Written evidence from UK Music
ABOUT UK MUSIC
UK Music is the umbrella organisation which
represents the collective interests of the UK's commercial music
industry—from artists, musicians, record producers, songwriters
and composers, to record labels, music managers, music publishers,
and collecting societies.
UK Music consists of: the Association of Independent
Music representing 850 small and medium sized independent music
companies; the British Academy of Songwriters, Composers and Authors
with over 2,200 songwriter and composer members; the BPI representing
over 440 record company members; the Music Managers Forum representing
425 managers throughout the music industry; the Music Producers
Guild representing and promoting the interests of all those involved
in the production of recorded music—including producers,
engineers, mixers, re-mixers, programmers and mastering engineers;
the Music Publishers Association, with more than 250 major and
independent music publishers representing close to 4,000 catalogues;
the Musicians Union representing 32,000 musicians;
PPL representing 42,000 performer members and
5,000 record company members; and
PRS for Music representing 70,000 songwriters
and composers and music publishers.
GOVERNMENT-BACKED
LOAN GUARANTEES
AND THE
UK'S MUSIC
SECTOR
Executive Summary
UK Music welcomes the BIS Select Committee inquiry
into Government Assistance to Industry. The evidence we submit
demonstrates that the obstacles that music sector SMEs face in
accessing finance amount to a market failure, and that Government
assistance designed to stimulate the flow of finance to SMEs is
still not reaching our sector.
"Difficulties in raising finance are affecting
the ability of the music business to grow and prosper. Particularly
worrying is the evidence... of a growing trend in recent years,
of a lack of confidence in accessing external finance."
— So said "Banking on a Hit,"
published by the Department for Culture, Media and Sport in 2001.
Words which resonate just as loudly today as they did almost 10
years ago.
— In the intervening years it would appear
that the inability of music industry SMEs to access finance has
now become an established and increasingly entrenched obstacle
and one which has intensified over recent months as the global
financial markets have attempted to re-stabilise.
— For many music industry SMEs, access
to finance might now be described as a systemic and worsening
problem, the consequences of which will not only be detrimental
to the music industry overall but to the UK's economy more broadly.
ECONOMIC CONTEXT
1. The UK's music industry is a valuable
cultural and economic national asset. The UK music industry was
worth around £4 billion in 2009.[19]
2. The invisible earnings and additional
value created by music is potentially immense. Music has driven
the growth of digital services like high speed broadband and digital
devices like iPods. Music also feeds a host of business that work
directly with music such as film, television, games, advertising
and fashion, which quite simply, would not be what they are without
music.
3. Likewise, music inescapably, intrinsically
and advantageously impacts upon the tourism, leisure and hospitality
sectors. An ever increasing number of people both within the UK
and abroad are choosing to spend their holiday money within the
UK attending music events and festivals. Live music in the nation's
vast array of music venues and festivals each year attract visitors
from all over the UK, Europe and the rest of the world.
4. The O2 arena in London, for instance,
since opening has already attracted 12 million visitors and is
now the largest ticketed entertainment venue in the whole world.
The Cavern Club is at the centre of Liverpool's tourist trade
and draws in half a million visitors each year. Glastonbury festival
annually accounts for approximately £73 million in spending,
£36 million of which is spent directly within the local economy.
5. In absolute terms the UK is the third
largest music market in the world while in relative terms, we
are the largest. Per capita we purchase and consume more music
than any other country in the world while the UK ranks second
only to North America in the league of nations who are net global
exporters.
6. Latest industry figures show that the
UK music industry bucked the global downward trend in 2009 with
a return to growth.[20]
Added to this background is the prospect that the digital marketplace
opens up further growth with the development of new music services,
wider markets, and faster distribution.
7. As the industry continues to realise
the potential value of music in the digital marketplace and live
music continues to expand outwards from London, the ability to
access finance becomes even more crucial. The innovators and entrepreneurs
from our sector need to be able to finance their ambitions of
tomorrow.
MUSIC AND
ACCESS TO
FINANCE: A
STRUCTURAL PROBLEM
8. In this section we provide our analysis
as to why our sector's difficulties in accessing finance is a
structural problem and not a transitional one.
9. The music industry is characterised by
a very small number of large corporate organisations, and a very
large number of small organisations. This remarkably diverse mix
of company structures sustains a vast array of talent.
10. The signature of many of these companies
is the long-term development of their relationships with their
artists, to support, to nurture, to sustain an artist's career
and therefore the company prospects over a long periods of time.
What these SMEs achieve is to create steady employment and the
continued production of IP assets and creative goods. Sustainability
is key. The thousands of small yet steady musical enterprises
for whom rapid growth is not an immediate priority form the backbone
of the UK's music industry.
