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Everyone Wants to Be a Music Distributor -- But Is That Actually a Good Business Decision?

As streaming continues to fuel recorded-music growth, investors see companies that get songs onto services as gold mines. But how much money is there?
On March 27, Downtown Music Holdings announced that it was acquiring CD Baby's parent company, paying a reported $200 million -- the latest in a string of music company acquisitions of distributors.

Last October, Spotify announced that it would take a minority stake in, and integrate with, DistroKid to make it easier for acts that upload music to the service directly and distribute their tracks to other services as well. In February, SoundCloud announced its own version of that strategy, partnering with FUGA to offer wider distribution capabilities for SoundCloud Pro artists who own the rights to their catalogs. That same month, Universal Music Group purchased Ingrooves. And over the last few years, venture capital firms have poured tens of millions of dollars into music distributors -- most notably $70 million into UnitedMasters.

For all this investment, however, distribution can be an unforgiving business with razor-thin margins, and some startups seem to underestimate the resources required to offer high-quality service on a sustainable basis. "We see this pattern where companies jump into distribution because they think that's an easy way to earn more money," says CD Baby vp marketing Kevin Breuner. "But what they don't realize is that distribution isn't just about pushing files. It's about managing relationships with artists and managing their content -- and at a certain scale it's also about going through millions of lines of data and matching them to artists in order to pay accurately."

When physical music sales were more important, distributors like CD Baby helped independent artists get CDs on the shelves of retail stores. Today, "shelf space" for digital music is infinite, and monetizing an artist's catalog on the various platforms has become far more complicated. And even as the prices distributors charge artists are falling, that complexity is driving up back-end costs. Several distribution executives tell Billboard that their biggest expenses are customer service departments that offer artist support; some also invest in teams to assess fraud and handle complicated payment and rights data. Done right, digital distribution is less like the traditional music business than fintech, which happens to deal with artists.

Some smaller distributors learned this the hard way. Dutch distributor Songflow, founded in 2012, closed in late 2018 due to difficulties scaling and making a profit on its flat-fee business model, according to the company's website. Songflow charged artists $5 per song and served around 10,000 artists at its peak, say sources. If each of those artists uploaded five tracks through Songflow, that would mean annual company revenue of just $250,000 -- not nearly enough to cover the cost of employees and infrastructure. Songflow and at least two other distributors tried to sell their companies to CD Baby, industry sources say. (Songflow declined to comment for this article.)

Any flat-fee model requires enormous scale to be profitable. But revenue-sharing models -- used by UnitedMasters, AWAL, Stem, Ditto Music and EMPIRE -- require distributors to find hits. "They're not going to make a profit anytime soon just off serving the long tail," says Breuner of UnitedMasters, which takes a 5% commission on sales.

The handful of distributors that survive may well end up resembling labels -- selling services like digital marketing, playlist pitching and synch licensing. "From the very beginning, our vision was always to be a record label that's fair to artists," says Lee Parsons, founder/CEO of Ditto Music, which now has its own in-house management arm. "We just happened to start off on the distribution side first."

Ditto isn't the only company to build a kind of career ladder out of its various offerings. "You first get to work with TuneCore as you're making beats in your basement, and then someday sign a deal with Believe, where you can get a formal advance and all the extra services you need," says TuneCore CEO Scott Ackerman. It's a model similar to AWAL's, or what Downtown is looking to build.

If direct digital distribution becomes a kind of farm system for A&R, is it any wonder the major labels want in? Last May, Warner Music Group launched Level Music, a distribution arm for unsigned artists. "I'm competing with major labels every day," says Parsons. "The market is very much in the independent artist's favor now, more than ever."

None of this means that every streaming service will successfully enter the distribution business. In fact, sources say, SoundCloud's strategy could hurt it if tracks that are now only on that platform become more widely available. "If anything, it's decreasing SoundCloud's share of listening," says a distribution executive. "If you give the artists on your platform the keys to go elsewhere, why should they tell people to go to SoundCloud to listen to music?"

The promise of digital distribution -- like much digital media -- was that frictionless technology would make it easy and inexpensive for artists to reach fans. The truth is, even businesses that embrace technology are finding that serious data and marketing scale on paper much more easily than they do in practice. And as basic distribution becomes a commodity service with ever-thinner margins, artists are taking a hard look at the kind of relationships and infrastructure that will get their music on playlists and make sure they collect every penny they're owed.

Eventually, distributors may also find that data becomes one of their assets as well as a significant expense. Labels, online services and even other distributors will pay for information about streaming consumption, as well as rights data -- which could allow some of these companies to keep growing in a crowded field.

"A lot of people are going to build distribution services that have a short shelf life and then sell to someone else, which might be a good idea because everyone's buying," says Parsons, who claims Ditto has already declined investments from two major labels. "But you have to be really careful in these circumstances, because everyone's going into mergers and acquisitions thinking this is going to drive business for the next 20 years, when we know market cycles don't go on forever."