Friday, June 14, 2013

The Self-Employed Musician vs. the Music Entrepreneur: How to Diversify your Music Portfolio or Profit from the Artistic Talents of Others

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Introduction

In a recent L.A. Times article entitled “Demand for ad jingles turns L.A. songwriters into music factories,” I found some rather interesting insights that I want to share with you. I thought you might benefit from some of the opinions and ideas I discovered in the article and want to bring them to your attention. Ironically, this is an article written and addressed to two sets of musicians (a) those who are and want to remain employees and freelance artists, and (b) those of us who want to create more income with much lower tax liabilities in order to achieve financial freedom.

In my previous article “The Cash Flow Quadrant - What Is It? And What Should It Mean to Musicians and other Artists,” I talked about Robert Kiyosaki’s description of the ‘S’, self-employed person, and how most musicians fit into this category. I also discussed the similarities between the ‘E’, or employee, and ‘S’ quadrants as well as the differences the left and right sides of the quadrant. In general, the ‘E’ wants security, whereas the self-employed person wants to do things their own way, unfortunately both get taxed at the highest levels. These 3 factors combined – the desire for security, doing things their own way and paying high taxes – damages the E’s and S’s ability to build wealth fast and efficiently. In contrast, B’s and I’s (business owners and investors) seek freedom their approach towards work is to use other people’s time and energy and other people’s money to work for them. These 2 factors working together and the motivation of freedom is what accelerates the B’s and I’s accumulation of wealth exponentially higher. In seeking freedom, they liberate themselves from the need to work and the need for money.

To begin this discussion I want to provide a brief profile of a resident musician and the company he works for – Mophonics. The reason I want to profile both the artist and the company is to identify the unique characteristics of each as presented in the article to show the difference in perspective between them. Primarily, the benefit to the artist in this sort of arrangement is in being able to earn a living from a peripheral activity related to music and hone their professional skills. While the primary benefit to the company is in generating passive income from the talents, time, and effort of others, along with enormous tax advantages.


A Profile of a Freelance Composer

In the L.A. Times article we follow Casey Gibson whose 25 and plays keyboards for the band Filligar. The band recently opened for Counting Crows, has finished a new album, and has recently signed with Red Light Management and the Windish Agency, two of rock music's top management and booking agencies. When Filligar goes on tour Gibson brings a mobile recording setup with him so he can write and submit new material for commercials from the road.

Gibson works for the commercial composition company Mophonics, where he started as an intern and is now called an "artist in residence." It's a small music factory in Venice housing four studios stocked with instruments and recording gear. Mophonics’ executive producer Michael Frick and creative director Stephan Altman started the company in 2002. They soon saw that commercial licensing was crowded with labels and bands looking to make some money. So, rather than pitching existing material, they decided Mophonics would offer tailor-made original compositions at a fast pace.

The self-employed musician, like most other self-employed people, is a business system where in order to continue being successful means increasing one’s amount of work. If the idea of filling one’s waking hours with work is a desirable condition then the self-employment approach is right for you, but what if you want something else. What other paths are available to musicians?

A Peak into Mophonics’ Financials

To answer that question, there are 2 basic solutions. One approach would be just to become legally savvy about the laws that protect the artist from copyright infringement and the laws that guarantee the right of the artist to get paid for the use of their works through royalties. The other approach is to establish a business built around hiring other musicians to work for you, where they produce assets that you own – per contract - and can profit from. If you think that this second approach can be your vehicle to your financial goals then let’s look at some of the incentives that await you should you follow through with a clear-cut business plan to get there.

Mophonics employs four composers in-house and at least 20 freelancers working from home studios. The company is responsible for scoring hundreds of television and Web ads by major companies such as Apple, Mitsubishi and Bacardi. The company makes as much as $180,000 for single songs. Those that receive repeat licensing, much as a hit song would, return more than $500,000.

Creative assignments vary drastically, Frick said, but usually include a video clip of the commercial and a text brief, broadly describing the client's wishes. One recent brief sent to Gibson which said, "Think Williamsburg indie rock. Start simple, build organically. Look for nice scoring moments that you can accentuate and take advantage of within the track." Though exceptions come through, most direction is typically the same. The emails he receives are comically generic, he says.