11. In reality the majority of record companies
working within our sector would employ less than 10 people. By
way of example a recent survey of the 850 companies who make up
the membership of the Association of Independent Music showed
that the average employee headcount was two people per company.
12. Size has a strong bearing on the ability
of a firm to access to finance. The Association of Chartered Certified
Accountants says that, "the financing of small businesses
is manifestly different from that of large businesses... there
have been persistent concerns that the finance markets do not
always fully meet the needs of small firms who can find it harder
than large firms to acquire finance that is accessible, appropriate
and affordable."[21]
13. If only because of their large numbers
of small firms, the creative industries may therefore experience
greater difficulties in accessing funds.
14. To compound matters, small music firms
face additional challenges to those SMEs in more traditional sectors
because of the intangible quality of their assets.
15. While many other small enterprises may
trade on intangible assets, such as graphic design or consultancy
services, the value of a cultural good can only be approximated
in hindsight, that is, after the music has already been created,
recorded, released and promoted. The Work Foundation report into
the economic performance of the UK's creative industries refers
to this underlying problem of market uncertainty as the "nobody
knows anything' scenario".[22]
Other sectors trading in intangible assets would be less exposed
to the vagaries of personal taste as those trading in cultural
goods, and so are able to tabulate and valuate their assets more
predictably.
16. The CBI recently published a blueprint
for the creative industries in which it acknowledged that "the
unpredictability of consumer reactions can make it difficult to
gauge the success of a product before its launch. This can affect
access to finance for creative businesses."[23]
17. There are further knock-on effects.
The loan applicant's track record is an important criteria that
bankers use in making lending decisions. It is likely that many
small firms and entrepreneurs in the music business will have
"misses" for every hit. In more traditional industries,
such a chequered track record might reasonably serve as a warning
against further investment. In the music industry, such a record
is the norm and is a less reliable an indicator of risk.
18. One way that banks can mitigate their
exposure to uncertainty and risk is by demanding security against
assets. However, for many creative businesses, the firm's assets
are intangible, tied up as they are in copyrights. Their value
can be difficult to gauge at any one point in time, as the value
of copyrights can fluctuate. While the income from a few back
catalogues have maintained a consistent value over many years,
most are less constant. Indeed, the value of a copyright in a
piece of music can suddenly rocket in value, for example, if a
piece of music is used in a popular film, television series or
commercial.
19. These characteristics of our sector—the
"no one knows"' factor of a cultural good, an inconsistent
producer track record, difficulty in valuing IP assets and offering
security—all conspire against our sector over and above
those experienced by other SMEs in terms of obtaining finance
from banks. This is partly because the standard criteria used
by banks to assess loan applications cannot usefully gauge whether
a proposition represents a reasonable level of risk in our sector.
The error will therefore almost always be on the side of caution.
20. While the music industry has reported
difficulties in accessing finance for many years, the problem
appears to have become even more exasperated of late. Several
reasons account for this. First is the global downturn.
21. Industries with large numbers of small
firms tend to suffer particularly severely in cyclical downturns
according to a number of studies.[24]
In a letter dated 11 August, the Governor of the Bank of England
observed "many businesses have had difficulty accessing bank
credit... these appear to have been most testing for small and
medium sized firms for which bank lending is a particularly important
source of finance."[25]
22. The CBI also conclude that "the
recent credit crisis has added to the already difficult task of
securing traditional sources of funding, reducing further the
finance options available for the (creative) sector."[26]
23. Certainly our own research and experience
confirms that the difficulties that small music firms report in
accessing finance have intensified during the global downturn.
24. Secondly, the music industry is in the
midst of significant structural change. One result of this change
is that the internal investment model that sustained the music
industry in the past is no longer a viable option.
25. To put this in context: historically,
there has been an internal investment model within the music industry.
Entrepreneurial individuals have started bands, management companies,
publishing companies and record labels with personal money or
personal borrowing; and been prepared to reinvest profits into
their businesses.
26. Music businesses have also invested
in each other, with established companies using their knowledge
of the key indicators of success in the music industry to invest
in artists or in other small firms. This has provided both equity
and debt finance, as well as management support. For example,
small record companies have used advances against future income
from their distribution companies or collection societies to provide
working capital, and have entered into joint ventures or other
equity deals with major labels and large independents in order
to grow.
27. Record companies used profits from the
record sales of their most popular acts to reinvest in new talent,
so the cycle continues. For composers and songwriters, the situation
was similar.
28. However, liquidity for an internal financing
model has all but disappeared. Record sales are down nearly 30%
from 2004 levels. Sales of digital music and online music services
have grown but the revenues generated from digital sales have
not made up the shortfall. The live music sector has also grown,
but revenues generated from live concerts and festivals do not
get reinvested in nurturing a new raft of talent. Concert promoters
and organisers do not "sign" new talent or give out
advances, as that is not their function. The result is less revenue
to go around for investment in new talent.
