11 Nov Taylor Swift & Art Finance Experiments
What is a song worth? Who creates the value: the songwriter, the singer, or the “star-maker machinery behind the popular song”? Perhaps all three, but how to divvy up the spoils equitably?
Taylor Swift’s decision to withdraw from Spotify has become a flashpoint for such questions. In her Yahoo interview last week, Swift is quoted as saying “… everything new, like Spotify, all feels to me a bit like a grand experiment. And I’m not willing to contribute my life’s work to an experiment that I don’t feel fairly compensates the writers, producers, artists, and creators of this music.”
The question of fair compensation to creatives is not new, but some new tools have become available to talk about it. Not surprisingly (since this is an R&R blog,) securitization is one of them. Rather than launching into a factual defense of securitization or explain here how it was sabotaged, this short blog presents a succinct case for using securitization in arts finance by attacking the standard interpretation of the balance sheet.
The balance sheet is a brilliant construct that simultaneously displays the resources of the world (assets) and the claims on it (liabilities and equity). However, the narrow scope of interpretation imposed on it is, arguably, ruinous. That is because the only people who really look at balance sheets are financiers and accountants; and, in the for profit world, the rules on constructing balance sheets prohibit the listing of most intangibles. There is no place on the asset side of Apple Inc. for the colors and sleek design that draw customers into an Apple store en masse, nor that of Dream Fluff Donuts (Berkeley) for the tantalizing first bite of their glazed buttermilk bar, nor that of MCG Jazz for the music, history and sense of belonging it has given jazz artists in America for the past 35 years.
No place, except a hint of the value in the time series of their receivables (which is disallowed in standard accounting). How much are people willing to pay for a good or service, and how stable is the demand? As an artist, you don’t have to produce Taylor Swift-like rates of return to earn out a stable revenue stream. You just have to develop a stable following. The information on payment stability translates into a measure of the professionalism of the artist and the loyalty of her or his client base.
Twenty-five years ago, securitization was invented to bridge a disconnect between valuing assets and valuing liabilities. The intangible value of the assets was quantifiable, but only when the receivables were analyzed using private data that are not part of the accounting disclosure package. A firm that was a BB to the financial world and so paid more to borrow money, might actually have AA asset quality and in principle could borrow funds more cheaply using an expanded information set.
The source of the disconnect is an incomplete information set that is biased in favor of lenders at the expense of creatives. In the music world, the same bias exists. It favors the studio, which takes the equity value created by musicians and gives them a salary in return. Unquestionably, studios deserve some of that equity for helping musicians commercialize their art. But the question is, where to draw the line between a fair rate of return and expropriation?
Securitization techniques go a long way to quantify intangible value. Using it to build incentives for creatives to create and giving them a path to build their business on and share equitably in the value they create may be an experiment worth investing in.