memo 26: big bank take lil' bank

Memo

February 2, 2021

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Hey! Happy Black History Month to you and yours.

What a wild, wild week in the stock market though. I have no shares in GameStop or AMC, but I'll say this: I bet 50 Cent had a come up in all of this. That dude always finesses something in moments like this, especially if Ja Rule is speaking out on it!

‍Before we dive into this week's memo, make sure you check the latest Trapital pod episode. I posted the audio and video recording of Def Jam's Past Present and Future with Gary Suarez. You can check it out on Apple Podcast, Spotify, watch the video on YouTube, or wherever else you listen to podcasts.

This week's Trapital memo covers two topics: Sony Music's acquisition of indie distributor AWAL, and Lil' Baby's rise.

Why major labels acquire indie music distributors

Today, Sony Music acquired Kobalt's indie distributor AWAL and its rights business for $430 million. It continues a trend of major labels acquiring the companies built to disrupt them.

‍The indie evolution. This acquisition is ironic since AWAL literally stands for Artists Without A Label! It started as an alternative to distribute music without signing to major labels and giving up any masters. AWAL, like Human Re-Sources and The Orchard, brought their indie businesses under the Sony Music Group umbrella. But given the recent industry trends, this acquisition is not ironic at all. There are a few reasons this continues to happen:

The barbell effect. This barbell effect has roots in media, but it applies to music too. One side of the barbell is for the major record labels. They have the power, money, and global distribution to maximize artist potential. The other side of the barbell is for the small and targeted players. Thanks to the internet, small players can run a low-cost operation, stay competitive, and continue as long as they're profitable. But the companies in the middle of the barbell, like many indie music distributors, are likely to struggle.They want to offer artists the services of a major record label with the cost structure of a DIY distribution service like TuneCore. As a result, the indies often make a choice: Do we stay nimble and potentially hold our artists back? Or team up with the Big 3 to benefit from their global reach and marketing budgets?This topic is top of mind because I just interviewed J. Erving for the Trapital Podcast. His indie distributor Human Re-Sources was acquired by Sony in December, so we talked all about this. Look out for this episode later this week!
Major record labels want to compete. Even though some indie distributors get caught between barbells, they're still valuable. They take on the initial risk and benefit when the bet pays off. If record labels only sign artists after they built up clout on an indie or non-label service, there's less upside.But when labels acquire distributors, the labels can tap into the artist development that many indie distributors have, and become the go-to spot if artists are ready to level up. No major label wants to miss out on that. This is why Republic Records—which currently has the top four albums on the Billboard 200!— is the first partner for DistroKid's news matchmaking service to help indie artists get seen by the majors.It's a version of this long-tail distribution map I drew in Why Roc Nation Needed to Restructure. It applies to most major record labels today. They all have their big-time artists and the labels that serve them, they also have joint ventures and other deals that serve rising artists, and the growing long-tail for indie distribution services:

The long-tail business model. This trend is not unique to music. The internet made it possible for more long-tail businesses to succeed. They often start with the goal to serve individuals and highlight them as success stories. But very few of its users ever replicate those success stories. Over time, it gets expensive to serve clients that don't drive enough money for the business. The Pareto principle kicks in—most of the revenue comes from a fraction of clients.For most long-tailed businesses, the most reliable money comes from the most established clients. But often, the most established clients either a) are companies that the long tail business initially set out to disrupt, or b) need resources that are only available at companies that the long-tail business set out to disrupt. It's the safest bet to increase customer lifetime value, decrease customer acquisition cost, and meet investor expectations.We've seen this happen with YouTube, WeWork, digital media, and countless music distributors. I've referenced this point often lately in Trapital, but it's worth repeating.

Read more about Sony Music's acquisition in Billboard.

Lil' Baby's rise to stardom

The 26-year-old rapper is living life right now. He signs new artists to his 4PF label. He charges $100K for a feature, earns $400K per concert, and gets $300K birthday gifts from James Harden. He had one of the strongest 2020s.

‍Quality Control extends its run. It's been four years since Migos dropped Culture, Donald Glover shouted the group out at the Golden Globes, "Bad And Boujee" was #1, and QC rose with the iconic group.

Four years later, the Migos have cooled off, while QC is still riding high with Lil' Baby and the City Girls not too far behind. Some of its due to the work Coach K and Pee put in. Some of it's luck. But that's the formula for success. In the Def Jam webinar I co-hosted, I said that I thought QC was the strongest pure hip-hop label right now. QC has still had its challenges, but it comes with the territory.

‍Is Lil' Baby a superstar? The term gets thrown around so loosely, but let's talk about it. Last year, I tweeted about the boxes that an artist has to check to be a true superstar:

sell 250,000+ albums first-week
get top coverage on major outlets
headline an arena/stadium tour
headline major festival / event (e.g. Coachella, Bonnaroo)
be known by your parents (and others who don't follow pop culture):

Lil Baby's latest album My Turn sold 197,000 its first week, but if he dropped an album next Friday, I bet it would top 250K+. Still, it was technically the top-selling album of 2020 according to MRC, but MRC's report favors artists who drop in the beginning of 2020 since it measures sales from the full calendar year. My Turn came out in February 2020, months before Taylor Swift, Pop Smoke, and others. It's misleading to say "Lil' Baby outsold Taylor Swift" as many sites have. But it's still an impressive stat.
He gets all the top media coverage on major outlets, so that box is checked.
Could he headline a US nationwide arena tour by himself? No. But with another artist? Yes. I wouldn't be surprised if Drake and Lil' Baby do a joint tour as Drake did with Future in 2016 and Migos in 2018. Drake loves to bring the hottest act of the moment on stage with him, but Drake still gets to be the primary act. Then we'll have to hear Charlamagne Tha God try to claim that Drake needs Lil' Baby to sell concert tickets!
Would Lil' Baby headline Coachella? Not right now. He would be on that second or third line of that lineup poster though. But he could in the future if his star continues to rise.
The "Mom test" is a baseline gauge for an artist's popularity. They have to be famous famous for your parents to know who they are. Personally, my Mom has no idea who Lil' Baby is, and I'm sure she's not the only one.

He's not there yet. That could change by this time in 2022 though. Not too long ago, Travis Scott was in this same spot that Lil' Baby is in right now. Things change fast.

Coming soon

Podcast - J. Erving, founder of Human Re-Sources, EVP Creative Development for Sony Music, and EVP at The Orchard (the Sony subsidiary where Human Re-Sources now sits). Drops later this week!