29. Today, record companies and music publishers
are still the primary investors in new music. But they are not
able to invest in as many new musicians, and the pressure to back
those hopefuls who are most likely to generate a return is considerable.
30. This raises questions about how those
that might be termed "experimental" or cutting edge
can get the opportunities they need. It also raises questions
about how those who are just starting out can get the nurturing
they need, as well as ongoing support for those who are able to
sustain steady careers.
31. Stepping up into the frame are thousands
of small record labels, publishers, band managers, promoters and
agents. These small enterprises do not have the ability to negotiate
with the major music retailers (such as Tesco) and broadcasters,
and so are more likely to pursue alternative approaches to marketing
and distribution in order to promote their roster. While there
is much innovation, the ability of these entrepreneurs to finance
their initiatives is a serious stumbling block.
32. Obtaining finance is particularly difficult
when sums of finance required are too low to be of interest to
venture capitalists, but deemed too risky to be of interest to
high street banks. Music enterprises seeking relatively small
amounts of finance, either to ease short-term cash flow issues,
or to finance a venture, are finding themselves unable to get
the finance they need. This appears to be the case generally,
even for those who have demonstrated great entrepreneurial flair
in the past, who have a good credit history, and a solid business
plan with credible revenue projections.
33. This combination—historical difficulties
in accessing finance, exacerbated by more recent developments—is
leaving many in the music sector unable to access finance. The
current situation is unsustainable.
GOVERNMENT-BACKED
ASSISTANCE IN
THE FORM
OF THE
EFG
34. The Enterprise Finance Guarantee seemed
the perfect finance vehicle to address the difficulties of the
music industry in accessing finance. In announcing the money at
the start of the scheme in 2008, the European Investment Bank
said it would be designed for SMEs throughout Europe to "help
them weather the global financial storm." The new loans were
to be channelled through existing commercial banks, with the aim
of being "simpler, more flexible and more transparent, making
it possible to reach a greater number of European SMEs."[27]
As the creative industries account for 2.8% of the GDP of Europe,
this sector anticipated sharing in this lifeline.
35. In January of 2009 the UK Government
announced that the funding would be made available via the new
EFGS. Upon initial inspection the EFGS would appear to have been
the answer to the historical funding issues within the industry
yet this has not provided to be the case. Government also specified
that the scheme should be open to artists and songwriters.
36. UK Music investigated the extent to
which music enterprises were able to access loans under the Enterprise
Finance Guarantee through a survey of our members. We learned
that many companies had applied for a loan under the EFG but were
turned down. Only one business was offered a loan under the EFG
(and only on the condition that the applicant's primary residence
was provided as security against the loan).
37. The difficulties experienced by our
sector with respect to the EFG have been recognised recently by
the CBI. CBI President Helen Alexander[28]
said: "Music, films and books are not seen as safe bets—and
so don't attract investment from banks keen to reduce their exposure
to risk. The Government's Enterprise Finance Guarantee Scheme
is meant to help alleviate this, but evidence on the ground from
CBI members suggests this isn't the case..."
Case Study: EFG and ATC Management
The EFGS is proving inaccessible to applicants
from the music sector. ATC Management have run a test case with
"the Rifles", applying to every high street bank for
a loan for working capital to allow them to record and tour their
new album. The EFGS is specifically for viable plans from small
businesses without sufficient access to capital to secure their
loans. The criteria explicitly include songwriters and artists,
and should be the idea vehicle for debt financing in music—but
in practise there are no banks willing to back our businesses.
The Rifles, artists managed by ATC Management
(management company of well known artists Radiohead and Kate Nash)
have applied for an EFG-backed loan of £200,000 to cash flow
their second tour and album.
Their proposal is based on a track record of
a successful first album and a national tour of venues of 1,000-2,000
capacity.
Their applications have been presented by ATC
director Brian Message. Brian is a chartered accountant and chairman
of the trade body for artist managers the Music Managers Forum.
He has successfully applied for the Small Firms Loan Guarantee
scheme for music businesses in the past. Another business which
Brian owns a stake in has obtained an EFG-backed loan. This was
not, however, a creative company.
When the EFGS was opened to own-account artists,
Brian decided to apply as a test case, hoping that this would
be of benefit to managers of other artists with viable businesses
who require debt finance to cashflow their businesses.
Over the last eight months, Brian has applied
on eight occasions to a number of the high street banks for funding
for the Rifles business including HSBC, Lloyds, RBS and Barclays.
All have been refused an EFG-backed loan for different reasons.
