Fred Davis wants to give you money.
Well, not you, specifically, but you lot – as in, the music business’s smartest operators.
Davis’s only proviso?
That your company offers the merchant bank in which he is a partner, Raine Group, a tasty return on its investment.
As M&A activity ramps up in the music industry, and an increasingly frequent pipeline of deals get inked, Davis stands as one of the modern business’s most influential figures.
Raine Group offers two services to music biz clients – it’s both an advisory hub for those looking to sell (or buy), as well as a hands-on investor in the music business. And it happens to have completed over $600m in music-related transactions in the past two years alone.
These investments, in recent times, have included Raine’s $75m bet in 2017 on SoundCloud, which is now emerging as an impressive turnaround story, having recently revealed narrowing losses and a $200m annual revenue run rate. (This morning, in a deal advised by Raine, SoundCloud raised a further $75m from satellite radio giant SiriusXM.)
What’s the most exciting thing about SoundCloud right now? With Raine as an investor, and in addition to its core audio platform, SC has positioned itself as a Tunecore-rivalling distribution service for independent artists – an area of the industry Davis believes is ripe for rapid expansion.
Other Raine investments include fast-growing, Stockholm-born distribution and label outfit Amuse – through which Lil Nas X’s Old Town Road was doing millions of streams before Sony’s Columbia swooped for it – as well as TikTok-rivalling short-form video platform Dubsmash, which recently confirmed that it is attracting over a billion views each month.
On the advisory side, Raine Group last year played an integral role in Downtown’s acquisition of CD Baby parent AVL (a $200m-plus deal). More recently, Raine advised another Downtown buyout target during its sales process – digital services company FUGA. (The latter acquisition, sources tell MBW, was worth upwards of $40m, but Davis refuses to be drawn on a number.)
Prior to joining Raine in 2014, Davis was a founding partner of investment bank CODE Advisors, which was an early supporter of platforms including Shazam, Last.fm and, yes, Spotify – whose founder, Daniel Ek, Davis first met in 2006, and still talks about in glowing terms.
Davis’s tenure as an investment mogul is actually his second chapter in the music business. Before he became a money man, Davis – who splits his time between Raine’s London and New York offices – was a hotshot lawyer for artists and executives.
The founder of famed NYC-based practice Davis Shapiro & Lewit, today Davis, with his Raine Group hat on, wishes some of his ex-legal contemporaries would remember to buzz his phone a little more often amid the heat of deal-making opportunities.
“It’s an odd dichotomy I have: I probably know more people in the music business than most, but I don’t think many people understand what I do,” he says.
Well, allow MBW to fix that – via one of the most perceptive interviews you’re likely to read about the future of the music business…
You were a music lawyer, now you’re a music investment tycoon. How did you make that transition?
It’s illogical, and yet very logical. Part one of my career was representing artists and helping them find record deals. So, what are record companies? They’re check-writers, they’re investors in talent.
The next phase of my career was working with digital entrepreneurs who had a new idea of how to fix the music business, post-Napster; that was YouTube, Spotify and MySpace. And what I learned from those guys was that, in the music business, the power and the energy is in the rights negotiations; but with venture-backed startups, it’s in the capital. The role of the lawyer was really minimized [in tech].
“Raising capital for entrepreneurs is just like finding money for bands.”
As a result, I learned about raising capital, which was closer to banking than it was to law. And then I logically made the transition.
Raising capital for entrepreneurs is just like finding money for bands. It’s about finding talent and matching it with the right capital – same skillset.
Are you still excited by your job?
There’s nothing more exciting than finding a new idea.
It doesn’t happen often; it happens generationally in the music space. But when I met Daniel Ek and saw Spotify for the first time in 2006, I remember him pressing play and it just… worked. It was incredible!
The last time I [felt] that more recently was when I met Musical.ly, and you saw the power of the 15 second clip. It was amazing – really amazing. [Musical.ly was acquired by TikTok parent Bytedance for circa $800m in 2017].
