After Fraud Suspensions, Global Outage, and Layoffs, Downtown Music's Songtrust Asks Artists For More
The Songtrust parent is seeking a deal with private equity interests. It'll come at the cost of artists.
For five years, my full-time gig has involved reporting on markets, retail investors, and Robinhood. Before that, I worked in the music industry — and despite the fact that few of my clients are interested in regular, granular reporting on the music business, I think many readers in finance (and other industries) might find lessons abound in this business.
Many industries have seen upheaval in recent years thanks to technological, social, and regulatory factors. In my opinion, perhaps music has been one of industries which has seen the most dramatic adjustment since recorded music revenues peaked in 1999.
Its rising fortunes have attracted meaningful reporting in recent years — a particular shoutout to the people at Bloomberg, The Wall Stret Journal, and some trade publications doing great work. Still, there are some stories that I haven’t seen written. After some kind nudges from reporter friends, I’ve decided to make good on a promise to finally share them.
Before the internet, the music industry was a mess. Today, it’s even messier. Since 1999, the industry has had to adjust to collapsing recorded music revenues — a product of piracy, the failure of the digital download to reverse its decline, and the dynamics of the streaming era.
In a way, Y2K did bring about the end of the world for industries like the music business. In the 24 years since the industry’s revenues peaked, it has been reborn again and again, seeking a new way back. It’s getting closer and closer, but this time, legacy music companies have to share the driver’s seat with their real competition — independent artists.
That’s a departure from form. Music used to be dominated by a small number of near-monopolies. Today, independent artists and labels represent nearly half of music streaming revenues. (And yes, an increasing share of bookings, merch sales, and other revenues.) It’s no wonder, with growth like this, many businesses have started catering exclusively to this fast-growing bloc. On the other hand, some have been here for awhile.
With their fast growth and bountiful potential, music service businesses focused on indies have transformed from an early-internet underground relic into industry heavyweights. New music entries have ballooned into multi-billion dollar businesses, valuations founded by how “tapped in” they are to capture the riches streamed by up-and-coming indie talent.
Well-positioned to capture industry growth, that’s making them an optimal takeout target for major labels and private equity interests. Some are not without risks.
Enter: Downtown Music
You’ve probably heard of large music businesses like Sony Music, Universal Music, and Warner Music — the old guard. If you’re a little more tapped in, you’ve probably read about buzzy “new wave” music businesses like music IP giant Hipgnosis — which is in the process of selling itself to Blackstone for $1.6 billion — and Believe — which was taken out by private equity companies earlier this year in a €1.46 billion deal. However, odds are, you’re less likely to have heard of Downtown Music.
Despite only being founded in 2007, it has become a giant in its own rite. Over a period of a decade, the company amassed a commanding percentage of the music publishing business by buying music rights and by convincing independent artists to give them a cut of theirs. They’ve used those revenues to cement their formidable foothold in the industry — they are now the world’s largest music services business. For listeners, that might not mean much. For industry participants, that’s a big deal.
In recent years, they spent hundreds of millions of dollars to acquire distribution giants CD Baby (one of the first digital music distributors) and FUGA (the world’s largest B2B music distributor.) They also own music Songtrust, a service that collects certain kinds of royalties on behalf of artists.
What is Songtrust?
Publishing is difficult and poorly understood, even by industry participants. Historically, songwriters would usually make deals with industry giants — often songwriter-focused arms of large labels called publishers — to get a set amount of money upfront in exchange for their publishing royalties.
It would then be the publisher’s responsibility to collect the money that songwriters generated from societies around the world — they are different in every country but usually are referred to as performance rights organizations (PROs), mechanical rights organizations (MROs), or in some cases, collective rights organizations (CROs).
In recent years, that has shifted.
Publishing administrators like Songtrust saw slow uptake from the growing and promising bloc of new independent artists (often artists in their own rite.) Then, as music skewed towards indies, they boomed. Songtrust is now the world’s largest publishing administrator. That’s made it the crown jewel of Downtown, which has surrounded it with distributors to build a truly end-to-end business for indies.
