How Wall Street Money Is Changing the Music Industry

On Billboard's new podcast, On the Record, investor Matt Pincus discusses the 'financialization' of music, major label changes, AI and whether the biz is really recession-proof.

The music business is changing — and fast. Between the three major music companies — Sony, Universal and Warner — restructuring their recorded music divisions, the rise of generative AI tools in the recording studio, the growth of streaming service subscriptions slowing down, the difficulty of turning TikTok virality into true fans, it’s common to hear music business workers question where the industry is going next. And with an overall shaky economy and job market, the future feels even more uncertain.

For this week’s episode of Billboard’s new music business podcast On the Record w/ Kristin Robinson, prominent music industry investor and entrepreneur Matt Pincus comes on the show to explain how the music biz has transformed, where he sees it going next, and how it increasingly relates to the overall economy.

Pincus is perhaps best known as the founder of independent publisher SONGS, which quickly grew into a formidable player in music publishing, signing acts like The Weeknd, Lorde, Pharrell, Diplo and more during its run from 2006 to 2017. After Pincus sold the company to Kobalt for a reported $150 million, he decided to refocus his energy on helping other investors build up music empires of their own through his investment company, MUSIC. To date, he’s deployed $180 million in capital across businesses like Splice, HIFI, LVRN, Kobalt, Dice and Soundtrack Your Brand.

Below is an excerpt of our conversation on this week’s episode of On the Record, focusing on one area of change that Pincus has been watching especially closely: the financialization of the music business.

Watch or listen to the full episode of On the Record on YouTube, Spotify or Apple Podcasts here, or watch it below.

I think the investors’ perspective is really helpful right now. It feels like we are on the precipice of a lot of change in this industry across many sectors. I’ve been trying to understand why, and one of the things I know you’ve mentioned to me before is how the increasing financialization of the music business is really having an impact. Can you explain what you mean by that?

This has been a big change, starting maybe 10 years ago, but really five years ago. When I was younger, the music business had two kinds of investors: the major labels, and then private money — usually wealthy entrepreneurs who would put money behind private businesses. Every now and then, you’d get a stray pension fund. That was looking for returns for their insurance company to wander into the business, usually to a great disaster, but it was pretty much a self-contained business.

Is this because others did not feel the music industry was a good investment?

It used to be a lot less transparent than it is now, so it was more of a relationship business. You had to understand how to get paid. I think financial people thought that was too risky. But also, [music] was a cash till for larger media companies. It was a guilty pleasure for movie studios that had a little unit that churned a bunch of cash flow that they could use to lubricate their businesses, but it wasn’t really big enough to be a global business, so it didn’t attract financial markets.

So when did you first see financial players get interested in music?

They started wandering into it in the early 2000s. That was the first time I started to see it. Hedge funds in the early 2000s had these things called “side pockets” — this little pocket of private investment capital that they started putting into increasingly exotic things. It started with them investing in music royalties…because they split off predictable cash flows.

Interest rates went way down, so that meant that it was harder to earn yield-type of returns. So they started buying increasingly exotic things. Lo and behold, music acts like a weird kind of bond when you look at an old catalog. That’s where it started.

Then on the equity side, people increasingly started to invest in growth companies on the technology side after Spotify, because Spotify was such a massive success. Before that, there weren’t really venture investments in the music business of any renown.

Like, there’s a company called Echo Nest that had a successful exit — it sold to Spotify, but really, how many successful venture-backed businesses have been in the music business? You can count them on one hand. But the way that the equity markets were so loaded with risk over the past 10 years or so, people started getting increasingly interested in the music business and what could be done. So you ended up with this financialization, first starting with the copyright business.

How has the financialization of the copyright business changed it over time?

Historically, if you wanted to buy a catalog of music copyrights, and you weren’t like a music publisher, you would have to put up 50% of money, you go to the bank and borrow the other 50% of the money. And it was a pretty simple structure to buy a catalog. Now, it’s evolved into a world where it’s like a mortgage market — you have your equity, which is sometimes only 10% of the overall money being used to buy something, then you have a mezzanine piece of debt that’s paying a higher interest rate, and you have a bank loan. Then, when they get it up to a certain level, they sell the debt off to the public in a thing called an ‘asset backed securitization’ (ABS). It’s become this complicated wizardry of capital structure over the past little while, which has a lot of implications.

Like what?

Recently Robert Kyncl [CEO of WMG] just did an interview where he was talking about whether the internet was good or bad for music. One way you could say it’s good for music is that the value of music copyrights has exploded. That’s partially true. I agree with him, but there’s also another factor — the financialization of music. The way that people are structuring these deals allows them to pay more, but now the industry has changed. It used to be a self-contained world, but now Blackstone, PIMCO, BlackRock, KKR, all these big financial institutions, have exposure to it. This correlates the music business more with how the broader economy behaves than it used to.

Meanwhile, there’s been consolidation of the majors. When I started, there were five majors. Now there are three. Plus now, [as of the last five years], two of the three majors have become public, pure-play music companies. And what that means is that anything that happens in music gets tattooed on the stock price of two companies the next day. So people start watching the implications of things that happen on the music business and activist investors get interested in the stock… you start enmeshing the music business with the broader economy in a bunch of ways it didn’t use to be.

I’ve heard it said before that the music industry is recession-proof or recession- resistant Given what you’ve been saying about the increasing financialization of the music business, do you think that is actually true?

I totally agree that it used to be uncorrelated to inversely correlated [with the overall economy.] Music is a small consumer purchase. So when the economy goes down, people may not go on vacation, but they’ll still buy records or concert tickets. I think that’s definitely true.

If you look back to the late 80s, the stock market tanked in ‘87 but a lot of the great music stuff happened around that time. [Music] was like a local economy where it only dealt with itself, but now, [music] is connected to global markets.

It feels a little bit like gentrification. Like, one day you know everybody in your local neighborhood, and then, all of a sudden, somebody comes in and starts buying up all the buildings in your neighborhood. Some people get really rich from it. Some people have a hard time finding a place to live as a result. And at one point you’re like, ‘wait a minute, I can’t find a place to live, and where did all the cool people go?’ The music business is a little bit like that. They just never got around to us. Because the financial markets are able to analyze things better than they used to, find transparency in areas that used to be opaque and look for returns anywhere and everywhere they can around the world, they got around to us.

Is this a good thing or a bad thing, in your view?

In some cases, that’s meant really great things. I mean, I would not be doing what I’m doing 10 years ago. Nobody would have given me $200 million bucks and said, ‘go invest in music companies’ 10 years ago, and the trend that Hipgnosis started by raising catalog values has made a lot of musicians very rich. More musicians making more money is a great thing, but it’s also sometimes complicated