The banks "would offer an EFG-backed loan
for a domino's pizza franchise", or "would take a charge
over the property of the directors of the management company",
but will not lend to a viable small business in the music industry
without security. Even an offer of a deposit of £50,000 (25%
of the loan amount) thereby providing the bank with an 100% security
when added to the EFG was rejected.
There is frustration in the music sector that
the EFGS is effectively closed off to music companies.
THE LACK
OF DATA
TO INFORM
THE EFFECTIVENESS
OF GOVERNMENT
ASSISTANCE
38. There is no lack of evidence of the
difficulties in accessing finance from the demand side.[29]
What is lacking is statistical evidence from the supply side.
However useful and illuminating case studies from our sector are,
we need information from lenders, not just borrowers.
39. UK Music sought to obtain data from
across a range of lenders in order to aggregate lending statistics,
so that comparisons could be made and the results analysed. For
instance, we wished to see how many loan applications or overdraft
requests have been made by music businesses, how many were granted,
the total value of finance made available to music businesses
over a given period, and the rate of default. We wished to compare
these statistics for music businesses versus statistics for SMEs
as a whole.
40. UK Music approached the largest high
street banks (Barclays, Lloyds, Santander, HSBC, NatWest) to enquire
whether they keep statistics about their lending on a sector basis.
However, these banks were not able to disclose whether or not
they keep such statistics.
41. UK Music maintains that such data is
essential in order to establish whether lending patterns have
changed over time, and assess whether music businesses or other
IP based firms experience difficulties over and above other sectors.
CONCLUSIONS
42. Government have a duty to ensure that
all business sectors of the economy are able to access appropriate
sources of finance. This is a basic requirement for any functioning
economy.
43. Difficulties in accessing finance have
plagued our industry for the best part of a decade. This is primarily
due to the specific characteristics of our industry that lead
banks to judge lending to our sector as too risky.
44. The difficulties faced by the music
sector in accessing finance have intensified in recent years.
The economic downturn has resulted in banks tightening up their
lending criteria further, and structural changes within the music
industry have resulted in the disappearance of an internal financing
model.
45. The UK's music sector is a cultural
and economic asset with a global reputation. The potential for
growth is strong as the digital economy continues to develop.
Music also has a significant role to play in driving tourism as
live music continues to grow.
46. The music industry will be unable to
meet its ambitions for growth unless it is able to access appropriate
sources of finance. Government assistance to industry, through
loan guarantees such as the Enterprise Finance Guarantee, has
so far failed to reach our sector.
47. Data that could help Government target
its assistance to industry better and assess its effectiveness,
such as aggregated lending statistics by sector, is patchy or
nonexistent.
48. The Government's review into sources
of finance, led by the Treasury, presents an opportunity for Government
to correct this serious market failure.
15 September 2010
19 PRS for Music, Adding Up The UK Music Industry,
August 2010. Back
20
Adding up the UK music industry for 2009, Will Page and
Chris Carey, PRS for Music, Economic Insight issue 20, 4 August
2010. Back
21
Improving access to finance for small firms, Association
of Chartered Certified Accountants, Policy Briefing Paper, March
2006. Back
22
Staying ahead: ibid. Back
23
Creating Growth: a blueprint for the creative industries,
CBI July 2010. Back
24
For example, see the conclusions of a survey conducted by IPSOS
MORI on behalf of the Institute of Chartered Accountants in July
2009: "The respondents' overall view is that SMEs clearly
have difficulty obtaining financing, but opinions vary as to whether
it is merely fairly difficult to almost impossible." P 7.
See also A Framework for Creative Industries Development in
South Hampshire, December 2009 which found: "Across all
business sectors access to finance has become a significant concern
over the past year." Back
25
Letter from Mervyn King to Feargal Sharkey dated 11 August 2010. Back
26
Creating Growth: a blueprint for the creative industries,
CBI, July 2010. Back
27
http://www.eib.org/projects/topics/sme/index.htm Back
28
CBI Press Release 9 March 2010, "Helen Alexander sets out
CBI priorities for creative industries". Back
29
For example, see Access to finance for the cultural and creative
industries in the South East of England, commissioned by the
South East England Development Agency in December 2009. See also
Creating Growth: A blueprint for the creative industries
published by the CBI in July 2010. And see Entrepreneurial
Reactions to Uncertainty in the Creative Industries a research
paper by Dr Anna Dempster at the Department of Management at Birkbeck
College in May 2008. The DCMS commissioned studies into music
and access to finance in 2001 (Banking on a Hit) and again
in 2006 (SME Music Businesses: Business Growth and Access to
Finance Report). Both only surveyed borrowers or potential
borrowers, rather than attempting to make an analysis by looking
at lending patterns. Back
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