However, behind the scenes, Songtrust has faced existential operational problems — most of which have been poorly covered, even as its parent company shops itself around to prospective suitors.
What Happened at Songtrust?
In its earlier years, Songtrust parent Downtown sold most of the music rights it had acquired over a decade — a $400 million sale of these rights in 2021 was seen as an apparent recalibration towards independent music. In Downtown’s eyes, maybe buying royalty rights was a waste of time — or maybe the company had to sell them as a product of their limited profits — particularly when hoards of independent artists had indicated a desire to simply give them a cut of their royalty rights (and pay them to do so.)
That business has shaped up swimmingly for Songtrust, which by many estimates is now making over $1 billion in revenue collecting on these rights for artists — and taking a commission for doing so. However, since the departure of co-founder Joe Conyers in 2021, users of this first-mover worry that the platform has been quietly deteriorating. Customers reported slower collection timelines, lower royalty match rates, less-timely support, and sporadic outages.
Then, in April 2023, everything broke. In the span of a short few weeks, the company announced sweeping layoffs across its indie-focused businesses, executives traded places, and the entire platform stopped working. It wasn’t just a coincidence.
The Outage That “Never Happened”
Songtrust’s web portal became inaccessible as users were forced — and unable — to reset their passwords. Their support channels and social media went silent, with page admins disabling comments on Instagram amid a flight of angry artists to the comment section. I reached out to Downtown Music during this time for comment on the situation — nobody responded.
Weeks later, things appeared to return to normal without indication that things had ever gone wrong. I didn’t cover music, so I shared my findings with one industry publication who was interested — there really was only one, which struck me as quite strange given the scale and size of the company.
Three months later, on Jul. 19, Songtrust acknowledged — for the first time since their site stopped working in April — that they had a problem. Still, they didn’t acknowledge their technical deficiencies. Instead, they focused on something unexpected and more disconcerting — fraud.
It’s no secret that fraud has become a problem in the music industry. By some estimates, it now makes up between 5% and 10% of all streaming revenues — hardly inconsequential. But for Songtrust, fraud jeopardized more than its entire business. The fintech and banking faithful might see themselves in Songtrust’s story of woe.
For years, Songtrust had limited mechanics to review publishing entries made on behalf of its customers. It simply trusted users when they registered songs as their own and required no other documentation. This was fine when Songtrust was small and used by a limited number of serious musicians. But in recent years, with tens of thousands of monthly registrations, this lack of oversight became existentially dangerous.
In an email to their customers, Songtrust said that it had restructured its tech and support teams to “improve and evolve” client services — but hidden inside that email was an admission that fraud was becoming an increasingly pervasive problem on the self-service publishing administrator.
Newly-crowned President Emily Stephenson — who is credited with authoring the email — said that Songtrust had, “undergone new leadership at the start of 2023 and aligned its back office operations with the other publishing groups within Downtown Music Holdings,” presumably a shot by then-President Emily Stephenson to distance itself from the company’s problems (and outgoing leadership.)
However, Songtrust left out the most important part — it wasn’t actually collecting royalties for artists for some portion of the last two years. On Sept. 8, Digital Music News’s Paul Resnikoff — the only publisher I reached out to that indicated some interest in the problems with Songtrust — published a story alleging that the company had actually been suspended from three major publishing societies.
Source of the SongDistrust
France’s SACEM and ICE — a product of the UK’s PRS, Sweden’s STIM, and Germany’s GEMA — refused to indicate anything more than “active conversations” with Songtrust. However, the UK’s PRS for Music shared that there had been at least two suspensions for Songtrust — and correspondence between PRS legal and Songtrust about “severe risk” from fraudulent, sloppy, and conflicting submissions.
During these suspensions, Songtrust was presumably not being paid a significant portion of European royalties — maybe tens of millions of dollars per month. During that time, artists weren’t getting paid, either. And while the timeline of Songtrust’s suspensions are opaque, Songtrust’s response was not — it simply didn’t do anything until it jeopardized its entire business.
