GM readers 👋,
After my last post clocked in at 7k-plus words, I planned on giving myself some time to recharge. Then Epic Games announced its acquisition of Bandcamp. I had to write something. So, no rest for the weary.
FYI. I published a version of this piece in Naavik’s excellent newsletter, Master the Meta (“MTM”). If you aren’t already subscribed to MTM, you are missing out. It’s free, published weekly, and helps you better understand the business of gaming. And since gaming is the biggest media category, shouldn’t we all want to become smarter about it?
Whereas my MTM note focused on Epic Games’ rationale for acquiring Bandcamp, this note digs a bit deeper on what makes Bandcamp’s platform unique for musicians struggling to make ends meet in today’s streaming driven recorded music business.
One final item before diving into the post:
As Alderbrook scales, we are looking for part-time analysts who are skilled writers, financial modelers, presentation designers, and strategic thinkers. This is a flexible, paid role for individuals who enjoy helping companies of various sizes solve challenging problems. Bonus points if you are knowledgeable and passionate about the gaming, music, or Web3 industries. Please reach out to contact@alderbrookcompanies.com if you are interested in learning more.
Thanks again for reading. Now, let’s get after it!
Jimmy
PS if you have feedback on the post, as always, please let me know!
Why Epic Games Bought Bandcamp
“I think of Bandcamp as a music company first, because I think of who we serve as first and foremost the artist… And the way you do that is by ensuring that artists are compensated fairly and transparently for their work. And that is through the direct support of their fans.” - Ethan Diamond, CEO of Bandcamp
This year is already a record-setting one for gaming deals. There was more gaming deal activity in January 2022 than all of last year combined, and we recently saw another interesting transaction. While it doesn’t rival Microsoft/Activision or Take-Two/Zynga in size, Epic Games buying Bandcamp surprised many media industry observers. What does a gaming juggernaut behind Fortnite and Unreal Engine see in a smaller music platform whose marketplace is a haven for emerging, independent artists?
Before going further, let’s explore what Bandcamp does. For suppliers of music content, Bandcamp is a digital storefront and music streaming platform used by hundreds of thousands of artists and their associated record labels. For consumers, it is a place where fans go to purchase digital music content in addition to CDs, cassettes, vinyl, and various merchandise (e.g., t-shirts) directly from the artists that they love.
The company was founded in 2008 by Ethan Diamond, Shawn Grunberger, Joe Holt, and Neal Tucker. On the surface, Bandcamp may sound like another digital music platform. User pays money in exchange for content. But it is actually quite different from Spotify and other popular music streaming services, even though both were founded two years apart. These differences includes:
Direct monetization: Bandcamp artists and labels are paid directly by the fans consuming their music whereas streaming services pay on a “pro rata” basis. This means royalties are determined based upon a creator’s share of all streams on a platform. For example, if Taylor Swift gets 5% of everyone’s streams on Spotify, Swift (and her label) gets 5% of the portion of your Spotify subscription that goes to artists regardless of whether you listen to any of her songs. Some research studies suggest that this benefits certain genres of music over others. Several industry pundits, such as Chris Castle, argue that platforms should adopt a user centric approach to support smaller and more niche creators. Simply put, Bandcamp allows artists to monetize their fans directly, whereas streaming services do not.
Allows for content scarcity: On Bandcamp, artists and labels set the price and quantity for their music. Meanwhile, music is “commoditized” on music streaming services, like Spotify, and digital download services, like iTunes. On these platforms, creators have no control over the price or quantity at which their music is consumed. And super fans have little opportunity to show their support of their favorite artists. Industry analyst Andrew Thompson did a great analysis which even showed that Bandcamp users paid 1.1x - 1.6x an item’s price, on average. This is another sign that streaming services are leaving money on the table when it comes to super fans. (For more on this dynamic, check out my recent post.)
Prioritizes fandom. Bandcamp describes its mission as “building a community where artists thrive through the direct support of their fans, and where fans gather to explore the amazing musical universe that their direct support helps create.” The previous two bullets highlight how Bandcamp has prioritized the direct relationship between artists and their fans in its design, whereas music streaming platforms have not.
Lower take-rates. Bandcamp states that on average 82% of the money goes to artists and labels, implying that the company’s take-rate plus processing fees is ~18%. Focusing solely on its take-rate, Bandcamp receives 15% but this drops to 10% once an artist’s revenue exceeds $5,000. Regardless, Bandcamp’s take-rate is much lower than streaming services, which currently rake ~30% of revenue.
Profitability. Despite a significantly lower take-rate, Bandcamp has been profitable since at least 2012 whereas Spotify has prioritized growth and failed to show an annual profit to date.
Minimal VC funding. Bandcamp has raised modest venture funding – just one round from True Ventures and Brad Garlinghouse in 2010. Bandcamp’s profitability has allowed the company to self-fund its - albeit slower - growth. Meanwhile, streaming platforms, like Spotify, have either raised billions of dollars from capital markets or leveraged large tech company cash balances to fund their growth.