A standard commercial composition can pay handsomely if it's selected for a big campaign. A job for the insurance company Progressive had Gibson writing nearly 100 tracks over six months, but it earned him a five-figure paycheck. Part of the trap the self-employed musician experiences is that the more success they achieve the more work they have to do. This means they do more of what they love (music), but they don’t really have time for anything else. Moreover, the money which is earned as a self-employed musician acts as a drug creating a temporary euphoria diminishing one’s drive to achieve financial freedom. One of Mophonics freelancer’s says it best about writing music for commercials. Last year, when he landed four commercials in a row he said he "was living like the king of Silver Lake for a little bit."

Now let’s take notice of the financials as described in the article so far. Remember, the company makes as much as $180,000 for single songs, but the ones that receive repeat licensing can return more than $500,000. In contrast, the artist or a resident musician like Casey Gibson gets a five-figure paycheck for 100 tracks over a six month period, but only if the campaign is successful.

Since we don’t know the exact figure Casey Gibson was paid, let’s assume he was paid somewhere between $200 – 999 per track. I got these numbers by guessing what his five-figure paycheck might have been. On the low end, I guessed that it might have been $20,000, and on the high end, I assumed the highest five-figure number $99,999. Now if you divide both numbers by 100, which was the number of tracks he composed over that 6-month period of time, we get two numbers $200 and $999.

Now let’s compare and contrast the difference in income between the artist pay and the revenue the company made on the musician. Remember the company can make as much as $180,000 per song, but if that song is repeatedly licensed that figure can grow to $500,000 (per song).

So the financials for Mophonics can look something like this:

$180,000 – 999 (paid to Casey Gibson) = $179,001 per song as revenue to Mophonics.

But if the song is repeatedly licensed we get this result.

$500,000 – 999 (paid to Casey Gibson) = $499,001 per song as revenue to Mophonics.

Now just imagine how these numbers multiply when we consider that Mophonics employs four in-house composers and at least 20 freelancers working from home studios. As a business, the financials definitely favor the owners, but when we consider that the tax advantages merely augment actual revenues, then passive income for Mophonics are conservatively $5 million per year.

I suppose as long as everybody is happy in this arrangement then it’s an ideal situation for all musicians looking for a reliable source of income and flexible hours. However, as brief a look as we’ve taken at Mophonics financials shows us how much the company benefits from the artist’s talents, while at the same time the owners maximize profits without needing to work. Isn’t it amazing how much money can be made when you focus less on a personal passion for music, fame, and fortune and instead develop good business skills and hire talented people to work for you. This was what I wanted to illustrate to you in this article, which was that in a free market economy the laws are written to benefit those who do 2 things: provide financing (investors) and create jobs (business owners). Consider becoming one or the other, or both, and watch yourself prosper because of it.

Conclusion

In the Mophonics office lobby there is a platinum record hanging on a wall for the Foster the People song "Pumped Up Kicks." The band's leader, Mark Foster, wrote and recorded that song in a single afternoon — while on the job at Mophonics as an in-house composer. The song became a huge hit, and Foster's band became one of 2011's bestselling rock artists and landed a deal with Columbia Records. Mophonics' Altman says he's happy to have cultivated Foster's songwriting abilities. "We saw this raw talent that [Foster] had, and after a few months his abilities really skyrocketed," Altman said. "Foster and Casey Gibson and all these guys think that they're learning to make jingles or beats. It turns out they are actually honing these incredible skills."

Of course, the impetus underlying the creation of Mophonics and other companies like it, is to find talented musicians, hone their skills, have those skills flourish in-house and profit from the artist’s development.  It’s the skills of the artist that the owner’s at Mophonics can harness and turn into an asset generating passive income, all under contract. That’s the goal of the business owner and it should be your goal too if you are thinking about becoming a music entrepreneur and starting your own music business.

Here are 2 Rich Dad books that I highly recommend as a great starting point for you going forward:


 



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Related Articles:

3 Types of Income:How Music Royalties Can Help You to Achieve Financial Freedom


The Cash Flow Quadrant - What Is It? And What Should It Mean to Musicians and other Artists

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Marc




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