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Great question, I asked my cousin this a while back (who is in the record label business, was a former lead singer of a relatively successful band). I was trying to dig for the exact same answer you are and he unknowingly revealed to me that it conceptually is a very similar business model. Though it is not as capital intensive, and much of the time the band itself will be forced to foot the bill in the early stages (unless it's some kind of blockbuster band that the label knows is a "can't miss," which might actually miss, lol) All the record company provides for most bands is a legitimate name, distribution channels, etc.
Now there are certain problems very unique to the record label business. One thing he mentioned is that a lot of the "investors" in the business don't take it very seriously or have no idea what they are doing because they are only in it to get close to the cool hip scene that the music world provides (and I would assume the women that come with it.) These people often are venture capitalists by profession to begin with, so that should spell it out right there.
Also, record labels are not nearly as profitable as a VC, especially in this day and age. It's not like you are buying equity in the singer, it's more of an agent-client type profit model, and in this day and age it's very hard to generate big time money with digital media taking so much profit away.
Apparently this is a very new time for record labels, and many are on their way under. He seemed to believe that, by necessity, the industry was going to have to evolve and so we may see a very different profit model going forward, but while individually it is a very different business because you are not looking at businesses, conceptually it is quite similar (though not nearly as capital intensive.)
so then my next question is why don't large VC companies hire professionals in that industry to take control of that market? Or since it isn't as profitable they don't bother. Because the winner of American Idol when they first started I have no idea how much it is now signs a $1 mm record deal but American Idol takes some % of the profit...of the sales from CD ands concerts and things of that nature
You're an idiot.
Please explain?
Are you asking why don't VC companies start their own record labels? Or, rather, why don't VC professionals use their knowledge of the business to take the market away from the traditional record labels?
Well, it boils down to what you know. VC's know finance or at least they know healthcare, cleantech, whatever industry they are invested in. You could argue that the record labels themselves already are the "VC" minds for that business, it's about industry connections, name brand, appealing to a young demographic, etc. The guys who are in it already pretty much have the market cornered on that. Also, like I said before, a lot of the investors into the record labels are VC professionals, but, yeah, it's not nearly as profitable for them.
What you're saying about American Idol, that sounds like a very traditional record label business model, though different in that American Idol actually generates money during the talent finding process as opposed to risking it. In the more traditional sense, this is what a record label would do and as pseudo-VC's themselves, you can argue they're better equipped to do it then some Silicon Valley based VC.
Hope this makes sense. Forgive me if I've misunderstood you.
thank you rebel that is basically what I was trying to understand
Also, I should add, while in the end what a record label does and what a VC does seem very similar in principle, a record label certainly doesn't look at its investments the same way that a VC would. The VC obviously takes a financially calculated risk on several firms to hopefully generate exponentially large enough profits on a few of those firms so that it will far and away dwarf the loss on the majority of failed firms, for which it takes into account.
A record label, on the other hand, truly believes in every one of its acts and does not take into account the kind of financial calculation that a VC does into account. They are bounded by capital constraints and capital constraints alone. A record label invests in acts that it feels will appeal to an audience and it just so happens that after enough of them fail and a few of them hit it big, the resulting profit gained is similar to the way a VC has generated profit. However, in the case of many small record labels, in this day and age, this profit is usually only large enough to either keep the firm solvent or not even. And in the case of your large record labels like Sony Music or whoever (I really don't know who the players are, I know nothing about modern music), they have enough of a monopoly on relationships MTV, radio networks, etc. that they can force publicity for their acts and create a market for most of their acts, even when one originally didn't exist. Hence, they can actually generate profits on a much higher percentage of their acts and they can keep the keep the cash cow alive as long as they had a few big hits over time that really resonated with people and keep the name legitimate in the eyes of the demographic that they are marketing to. Hence, their big success with a few acts allows them to continue to force their bad investments upon people and generate profits from them as well.
its the idea of monopoly that I wasn't thinking about when it comes to record labels thank you rebel
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