You have your own impressive history in the music industry – before founding Davis Shapiro & Lewit you rose to EVP at EMI, working with a number of superstars. But you also happen to be the son of a music biz legend, Clive Davis. How has that affected your path in your professional life?
Over the years it’s been a blessing and somewhat of a curse – although curse is a tough word.
I had the greatest upbringing and youth you could imagine. I wouldn’t trade it for anybody else’s upbringing. But the way [Clive affected Fred’s career] was very hands-off, with no doors being opened or special treatment.
Sometimes it was difficult to overcome the fact I was the son of [Clive]. You have to prove yourself a little bit, and forge your own way.
Why do you choose to split your time between London and New York?
If you look back over the last 15 years, most of the innovation in music has happened out of Europe.
Shazam, Deezer, Spotify, SoundCloud, Last.fm – all of them. When I do my ‘A&R’, if you will, [looking at tech startups], Sweden, Germany, the Netherlands, the UK – they are all incredible bastions of innovation and I believe more people should be focused on them.
“[The next big thing in music tech] is not going to come out of the US, it might come out of China, but Europe has a history of it.”
[The next big thing in music tech] is not going to come out of the US, it might come out of China, but Europe has a history of it.
The three labels are run by Brits: that’s not a coincidence. Add into that BMG, Kobalt, Hipgnosis… all run by Europeans; it goes on. Europe doesn’t get enough credit for the musical and technological innovation that’s happened in the world.
Which ‘bets’ are you proudest of in your investment career so far?
The one I’m most proud of is meeting Daniel Ek when he was 22 years old, and Spotify was just a Powerpoint.
I’m proud I had the foresight to work with him as closely as I did for ten years – first helping him get all the sets of rights, then raising the first hundreds of millions of dollars for him, which helped transform the entire music industry.
How would you characterize the general relationship between tech and music today? It’s been a tense journey over the decades.
I have three answers: Phase one of the relationship was extremely rocky; the tech entrepreneurs didn’t appreciate the value of copyright and it forced the labels to protect and create value for copyrights in that post-Napster era.
My second answer is that I don’t think the record companies get enough credit for taking as many chances as they did; I had a front-row seat [post-Napster], and there were hundreds of deals done with tech entrepreneurs. Just because many of them failed and/or were difficult to reach didn’t mean the music industry didn’t try. That’s a myth and it’s incorrect.
“I wish there were more ideas coming out of the rightsholders and that [they] weren’t so dependent on third parties all of the time.”
And the third answer is that all of the innovation [in music x tech] has been led by third parties and not by the rightsholders themselves, and that’s not the way it could have, should have, and always will be.
I wish there were more ideas coming out of the rightsholders and that [they] weren’t so dependent on third parties all of the time.
As the streaming-driven growth of the major music companies inevitably slows down, do you think we’ll see them forced to innovate more?
I hope so. I hope we’re now reaching a more optimistic [situation], where those ideas can come from the labels.
Right now we’re basically in a $9.99-or-nothing world; why do the labels have to wait for a different type of model? Why can’t they come up with it themselves? I hope there are new ideas, but I haven’t seen any yet.
SoundCloud just posted a $200m revenue run rate. I, like many, was skeptical of Raine’s investment in 2017 – SoundCloud looked like a business without a model, getting squeezed by its key customers through enforced licensing. Now, things look much brighter. Why were you so confident in the company’s future?
SoundCloud as a platform is incredibly unique. It’s the only audio-only platform where composers can upload their music [direct] and reach an audience of 50 or 60 million listeners.
We did our diligence on our investment, and we felt the passion of the creators [for SoundCloud]; where else would they go if they lost it?
“For the listener who wants to discover music, SoundCloud’s the best place out there.”
For the listener who wants to discover music, it’s the best place out there. It’s a true marketplace for creators and listeners to discover music that doesn’t exist anywhere else in the world.
