving in the end hold on to your wallets boys and girls money rehab will be right back now for some more money rehab we had skylar Gray on the show, too, and she made headlines for selling her catalog. Do you see this as something new in the music business and the economics behind it, or is it just something we're hearing more about?

You know, I think it's new in a sense of the mentality has changed. It used to be taboo for artists to sell their catalogs and songwriters to sell their catalogs. It just was like very, very taboo. And so a lot of great artists, you know, they ended up dying and passing the catalogs on to their children and things along those lines. And I think over the past, I would say six years or so, you saw this trend of iconic artists who were older that were willing to part ways, you know, whether it was for tax planning purposes, whether it was, you know, for cash purposes, you know, whatever that was. And I think seeing some of the icons willing to do it, it kind of made it okay for other artists to take away that taboo. And so, you know, for me, I just believe in artists

having the freedom to make whatever choice they want. And usually they don't own the catalog when they start their career because they signed bad publishing deals or they signed bad record deals. So they never had an opportunity to do it. So it's just good that they have the options to do it now and that they actually, you know, I'm seeing people make real money from it. Yeah, for sure. And also on the flip side, there's a bunch of private equity companies that are getting into it. Do you see them being able to monetize this in interesting ways moving forward? Or is there some sort of handicap for not knowing the music industry in and out as being like a Wall Street firm? Yeah, a lot of what I'm seeing is the really smart ones are actually hiring people to run

the catalogs for them. So it's not just, you know, these assets that kind of sit there and like, you know, a bond or anything like that, like the smart ones actually are invested in these sort of these vehicles that are going out buying catalogs. And you have professionals from the music industry that are making the day-to-day choices. So, you know, we're seeing pension funds invest, you know, we're seeing, you know, we just saw the Cobbalt deals um that happened recently where cobalt sold um a few of their catalogs that were set up as funds so um you know what what i was a little bit afraid of was who's going to be making decisions around how these

songs are placed and like you know what happens with these classic records. And, you know, so far we're seeing, you know, people like Hypnosis, who their CEO, Merck, is incredible and he loves artists, loves songs. And we're seeing companies like that that actually care and actually have the experience. That's cool. They have somebody with like subject matter expertise running it. Can regular folks make money off that yet? you know, from these sort of group funded programs. I think I'd be careful, like, you know, just as a consumer on the outside, understanding, having a clear understanding of how the economics work. You know, it kind of scares me when I see some of the launches where these are crowdfunded songs where people are receiving payments from investments. And I know how streaming pays out.

So it's like that song has to get a lot of streams in order for these people to ever make money back, you know, from, from their investment. So, you know, and also, you know, I think it could get weird sometimes when fans have a financial interest in the artist. You know, so it's like, you know, will artists be making decisions based off of their financial relationships with their fans versus, you know, their real relationships with their fans? That's really interesting. And as you know, any evaluation is very subjective. Have you seen any of these catalogs being priced like way off the mark or has anything surprised you higher or lower? I think long term, the multiple on catalogs are super cheap. Like, you know, even that, you know, we're seeing some 18 X multiples that people are

like, oh, these people are overpaying. And, you know, I think in a big scheme of things, when we look at unique assets, you know, what's the value on, you know, purple rain, you know, and why would that value be any different from a Keith Haring painting or a Warhol painting, you know, when we think about unique assets and actually, you know, have an ownership in those assets. And so I feel like music hasn't been positioned well in the unique asset category. And so I think a lot of these assets are super cheap in a big scheme of things. Well, are they all super cheap or like, you know, the democratization is very cool with a lot of NFTs and whatnot, but maybe just the great ones are super cheap. There's kind of like a handful of the purple reins of the world. Yeah, I think, you know, I'm generalizing catalogs just, you know, across for every Purple Rain Prince might have in his catalog, Prince might have, let's call it, 25 gems in his catalog.

Or Bob Dylan might have 25 gems in the catalog. One of those gems might be worth the price of what they sold Bob Dylan's entire catalog for. You know, so I think, you know, whether you want to separate them as unique assets, whether you want to bundle, you know, I think overall that, you know, the value on it is incredibly cheap. And 18 times multiple seems high. Where do you see it going or where would it be better priced? Well, if you look at where music assets were 10, 15 years ago, you know,

they were incredibly cheap. You know, like you look at Warner with Limb Levotnik bought it for I think 10 years ago, however long ago he bought it, versus what it's worth today. Or you look at Universal's valuation 10 years ago and what it's worth today. Music has found so many other places to live and so many other places to monetize. And you look at how China wasn't a monetizable market at one point. And India wasn't a monetizable market for music at one point. And so now you look at, you know, these markets that are still nascent in terms of, you know, making money, China, India, Africa, you look at their populations, you look at,

you know, how mobile's growing in those spaces, how broadband's growing in those spaces. And you look at the gaming category where music plays this very, very, very small role right now. I just feel like it's value there that has yet to be unlocked. That's a really good point. I know we're so U.S.-focused all the time, U.S.-centric. You have also figured out ways to monetize, uh, sir, let's talk about one of your other hats, angel investing. How did you get into this? I've been angel investing almost 12, about 12 years now. Um, but you know, I got into it like really it was out of curiosity. Somebody offered me, um, a chance to invest in a deal. And, um, and that sort of led to me and other founders. And I just started

spending two to three days a week in Silicon Valley and meeting a ton of people around the world in the tech space. And it was helpful in terms of me understanding what the future was going to look like. And it allowed me to look at my own business of like, okay, how's our business going to be disrupted? What are the things we should be looking at? And so it kind of gave me a view into all of these different worlds. Yeah, it was probably beneficial in both spaces. What a great time to get into it. Can you explain for those who don't know what's the difference between angel investing and investing in a public company? Yeah, you know, angel investing, you're there as one of the earliest investors in the company. So, you know, sometimes it's, you know, pre-market product fit.

