Taylor Swift’s Battle to Own Her Songs - Private Equity in the Entertainment Business
Many MBA students and business school applicants have never heard of the private equity (PE) industry. However, many people are quickly gaining familiarity with this obscure sector, which has an enormous impact on business.
Private equity has implications for a range of businesses, but what about creative industries such as entertainment? Recently, there has been intense scrutiny on the tools, overreach, and applications of PE due to a scandal involving one of the biggest names in show business: singer, songwriter, musician, and dancer Taylor Swift.
But how in the world did one of the most beloved and successful figures in entertainment find herself abruptly wrapped up in a rapidly escalating battle with high finance? And why should the MBA community care, anyway?
At the Billboard Women in Music Awards in December 2019, Swift told her audience during her carefully-scripted Artist of the Decade award acceptance speech (complete video here):
. . .Lately there’s been a new shift that has affected me personally and that I feel is a potentially harmful force in our industry. . .the unregulated world of private equity coming in and buying up our music as if it is real estate. As if it’s an app or a shoe line. This just happened to me without my approval, consultation, or consent.
After I was denied the chance to purchase my music outright, my entire catalog was sold to Scooter Braun’s Ithaca Holdings in a deal that I’m told was funded by the Soros Family, 23 Capital, and the Carlyle Group. Yet to this day none of these investors have ever bothered to contact me or my team directly. To perform their due diligence on their investment. On their investment in me. To ask how I might feel about the new owner of my art. The music I wrote. The videos I created. Photos of me, my handwriting, my album designs. And of course, Scooter never contacted me or my team to discuss it prior to the sale or even when it was announced. . .The fact is that private equity is what enabled this man to think, according to his own social media post, that he could buy me. But I’m obviously not going willingly.
How Record Deals Work
Understanding Swift’s allegations requires knowledge of how record company deals typically work. Typically, record labels operate with business models much like venture capital firms in Silicon Valley. Venture firms provide cash and loans to talented founders in exchange for an ownership stake in their fledgling company.
These are risky investments because only a small proportion of these companies in a venture firm’s portfolio ever achieve success. But the most successful companies that launch this way—Apple, Amazon, Google, and Facebook, among many others—achieve such enormous returns that they easily offset the investments venture capitalists make in the 75 percent of startups that go out of business.
Similarly, record companies make risky investments in new talent early in their careers. Only a small proportion of these acts ever succeed, but some that do are so wildly successful that they exponentially offset the losses suffered by the artists who fail.
However, in most recording contracts, record labels don’t own stock in their artists. Instead, in exchange, the labels typically insist upon all rights to the creative work product produced by these recording artists, with the possible exceptions of sheet music publishing revenue and public performance royalties. Rights to the original studio master recordings are always key assets in these deals.
These were probably the kinds of terms to which Swift agreed when she signed with a small independent Nashville label, Big Machine Records, as an aspiring 15-year-old country singer in 2005. Over the following 14 years, Swift had recorded six albums for Big Machine, five of which had sold over four million copies each. She has sold over 50 million albums worldwide.
However, Big Machine openly disputed several of Swift’s allegations on the label’s website more than five months before Swift’s award speech. CEO Scott Borchetta, who originally signed her and guided her early career, claimed that he walked through the contract extension deal that he had proposed with Swift over the phone. To back up his story, he published online excerpts from documents he asserts were the focus of those negotiations with her. Borchetta also claims that in exchange for a ten-year contract extension package, Big Machine offered to transfer complete ownership of all of Swift’s work back to her.
Apparently Universal Music Group offered Swift a better deal because she walked away from negotiations with Big Machine and instead signed with Universal. At this point, the facts become murky. What’s known is that a music industry insider, Scott Samuel “Scooter” Braun, bought Big Machine in June 2019. Braun’s motivation appears to be to hold Swift’s six-album catalog “hostage.” In other words, without paying exorbitant sums to Braun as “ransom” to buy back the rights to all her work, Swift may have lost most of the rights to her own music following her world tour that played to sold-out stadiums during the summer of 2019.
If Swift refuses to pay the ransom that Braun demands, she can’t get access to her original studio masters. In other words, she can’t remix the songs she wrote and recorded—and she can’t issue any greatest hits compilations on Universal or any other label. But what’s more concerning is that Swift may also lose the right to perform songs from her catalog in public as well.
It’s not entirely clear which legal theories Braun would assert to block Swift from these public performances. Nevertheless, according to Swift, Braun had initially refused to allow Swift to perform a medley of her greatest hits during this segment at the most recent American Music Awards ceremony until one of the PE firms that helped finance the deal intervened upon urging from Swift and her management team. Mark Tavern, a music industry expert and a business administration professor at the City University of New York, explains that several legal strategies could buttress Braun’s challenges.
Braun may not have had enough of his own money to pay a reported $300 million for the label, no doubt mostly based on a valuation of the assets created by Swift. Consequently, he used OPM: “other people’s money.” But few sources of capital have the financial resources to commit the roughly third-of-a-billion dollars required for a mega-deal like this one. Braun needed sources of capital with extraordinarily deep pockets, which is one of the reasons he turned to private equity firms to finance the deal.
What is a Private Equity Firm?
A private equity firm directly invests in operating companies. Technically, a venture capital firm is one type of a private equity firm, although venture firms that invest in new tech startups pursue very different investment strategies from the organizations that refer to themselves as private equity firms.