Only in its July correspondence with customers did it say for the first time that it would fight back against fraud — implementing Plaid for Know Your Customer (KYC) onboarding. Still, it left a lot up to the imagination. Songtrust had just laid off a double-digit percent of its staff, its web portal was down for months, tax filings were sent out after the tax filing deadline, and it still didn’t acknowledge its suspensions to the media or in its correspondence.
Songtrust has estimated that saying and doing less is a winning strategy. And given the lack of meaningful coverage on the music industry — especially from industry participants — they are probably right. I tried to reach out to Downtown Music and Songtrust at least three separate times for comment. They did not return my comments. And while Songtrust Ave and Blvd — its two registered publishers at ASCAP and BMI — churned tens of thousands of registrations during its 2023 outage, you wouldn’t guess today that it had ever hit such a speedbump.
As of Dec. 1, the respective publishing companies have 1,012,060 and 474,036 works registered respectively according to data sourced from Songview, which makes them one of the world’s largest publishers.
Sellout Era
With its dominant foothold in the industry, Songtrust’s Downtown is looking to sell to private equity or a music giant — whichever bids more. It would be the latest in a long line of new music companies to seek an exit, potentially portending an end to the fragmented industry which has spawned from the rise of the indie artist.
There are still plenty of red flags that investors might be weary of. To conduct the kind of layoffs which left the company operationally bareboned, just two years after a nine-figure catalog sale, the company must have been in dire straits. It dismissed essential staffers, made its product inoperable for months, and stayed quiet on potentially existential threats to its business while suspended from key publishers.
Still, with a more lean balance sheet and lower employee count, the company now has a year of stronger fundamentals to flex. Its case for investors — who it had reportedly been in talks with earlier this year — could be much more credible. And bolstering its case, the company announced increases on its take of “non-performance royalties” starting next year.
Rather than take the industry-standard 15% on royalties, the company will begin taking a 20% cut of non-performance royalties like mechanicals starting in the Q1 2025 billing period. It has prescribed these increased rates as a matter of “reducing fraud,” but that’s just the song and dance to justify taking a larger share of artists’ income. The higher rates will mean that artists will pay 33% more commission on the majority of their income when affiliating with Songtrust.
That means record profits are in the cards — and double-digit profit growth. It also knows that artists, who have already entrusted them to collect their money, will likely miss or disregard the changes. After all, Songtrust has charged the majority of small songwriters a $100 fee to join its platform for years, something they’ve gladly shelled out for. What’s another 5% of their publishing revenue?
Furthermore, it also knows that it has made it ostensibly difficult to leave. Procuring a Letter of Requisition (LOR) to leave Songtrust would mean: 1) forfeiting the $100 you paid to join the platform; 2) waiting to take your registrations elsewhere; and 3) re-registering all your works on another platform. So even if you’re literate and paying attention, the economics might not add up.
In their estimation, many artists and songwriters simply won’t understand or care enough — they’ll simply ignore the rate increase and reap the benefits. The small volume of outrage that could spawn from such an event is unlikely to create business turbulence. After all, they’ve had it much worse before. This time, there’s real upside for them — particularly as the company shops a sale — either to private equity or a major music business.
Let’s Make A Deal
Even a modest increase in profits could bolster a deal — if one comes to pass at all. As reporting from Bloomberg’s Lucas Shaw reveals, asking prices for music businesses like Downtown have been lofty. But even though suitors are publicly gawking at the premiums, make no mistake — they repeat in filings and earnings calls that their incumbency in the industry is no longer a given. That means few easy or cheap paths forward for legacy giants without the use of M&A.
That underscores a reality of the increasingly digital-first industry: many legacy music businesses are acting like they’ve already lost their competitive edge — and after years of “shelving” artists, not moving swiftly to reclaim share in the business could mean that investors will give them their stock the same treatment.