Bill Ackman’s Bet On Universal Music Will Likely Not Pan Out Well

Bill Ackman is a brilliant man. He’s made some of the greatest trades in the past few decades. He finds fantastic opportunity where others see too much risk. In this case, I think he missed the mark.

There are some industries that operate so differently than average that you need to be crazy or intensely passionate to make a profit in. A great example is the airline industry. Peter Thiel said that the value of planes likely greatly outweighs the value of search engines, but if you combine the market cap of all the publically traded airlines it doesn’t come anywhere close to reaching the value of Google. Now, that’s not a perfect example because Google makes money through a variety of different industries, but you get the point.

I would venture to say that the airline industry is almost a vanity investment, not disimilar to sports teams. In the same vein, the music industry is full of extremely passionate, talented people who are dying to make a penny off of their talents.

On top of that, it has a history of somehow funneling most of the profits away from the people who are producing content into the pockets of a tiny group of non-creatives. That may work out for shareholders, but I would guess that managers are still able to keep most of those dollars flowing to themselves. They’re not willing to die for art and want to be paid as well as their counterparts in other industries.

Possibly the worst part of this industry is technological disruption. Bill has remarked himself on how illegal downloads needed to be dealt with and that the industry has figured this out, but that’s only partially true. The industry has figured it out in that they’ve found out how to get people to pay for music, but the profits from music “sales” are a pittance compared to what they were in the 90’s. Streams often get fractions of a penny in profit. Music sales now are closer to promotions for live shows than an actual money maker. There are some indirect ways that still help like music in advertisements, videogames, and movies, but even these don’t move the needle extremely well. Radio is also still chugging along, somehow.

Couple the ability that modern artists have to be able to take control of every aspect of their career with the horrible reputation that music execs and managers have for their treatment of artists and you get a difficult situation. Finding an artist that’s willing to take a deal that is not highly favorable to them is going to get harder and harder to come by. You have to hope that there’s enough desperate and highly talented people that are very intelligent, but not good at business. On one hand, the music industry is so full that you’re bound to find people like that, but with social media they can build an audience on their own. You need to provide a lot of value, which likely means less profit for you.

There is still a good chunk of change to be made in live music. The industry did start doing more 360 deals ages ago. This would be the best path forward in my opinion. But the business model still has this fundamental flaw in that if you make a contract with an artist for a few albums and they blow up they could leave and take their audience with them. You may still get royalties, but it’s just not that much.

I think you can still make money from this, but is it better than just putting your money into the S&P? I’m gonna guess no.