Seems like every six months or so I have friends  forward me an article or interview with a manager or agent extolling the virtues of streaming (and sometimes even piracy.)  Usually this comes with some note that reads something like this “Agent/Manager  X thinks streaming/piracy is a good thing, Why don’t you?”  I am always  perplexed by this.   Of course some managers and agents love streaming and piracy! Less revenue from recorded music means their artists must play more and more live shows to make up the difference.  I thought everyone knew this.

You see managers and agents make virtually all their money from an artist’s live performance not from the artist’s recorded music.    However screwed up it might seem from an artist’s perspective it makes perfect financial sense (at least in the short term) for managers and agents to turn a blind eye to piracy and low payouts for streaming. Precisely because  it seems to result in more touring.  You can’t really blame them for this can you?

I teach a class on the finance and economics of the music business at the  University of Georgia.  I usually spend at least one lecture on the differing financial incentives for artists, managers and agents, and in particular how managers and agents are often incentivized to work against the artists long term interest.  Let me try to summarize that lecture here.  Especially how it relates to streaming and piracy.

First , have artists resorted to playing more shows to make up for declining revenues from their recordings?   In my case? Yes, absolutely. So have virtually all my friends.   There are plenty of  anecdotal stories of artists touring into their old age because recorded music royalties have dropped off.  Levon Helm of The Band is one tragic case and here’s Robert Hunter from The Grateful Dead spelling it out clearly.    But you don’t have to rely on anecdotal data as it is clearly reflected in the records kept by companies like Pollstar.  It depends on how you interpret the data but even the most conservative reading suggests there has been a 200%  rise in the number of shows since the advent of Napster.  Now this would all be great news except that average attendance has fallen and any gains in revenue appear to have gone to the top 1% of acts.

So why is this good news for managers and agents but not artists?   You have to consider the order in which people are compensated.   Managers and agents are paid first and off the top before expenses.  Artists are paid last and after expenses. Let me explain.

Agents.

An agent’s only source of revenue is commissions on live performance.  So if artists play more shows this is generally good for agents.  But dig a little deeper. Specifically agents usually receive 10% of gross.   Not net, but gross.  You get what that means, right?  Whether the artist makes a profit or loss on the show the agents commission comes off the top.  The agent always gets paid.

Example: a baby band gets a $500 club show but it costs them $465 dollars, in hotels, gas, rental vehicle, meals etc.   The agent still get’s his/her 50 bucks.   Off the top. Before expenses.  So the band would actually lose $15 dollars on that show.

A more subtle example is to examine what happens when a  band that normally plays 75 shows a year  suddenly starts playing 150 shows a year to make up for lost recording revenue. My wife is a concert promoter and books hundreds of shows every  year.  We see this situation all the time.  We are very familiar with what happens.    In order to accomplish this an artist may needs to play smaller rooms;  go into smaller markets and overplay and hence saturate some major markets.  The artists annual gross for live shows will not double as the result of playing twice as many shows. If the band is lucky they will see a rise in revenue of around 50%.   But unfortunately for the band, expenses may come close to doubling! As a result the artist usually only sees a small increase in their income since they get paid after expenses.  In some cases I’ve seen artists actually earn less by doing more shows!  I think this was the case for my band  in 2007! Regardless the 50% rise in gross revenues never turns into 50% rise in income to the artist.  But the agent DOES see a 50% increase in income.   As a result the agent has a much bigger financial incentive to see an artist play more shows even if the artists doesn’t see a substantial increase in income.

Managers.

Unlike agents, a manager typically does make money from recorded music revenue.  So you would think a manager might be more concerned about piracy and low payouts from streaming services.   But as it turns out managers make such a small percentage from recorded music revenues when compared to live revenues their financial incentives are no different than agents.   Also it turns out that certain managers are investors in Spotify. Again let me lay it out for you.

Like agents, managers are paid a gross percentage on their artists live revenues.  Typically a manager will get between 15%-20% of gross from concerts.  But it is customary that a manager take their cut of all other income after all expenses have been deducted,  i.e. they get paid when the artist (finally) gets paid.

So for instance if a band receives a recording advance of $70,000 and the band spends $50,000 recording the album, the manager only gets 20% of $20,000 not $70,000!

Similarly an artist is typically compensated for recorded music with an “Artist Royalty” of 10-20% of the wholesale price of a download, “stream”  or CD.  So a manager’s 15-20% of that means a manager only  nets 1.5%-4% of recorded music revenue.  And these royalties are only payable  after the artist has recouped it’s recording and promotion costs.  So in practice a manager receives very little money from these sources.

Finally a time-tested way for a manager to generate additional revenue is to get the label to pay for “tour support” and send the artist out on an otherwise unprofitable tour.  Stick with me  on this one cause this is brilliant scam.

Let’s say band X is planning a  tour and they have gross guarantees of $50,000 dollars but they have $60,000 in expenses.   The band would normally cancel this tour and the manager would get nothing.  Instead the manager requests 10k in tour support from the record label.   The record label hoping to generate sales agrees. The band then goes out on a break even tour but the manager still  pockets 20% of $50,000 which is $10,000.   Now where does that $10,000 in tour support really come from?  Does it really come from the label?  No.   It’s almost always configured as an advance against the artist’s royalties.   So in effect the manager has traded  20% cut of $10,000 in future artist royalties for 20% cut of $50,000 in live revenues.   The manager turned $2,000 potential commission into $10,000 actual bird-in-the-hand commission.

There are a zillion of these clever tricks that managers have dreamed up over the years, but that’s not really the point of this post.  The point is that managers and agents don’t really make anything off of recorded music revenues at least when you compare it to the amount they make off of live concerts.  Managers and agents have never really cared about revenue from recorded music and they have even less incentive to care about it now that streaming has obliterated what little revenue there was.

So managers and agents are free to say whatever they want about streaming and piracy.  But just remember  what’s good for managers and agents is not necessarily what is good for artists.  Keep that in mind next time you see an agent or manager extoll the “virtues” of streaming or piracy.   Heck some managers even own pieces of these low paying streaming services or worse unlicensed services that pay nothing to artists. No wonder they love  streaming and piracy.