So you don't know whether the product's going to work. Sometimes it's before product has been actually built. So, you know, you're one of the early people that that's taken a chance and is, and at that point is very high risk. So, you know, you end up, you know, losing, you know, if you invest in a hundred companies, you know, chances are, you know, a good portion of those companies are either going to fail or, or break even, or, you know, you get a low return and you're looking at, you know, high yield on a handful of companies. So it's very high risk and not really, and not as regulated and transparent sometimes,

you know, as far as investor rights and things like that, as it would be with a publicly traded company. And it's also illiquid. So when you invest, you go in understanding that if I do get a return, it's probably going to be on average seven to 10 years before there's a return. So you know it's going to be illiquid versus a publicly traded company that's essentially a liquid asset when you want to sell. You're being modest, by the way. You're like, oh, I put in a little investment. You had early investments in Uber and Lyft and Dropbox and Spotify and Forby Parker and some other biggies.

So high risk, high reward. Yeah, you know, it's high, high risk, high reward. And really understanding going into it with your eyes open, or even if your eyes aren't as open in terms of deep domain expertise on any one company or category, having enough trust in either who you're investing in, their board members or co-investors who are smart and might have done deals with that founder in the past, or they've done a deep level of diligence that you're piggybacking. And I'm assuming for every Uber and Spotify, you also invested in some ones we don't know. Oh, yeah. It's like nobody ever talks about, you know, the dogs in their portfolio,

but, um, but yeah, you know, it's, it's, it was very rare. I never invested in a company that I didn't believe in. And for even the companies that didn't make it 99% of the founders, I would probably invest in again, you know, and just because they were high integrity, sometimes it's just timing on a company. Sometimes, you know, it could be, you know, market conditions that they don't actually control. You know, it could be the competitive environment, but it's been very rare when I felt burnt by a founder. So most of the deals that I invested in are deals, the ones that I lost on are deals that I regret. Yeah, you didn't lose after all.

How would somebody get into angel investing if they think this sounds pretty cool. I think it's so competitive in terms of being able to put in direct capital, you know, just because when founders, really good founders that want to raise money, like the deals that are actually worth investing in, those deals usually aren't hard for founders to raise money around. So, you know, for people who may not have that network, AngelList kind of serves as a good place to, you know, sort of find deals to invest in. And then for people that actually can add value and like, and have, you know, whether it's,

if you're the CMO of a Fortune 500 company, you know, you should be able to get access to a certain level of deals, you know, as an angel investor, just by way of what your network will look like as being a CMO. value that then you could sell like a venture capital firm on to say, hey, as you are investing in deals, if your founders need any marketing advice, I'd love to be a resource for them, you know, as a marketer. And, you know, in exchange, I would love to be an angel investor in companies. And so I've seen a lot of people from outside of angel investing make their entry points by way of that type of strategy. Smart. And how does the financial model work for angel investing? I know it kind of is Wild West, but what are the check sizes typically? What's the typical ROI if there's typical at all?

Yeah, it's no really, it's hard. ROI is all over the place. And check size varies as well. You know, my rule of thumb was always, you know, don't put in any amount that I'm going to lose sleep over at night. And that might vary for different people. And, you know, so for me, I didn't, you know, I was, I was investing primarily off of my balance sheet. So it's like, so if, you know, having, you know, profit from the company, I can then invest that into, into other companies. And so, but being able to keep those two separate. So if it was a really good year, I can invest a lot. If it was a not so good year, then I could pull back. And if I lost everything on the angel investments, it wouldn't have direct impact on my primary business

or my quality of life at home. So, you know, what I would say is strategy should be a portfolio strategy. So where you have, you know, not putting all your money in one company, you know, because that's a very, very risky bet. How can you take, if you were going to invest? I'm just making this number up $50,000. You know, could you put $10,000 into five companies versus, you know, all all into one. So just figuring out

how to mitigate that risk, or even put 10,000 maybe into five companies and the rest into index funds. Yeah, yeah. Cool. Thank you so much, Troy. I hope to meet you IRL, not just IRL one day. I'm a fan and congratulations on everything. Thank you. you can take straight to the bank. As Troy reminds us, with companies that exist in fast-paced industries like music or tech, you should expect to see cycles of movement forwards and standing still, which feels like moving backwards on Wall Street. And that's why you should always look through a long-term lens, even if the company moves a mile a minute. Some companies that you

invest in may be affected by a change in technology, and that's inevitable. But what you need to figure out as an investor is whether that company can adapt to those changes. That's a key quality in what separates the good investments from the bad. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic,

and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.