Bandcamp is quite different from music streaming platforms. It focuses on connecting independent artists with their 1,000+ true fans. Some critics suggest that Bandcamp’s market size is quite small. The company says that it “paid $204 million to artists last year,” implying $250 million of revenue (at the 18% take-rate). Yes, this is significantly smaller than Spotify’s $3 billion of revenue in 2021. But at about 8% of Spotify’s total revenue and very little in the way of superstar artists on the platform, Bandcamp’s fandom focus does appear to be unlocking a new revenue stream for the recorded music industry.
Now that we’ve analyzed what makes the company unique in the current digital music environment, let’s explore why Epic Games might want to acquire Bandcamp.
About a year ago, I wrote a newsletter piece with Naavik’s Aaron Bush about how Epic’s flurry of acquisitions was fueling its metaverse ambitions. The company’s Bandcamp acquisition speaks to this vision: “Bandcamp will play an important role in Epic’s vision to build out a creator marketplace ecosystem for content, technology, games, art, music and more.” A non-exhaustive list of some of these acquisitions by category include:
Content - Tonic Games Group (maker of Fall Guys), Psyonix (maker of Rocket League), and Harmonix (make of Rock Band and Dance Central)
Technology - 3Lateral, Cubic Motion, and Quixel (contributed to the development of Epic’s MetaHuman Creator)
Art - ArtStation (platform where digital artists can share their portfolios and sell their assets)
“More” - SuperHuman (platform that gives developers tools to create safer digital experiences for younger audiences)
In my opinion, the acquisition of Bandcamp is aligned with Epic’s focus on building out the strongest ecosystem possible to attract more developers to build on Unreal Engine and users to play Epic Games’ titles. Along these lines, large gaming companies - including Roblox and Twitch - have struggled with music licensing and fighting DMCA take-down notices from the music industry in recent years. Bandcamp provides Epic with a foothold into the music industry and leverages a team experienced in negotiating with music rights holders.
There are also potential win/wins from seamlessly pairing game developers, who want pre-cleared music in their games, with independent musicians, who want to find creative ways to make ends meet given streaming’s notoriously low payouts to artists outside the top 1%. I could imagine Bandcamp’s music being rolled into Epic’s Unreal asset ecosystem, where developers can, with the click of a button, license pre-cleared music for their games. This Epic Games job posting certainly points to this angle.
Some articles on the Bandcamp deal have pointed to the highly successful virtual concerts in Fortnite. Major artists like Travis Scott and Ariana Grande have attracted tens of millions of views with their in-game concert experiences. Clearly, this is an exciting area with Sony (one of the “major” record labels and publishers) making strategic investments into Epic Games. But that strategy focuses on superstar artists, whereas Bandcamp caters to the music middle class. So, while there certainly could be virtual concerts for Bandcamp distributed artists down the road, I don’t see that as the driving force behind Epic’s acquisition. In my opinion, the strategic rationale (i.e., bring on a great team with years of music rights experience and provide gaming creators with music that is easy to integrate) feels quite similar to the ArtStation one, just for a different medium.
Another argument being made is that Epic acquired Bandcamp to strengthen its legal argument against Apple. The smart and insightful Tim Ingham from Music Business Worldwide has argued this could be the “real reason” for the deal. Ingham believes that Bandcamp’s profitability despite its low rake will help Epic’s legal aims. In my opinion, this feels a bit of a stretch because Epic could and can make this point – it was publicly known that Bandcamp was profitable – without owning Bandcamp’s assets.
There are also similar cultural dynamics between the Bandcamp and ArtStation deals. ArtStation was seen as having a strong community of independent artists and there were concerns that an acquisition by Epic Games could change that. Among independent musicians who struggle to monetize via streaming, Bandcamp is seen as the place to bring users and monetize their fandom. As a result, there is concern about Epic’s plans for Bandcamp and several music outlets have pointed out Tencent’s ownership interest in Epic. “The giant red flag is Tencent’s involvement, and its predication upon Epic’s adoption of a GaaS subscription model.” It’s worth noting that after Epic acquired ArtStation, it quickly cut its take-rate from 30% to 12%. Bandcamp has a friendlier take-rate at 18% (especially compared to music streaming platform’s ~30% rake), but I wouldn’t be surprised to see Epic announce a slight cut post-transaction. Along these lines, Epic CEO Tim Sweeney has been outspoken about creating fair and open platforms in addition to attractive and successful ones. Simply put, I see Bandcamp as a great cultural fit, at least on the surface, for Epic.
Tim Sweeney continues to point the Epic Games ship towards creating a digital world that expands the pie for all creators. With the Bandcamp acquisition, he brings a team onboard that has been focused on doing that for independent musicians. The addition should create more opportunities for game developers and music artists alike to collaborate, keeping Epic as a frontrunner in developing the immersive experiences of the future.
Thanks to Fawzi, Hannah, Adam for the feedback, input, and editing!