The power of that gave us confidence in the investment, and Kerry Trainor [SoundCloud CEO] and Mike Weissman [President] have made some smart moves that have right-sided the business.
What’s exciting you today?
The most exciting area in the music industry right now is the world of the independent artist – not the artist on independent labels, but the independent artist who uploads their music straight to the DPSs.
Because of that, strong businesses are being built: CD Baby is one, FUGA, AWAL, TuneCore – it’s becoming a multi-billion dollar industry.
Downtown’s very clever to see it and has become one of the forerunners in building upon this business [via its AVL/CD Baby and FUGA buys].
You say it’s exciting; a major label boss, losing market share to bedroom musicians, might say otherwise!
Well then my suggestion is that the major labels spend more time in this world.
My prediction is that by the end of this year, it’ll be 10% of the [global annual revenues of the] record business, growing 35 to 40% year-on-year, making it the fastest-growing segment of the industry.
“My prediction is that by the end of this year, [independent artists will] be 10% of the [global revenue of the] music business, growing 35 to 40% year-on-year.”
Why shouldn’t the major labels be participating in this sector more than they are? I think that will happen, but I think it will happen too late for them to [dominate] the sector.
Downtown is doing things today that maybe the major labels should be doing.
The majors might argue that by getting too heavily involved they risk de-valuing the record label proposition that brings in their main chunk of revenue.
But why? If it’s profitable, and it’s growing, and it’s music, why can’t they be in that business?
I’m very confident that it’s going to be a multi-billion dollar part of the industry – and that’s just the masters side.
The growth in the independent artist sector requires audiences to move in that direction, which, in a zero sum game, takes away from the dominance of the ‘megastar’ artists – a staple of the bygone radio-dominated paradigm. How will this play out?
It’s a more democratic system today.
Think of it this way: if you look at a pyramid, the more artists that can make a living off their music – and can [be funded by streaming royalties to] improve their craft for longer periods of time – will be able to move up the pyramid.
Some will be able to pay their rent, pay their gas money, through DSP income where they never could before, when they could only make that money playing a local gig or working in a bar.
“[Independent artists making a living from streaming] Is the best thing that’s happened to the music industry, worldwide.”
That creates a healthier middle class of artists, and it’s a natural driver of artist development. It might take five years, rather than five months, to develop your craft [and independent artists can fund that development time by their streaming payments].
It’s the best thing that’s happened to the music industry, worldwide – you’re seeing it in the US, UK, France, Sweden, South East Asia, everywhere there are these economies building up.
You have invested capital and/or advised a number of businesses that have disrupted record companies over the years – and made their lives more difficult. Do you still believe in the major labels?
I take exception to the idea that they’ve disrupted record companies – I think they’ve helped record companies.
Companies like the DSPs I’ve worked with, they were medicinal to the labels. Look at SoundCloud; track the number of artists who got their start on that platform who are now at the top of the charts, and you’ll see direct correlations. SoundCloud has been a great A&R source.
The distribution companies and independent labels we work with are additive to the music industry, not disruptive.
Are you excited by the amount of new capital pouring into the music business from all angles – be that yourselves, Hipgnosis, Primary Wave, Round Hill, Reservoir, Providence, Downtown etc?
It’s incredibly exciting. I think it’s the beginning of a wave which is only going to increase.
As a result of this new capital, BMG boss Hartwig Masuch says that the rights acquisition market – especially in publishing – has become “a feeding frenzy which has pushed prices in some cases beyond all reason” . What’s your view of that?
If you’ve had great success paying five to ten times multiples [for acquisitions], it’s obviously then difficult to pay 15 to 20 times multiples for what you used to get [cheaper].
Hartwig was very intelligent in getting BMG in [to rights M&A] when very few others believed in music and, as a result, [BMG] made a killing.
