Justin Kalifowitz on why Downtown bought CD Baby owner AVL Digital

New York-based Downtown Music Holdings sent shockwaves across the global music business in March when it acquired CD Baby owner AVL Digital Group.

Industry sources estimated that the deal was in the vicinity of $200 million and included AVL’s entire portfolio of businesses (CD Baby, AdRev, DashGo and Soundrop).

AVL’s wider client base includes over 900,000 artists, labels and other rightsholders, representing what it says is the largest independent sound recording catalog in the music industry.

The timing of the acquisition was especially significant because of the growing market share of the DIY sector – this year alone will see self-releasing artists earn over $1 billion.

In 2018 the total revenue generated by these DIY acts was $643 million, according to figures published by MIDiA Research; CD Baby, now owned by Downtown, contributed over $100m of that $600m-plus figure.

Downtown also owns Songtrust, which provides publishing admin and collection tools to over 170,000 artists across more than 1 million copyrights.

Downtown’s founder and CEO Justin Kalifowitz gave a wide-ranging interview live on stage yesterday (May 9) with CMU’s Chris Cooke at The Great Escape music business conference in Brighton, UK.

Kalifowitz discussed the origins Downtown and Songtrust, as well as what makes a good music publisher in the 21st century and why his company acquired AVL Digital.

You can read an abridged version of the interview below.

Tell us about where the business came from and what were the original priorities back in the early days…

We started Downtown Music Publishing back in April 2007. Back then, I was 25.

There was this incredible wave of consolidation in music publishing, between 2004 and 2007.  We felt that there was a real lane to build a world-class music publisher for what we were describing as ‘[the] modern era’.

“There wasn’t much by the way of technology addressing the challenges for music publishers, collection societies, songwriters and really it became a function of building it ourselves. Today, Songtrust has grown to be one of the largest platforms in the world, serving 170,000 songwriters as well as publishers like Downtown.”

It was about nuts and bolts. It was about great creative services, it was about great thoughtful approaches to administration and cutting out the middleman everywhere we could. To do that we needed a technology backbone to what we were doing.

A few years into that we started to look at how we can grow this business a little bit more and expand internationally. We built out Downtown Music Publishing and focused on what we refer to as world class songs and songwriters, to the point where we now look after things like George Gershwin to John Lennon to hit songs like Shallow and Sucker by the Jonas Brothers, which is No.1 in the US this week, and doing that in a number of markets around the world.

Songtrust was part of that story in the sense that we started to think about, How can we build a platform that really scales? We weren’t happy with the technology solutions available in the marketplace.

You had the advantage of being new to the market, so you weren’t carrying your own legacy, but you’ve had to plug into the existing music publishing system and collective licensing system. how quickly did you realise that was going to be a challenge and how did you meet that challenge?

When you’re in the music publishing business and you have lots of copyrights that you look after, you are effectively managing a ton of joint ventures.  A song is effectively is an asset; it’s a JV with another publisher or two or 10, and they all have different managers and they never talk. It’s a really dysfunctional system.

You add a layer of collection society rules and regulations on to that and different local customs, [and it becomes a] challenge. We spent years looking at how to navigate the system and we’re still perfecting it.

“We get asked this question all the time, ‘are you guys the  best solution?’ I have no idea. I think so, but what I can tell you is that every day we have dozens and dozens of people trying to refine it.”

Part of it is we didn’t go to the societies with any animus, like, ‘You’re not doing this right,’ or, ‘We can tell you how to do it better’ or, ‘Please don’t change your rules,’ or, ‘Please change your rules.’ It was more like, ‘We want to find the best way going forward, because we can now just accept how it hasn’t been working.’

“I often think about the deal we did with YouTube which was publicised a number years ago. YouTube was getting a lot of flack as they should for not paying enough for the use of music on their platform. But one of things that I think people didn’t realize was that there was a lot of bleeding of money going from YouTube to Collection societies.”

I often think about the deal we did with YouTube which was publicised a number years ago. YouTube was getting a lot of flak, as they should, for not paying enough for the use of music on their platform. But one of things that I think people didn’t realize was that there was a lot of bleeding of money going from YouTube to collection societies.

We said, ‘Well you’re paying us directly in the US for sync, can you pay us for performance as well?’ They were like, ‘We’ve never done that before – can we? We said, Yeah. Willing buyer, willing seller, we can make this work with ASCAP and BMI.

We cut a deal, [and now] we get paid directly and our writers are getting paid monthly from YouTube. We found that a direct data feed from YouTube to be much more accurate [than the way things were].

When you’re YouTube and when you’re any DSP and you get to pay the rightsholder fairly, accurately and faster, I think that’s a huge benefit to them, you’re [not held back] by layers and layers of misunderstanding. For the writers, that’s a tremendous benefit. If you approach these situations, like ‘how do you make both sides win?’ and how can you be in the middle of that, that’s really what we’re waking up to do every day.

Beyond the data, what makes a good music publisher in the 21st century?

