If you have studied personal finance, you will know what the diversification rule is. For those who do not know this rule, the diversification rule simply states that the more you spread out your investment portfolio, the less risk you assume. It is the old saying of “don’t put all your eggs in one basket” that this rule adheres to. For example, if one were to invest money only in the commodity of copper, that persons investment portfolio solely relies on the performance of copper in the market. However, if that same person invests in both copper and steel, then that persons portfolio would be the average of both the copper and steel markets. And what are the chances that the prices of both copper and steel would decrease at the same time? Lower than relying on just the price of copper. Knowing this then, how does this principle relate to music?
In the same way an investor reduces risk by the rule of diversification, a musician can do the same. For example, if a musicians’ income only comes from ticket sales, then that musicians’ livelihood is solely based on ticket sales. If something were to happen causing ticket sales to plummet or even worse, be non-existent, then the musicians’ income would follow suit. Now that’s a risk I would not want to take! Instead, musicians should diversify their avenues of income in order to reduce risk and potentially increase income so that they can continue to do what they do best: create beautiful music. Have I got your attention now? Yes? Good, let us continue.
At the writing of this post, there are many opportunities for artists who want to earn a living creating music. Online opportunities such as physical and digital music sales, shows/concerts, merchandise, music streaming, ad revenue, and many more. Yes, many of these avenues have been tested and their overall payback to artists is quite minimal. For example, Spotify, a music streaming service, states that “we pay out nearly 70% of our total revenue to rights holders. We retain approximately 30%.” Now by “rights holders” they mean “labels, publishers, distributors, and, through certain digital distributors, independent artists themselves.” This 70% is split among the various parties and of course, the artist is left until last and most often than not, receives little, if any, income. Just Google “Spotify Payouts” for verification and to learn more on the subject.
Now let us take a look at the more classic example of playing shows or concerts. In most cases, an artist and a venue owner come to an agreement on what is to be expected from each other. The artist might ask the venue owner for most of the ticket sales, a flat fee, and a free beer for each band member while the venue owner might ask the artist to bring in x number of people, a flat fee, and play for x amount of time. Once the agreement is set and then completed, the artist will get some sort of income. This income then needs to be split among artist contributors like band members and the aforementioned list in the previous paragraph. Assuming that the artists has a few people to pay money to, they are yet again, left with little, if any, income from the event. Now where does this diversification rule come to save the day? Soon, my Padawan.
The two examples above represent some of the many avenues of income that musicians and artists can take advantage of. However, by themselves the payout is very low and is hardly a viable living income. Musician try to solve this problem by performing at more venues, putting on more shows, increase ticket prices, create more music, asking more money upfront, and even play for exposure, which for this post, is synonymous with free. Therefore, musicians and artists work harder and still get the same results. Is there a better way? Yes there is! Now let me explain.
By taking the diversification rule out of finance and into the music industry, musicians and artists can reap the benefits of a decrease in risk and a potential increase in income. To follow the diversification rule, musicians must acquire many different assets, in many different mediums, and take advantage of every physical and digital opportunity that could result in income. To start, an asset is something that can make you money. In the case of a musician, a song can make you money. In terms of different mediums, that one song can be sold either physically or digitally, can be performed live at shows/concerts and earn performance royalties, played on radio, and streamed on services like Spotify and earn more performance royalties, it can be transcribed and sold as sheet music, and can even act as a teaser for an upcoming EP, album, or tour. Ultimately, the trick is to maximize the number of assets you have, maximize each assets potential, and maximize the number of opportunities for potential income.
What are your thoughts on this post? Is the diversification rule worth attempting or is it just no better than a theory? I want to know your opinions on my post. I will create a second part to this post that will bring in real world examples to back up my theory.