In essence, private equity firms buy poorly performing companies with great potential. PE firms then “refurbish” them through a variety of techniques that might include refocusing their strategy and replacing their executive team, as well as injecting capital. The private equity firms then sell the revitalized companies to larger conglomerates in merger or acquisition deals through which the PE firm harvests windfall profits. The entertaining two-minute video in this Investopedia article provides a hypothetical case study of a revitalized toy manufacturer that outlines the theory of how private equity firms make their money.
Private Equity’s Deep Pockets
The most successful of these firms have enormous cash reserves that they seek to invest. Why is that? Again, according to Investopedia:
Since the basis of private equity investment is a direct investment into a firm, often to gain a significant level of influence over the firm’s operations, quite a large capital outlay is required, which is why larger funds with deep pockets dominate the industry.
Braun appears to have enlisted three such “deep pocket” PE firms as sources of financing to buy Big Machine in order to win the rights to the extremely valuable Taylor Swift catalog.
One of these firms is the Carlyle Group—the Washington, D.C. conglomerate well-known for its close ties to the family of President George W. Bush. The size and financial power of Carlyle are truly staggering.
According to a 2018 Form 10-Q filed with the U.S. Securities and Exchange Commission, Carlyle is a $13 billion company, with $201 billion worth of assets controlled under the firm’s management, or AUM. To put that AUM value in perspective, that’s an amount greater than the gross domestic product of 158 nations—all but the world’s top-producing 53 economies.
A second such firm is controlled by the family of U.S. Democratic Party benefactor Dr. George Soros, which had a net worth of $8 billion in 2018. And a third is 23 Capital, a relatively young London-based PE firm which controls the trendy online publication Vice, and claims on its LinkedIn profile to have “advised and funded more than $2.7 billion in direct capital since our inception in 2014.”
“I’m Obviously Not Going Willingly”
No doubt, these three PE firms are looking forward to a windfall return on their capital investment, believing that Swift will have no option but to eventually agree to Braun’s likely outrageous terms. After all, one of the organizations Braun controls calls itself 100 Thieves.
But that might not necessarily happen. For one thing, Braun might be having second thoughts about the deal following “numerous death threats” linked to the controversy that targeted his family in late November 2019.
For another, Swift might decide to re-record her catalog instead, a step with clear precedents. The act that taught the Beatles how to sing in close harmony, the Everly Brothers, re-recorded their first mono recordings in stereo during the early 1960s. Ever since, recording contracts have typically contained clauses stipulating waiting periods during which acts cannot re-record their songs, since the new versions provide competition that could destroy the label’s catalog sales.
But more recently, the artist known as Prince re-recorded early songs after his initial contract’s waiting period had expired. Swift claims that the waiting period for her first album runs out in November 2020, and she has announced that she plans re-recording projects in addition to her commitments for Universal.
Does Private Equity Pose a Threat to the Entertainment Industry?
A number of specific allegations that Swift asserts appear to either be in dispute or don’t square with inferences drawn from facts known about the controversy so far. For example, at the time of this writing in late May 2020, evidence hasn’t surfaced that the private equity firms that provided financing to Braun’s company Ithaca Holdings ever attempted to buy Swift’s catalog or Big Machine directly, as she contends.
Nevertheless, a clear precedent exists where a private equity firm did buy a record label outright—and ended up destroying that label in the process. That occurred when in 2007, Terra Firma Capital Partners bought Britain’s recording conglomerate EMI, which owned Parlophone Records in the United Kingdom and Capitol Records in the United States, the Beatles’ first two labels. EMI’s buyout and breakup prompted the departures of talent like Paul McCartney, the Rolling Stones, and Radiohead before Universal Music Group bought what remained of the company in 2012.
Swift is clearly alluding to the EMI disaster in her speech. EMI’s breakup shows the destructive consequences that can result when PE firms involve themselves in industries they don’t understand, like entertainment, that have unique intangible assets that are difficult to value on a balance sheet’s “Goodwill” account. She is also correct to assert that in the United States, private equity largely exists as an unregulated industry to which the entertainment business remains vulnerable.
And Swift raises an insightful point that Scooter Braun could most likely never have gained control of her catalog without the private equity industry because few other financing alternatives offer such vast sources of investment capital.
Effects of Taylor Swift’s Private Equity Battle on MBAs and Business Schools
The silver lining in this controversy is that—because of Swift’s focusing intense scrutiny on the private equity industry—plenty of MBA applicants, students, and graduates are suddenly learning along with the public about this secretive, low-profile sector. That’s beneficial because plenty of the best-qualified MBAs who might have overlooked this industry will now consider careers with the 4,000 firms in this well-paying field and the robust ecosystem that supports it.
This is an industry that offers terrific opportunities to outstanding MBA graduates. However, a caveat is that these days, many MBAs—especially younger graduates who are Millennials—want to feel like they’re making a significant impact on the world through their careers. Jeffrey Hooke, a Wharton MBA, a professor at the Johns Hopkins Carey Business School, and an author of several textbooks on securities and investments, implies that PE may not be the best sector for those MBAs.
It may be true that some of the biggest turnaround successes in American business—brands like Hilton Hotels, Safeway, and Dell Computer—survived thanks to emergency restructuring by private equity firms. However, Hooke points out in this speech at Google’s headquarters that much of the value creation ascribed to private equity firms overall turns out to be a myth unsupported by the evidence.
Before interviewing with private equity firms like those “called out” by Taylor Swift, MBAs who want to work in a sector that affords meaning and impact besides great pay owe it to themselves to study Professor Hooke’s remarks carefully.