That question is best answered by looking at it on a writer-by-writer basis. If you are going to do a deal with a music publisher where the deal is something other than they collect your money, it should be a very tailored approach to what you are looking for and it is partially based on what you are trying to achieve.

[We] work with Hans Zimmer, which is a very different relationship to Ryan Tedder, which is a very different relationship to an emerging artist like Cautious Clay who we are working to develop.

Why at this stage of the growth of the business did acquiring something like AVL and particularly CD Baby seem like the next move for downtown to take?

[When] you look at businesses like that… you look at the people. The people that run AVL, Tracey Maddux who has been there for over 10 years, and the average tenure of the senior management team was like 12 or 14 years.

And then you look at the innovation that the business has brought; you look at the number of artists that they empower to run very successful businesses; then you look at the other segments of the business outside of CD Baby, like AdRev, which I think is the global leader in YouTube rights management, just in terms of the number of assets that they manage. You look at DashGo and what it is doing in the label services space.

“You look at these businesses and you say, If you are going to make a move like this, do you trust these people? And for me it was a very simple question. I’ve been trusting them for five years. We’ve had such an amazing relationship between Songtrust and CD Baby. We thought this would be interesting.”

You look at these businesses and you say, ‘If you are going to make a move like this, do you trust these people?’ And for me it was a very simple question. I’ve been trusting them for five years.

In 2014 we started to have Songtrust offer publishing royalty collection on a white label basis through a new product that CDBaby offered called CD Baby Pro, which was the first of its kind to marry independent releases, distribution and publishing at the same time. It grew into a wildly successful partnership with incredible opt in rates and incredible results.

We’ve been through thick and thin on product development, product launches, marketing, promotion, dealing with collection society issues, payment issues. This wasn’t like, ‘Oh this business is on the market, we should buy it.’ It’s like, a really important business partner of ours has an investor group that is looking to exit and we can find really interesting ways to [collaborate] with them. They’re an amazing business on a standalone basis and together we think we can build something really strong. And that’s really it. It’s not a more complicated story.

AVL will remain as a separate division within the wider Downtown group, but Presumably you will be looking for synergies?

From a technology standpoint, we have as a deep an integration as we could possibly could have between our businesses today. There are obviously some operational areas, they’re pretty well covered across Latin America for example where we do not have any presence with Downtown.

That was really appealing to me, that they have such incredible market expertise and actually real significant market share in places like Brazil and Colombia and increasingly in Mexico – that’s just an area that Downtown hasn’t gotten to yet, so we’re excited to jump on that.

Similarly we’ve been in Japan for a number of years, they’ve not had a meaningful presence there. We’ve been operating in a number of markets in Europe for over five years now. They are just getting their feet wet here.

Some of their businesses have never really expanded outside of the US. I think there’s some amazing opportunities there. But again, time will tell. But we are really happy with the [AVL] business as it is and its growth trajectory and I’m excited to have it as our family of companies.

Although we are all guilty of reporting it as a CD Baby acquisition, those other tools, those other businesses are all adding to the suite of services to self-managed, self-releasing artists…

I think so; I mean I look at what AdRev has done. It’s made an incredible name for itself just within the YouTube platform, but it’s expanding. It’s doing licensing deals with a number other digital services and as video grows in importance and companies who own repertoire actually need that administered in a slightly different way, as CMOs are thinking about outsourcing their work in short-form video, AdRev is well positioned to do that. There’s elements in what we are doing in Downtown Music Publishing and Songtrust in particular where we can see some real crossover there.

Similarly with DashGo, which focuses on the  label services component… I think that there’s significant business development crossover there for us to look at and bring those segments of the business together.

Also from a licensing standpoint, you know AVL businesses have approached different DSPs in different ways and we have approached different DSPs in different ways.

It’s not a secret that the majors have approached [digital services] with one basket of rights of records and publishing together and they bang out [a deal of] what it’s going to be. They say they don’t do that; I’ll leave that.

But [with AVL within Downown] there’s an opportunity to share a lot of information in a really interesting way – all in the spirit of empowering independent artists.

Will the copyright reforms that happened in the US make any difference? will it mean more money getting through to writers?

The most important thing that happened were that the word ‘songwriters’ and ‘music publishing’ were in the press like every day. Lawmakers actually understand now that songwriting is a thing that’s unique from  recording, which is not something I think most people understand as a basic business principal.

The work that NMPA and other groups did was tremendous from an awareness perspective.

The bill itself obviously like all legislation got watered down a little bit. Some of the teeth got pulled out of it, but ultimately as an industry we are in a much better place than [we were] before.

[The Music Modernization Act] will not solve all challenges. The fact that bundled rights are not a part of the new collective is going to be an enormous challenge for any DSP – unless they simply want to do interactive streaming. But I am not currently aware of a DSP that just wants do interactive streaming, without lyrics, without sync, and all the new ideas that are coming which people even haven’t even thought of yet. There is so going to be a significant opportunity in that space and I am excited to see how it pans out.Music Business Worldwide

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