“I’m not saying that all the money that’s flowing in [today] is smart money; I’m not saying everyone’s right…”
I’m not saying that all the money that’s flowing in [today] is smart money; I’m not saying everyone’s right; and I’m not saying that just because Hartwig’s sitting out and someone else is paying 18X that [the latter person] isn’t correct.
Not every investment is going to be right, but this is a numbers game, and more people taking chances in music will help [the industry]. Plus, money is not just going into copyrights; it’s going into platforms, distribution, tools, so many different areas of music. All boats will rise because of that.
What’s the biggest danger for the modern music industry?
Not understanding your audience.
The most exciting new company that’s come around in the past two or three years is TikTok. I still don’t think the music industry really understands the power of 15 seconds.
[The future is about] understanding how those clips are being made, how the songs are becoming broken [on TikTok], what the audience is looking for… and what’s next. Who would have predicted 15 seconds? Nobody. That’s dangerous.
Also, you still have segments like classical, jazz and hi-fidelity [formats] that are being left out of the streaming industry, where niches are not being created [to better serve niche fans].
Failing to understand your audience is not good generationally and it’s not good for current business. There’s too much focus going on [mainstream] playlisting and getting into the Top 10 of the chart.
You spend a lot of time in China. How do you think the Tencent/Universal investment will play out?
I have a difficult time with that because in my opinion, we’re two thirds of the way through the movie. Until it passes the regulatory bodies, I don’t trust it [as a done deal] yet.
The single most exciting company I deal with today is Bytedance. I have seen [Bytedance’s audio service] Resso – it’s the best new platform I have seen since Spotify. I hope the music industry embraces it, and I hope Bytedance doesn’t get turned off by the complexities of getting licenses.
The music industry needs another platform to succeed, to me this is absolutely the best one that’s out there and they should embrace it as quickly as they could.
Is there anything obvious the major labels are not doing that would be a win?
Vevo, to me, is one of the great proactive ideas the music industry has come up with, but its proper value has never been realized – and that’s because there’s a conflict between short-term revenue [from YouTube] and long-term value.
Because of that, there’s been an incredible amount of value left on the table.
I hope in this era of optimism and buoyancy [for labels] that the owners of Vevo take a look at it again and figure out a different strategy of how to realize proper value from that platform. [Vevo is jointly majority-owned by two parties – Universal/Vivendi and Sony Music Entertainment.]
Audio has revolutionized and returned proper value to [rightsholders]. In video, most of the value today is in 15 second clips rather than full streams. That has to change.
Arguably, making that change would mean those major record companies giving up a $300m-plus advance check from YouTube every few years…
Even if that’s true, the labels can afford to do that more now than they could five or ten years ago.
Vevo was launched in 2008; that wasn’t the best time for the music industry. Maybe today they could forsake some short-term revenue for long-term value. I hope so.
You were a success in this business before all of this investment fun started. You strike me as someone fiscally comfortable. Why not quit the industry and enjoy a lovely life in the Hollywood Hills, playing golf and going for long walks?
Two answers: I have a father who’s 87 years old who goes to work every day, who could also go to the Hollywood Hills and retire and chooses not to. And the second part is that I love what I do.
What else would I do every day? I want to do more of it, not less.
What message would you like to get out there from this interview?
Deal-making in the music business has been organized, controlled and managed by the music lawyer for a long time. I would like the music legal industry to recognize that what I do – from an investment and advisory perspective – is complementary to what they do.
“We at Raine know of so much more outside capital that wants to come in to the music business.”
You talk about outside capital coming into music; we at Raine know of so much more outside capital that wants to come in. But [in order to spend that capital], I need supply.
The music lawyers are more in touch with the supply, and I’m trying to figure out how to get them to call me.
Fair warning: You might be inundated by phone calls, not to mention pitch decks, after this.
I’m okay with that.
How many pitch decks in the music space can there be that deserve someone writing $50 to $100m checks?Music Business Worldwide