Mom and Dad would be proud. It only took 24 years from when I received my Bachelor of Music degree to locate the convergence between fine arts and sustainable finance. Sustainable practices in entertainment and media are perhaps not as obviously critical as they might be in extractive industries, food services, or manufacturing. What is clear through closer examination, is that the entertainment and media sectors serve as a laboratory for considering central sustainability themes around intellectual and human capital. A great song or a well-written play might not cure a disease or feed a nation, but, from the Marriage of Figaro to Pussy Riot, could inspire a movement or bring down a government as surely as they can amuse or entertain. Music, theatre, and the visual arts are quintessentially human endeavors that go to the heart of a sustainable community.

Variously attributed to composers from Igor Stravinsky to Frank Zappa, there is the quip “Writing about music is like dancing about architecture.” I like a challenge. Let’s dance.

The difficulty in music as in all of the fine arts is the abstract intensity of human and intellectual capital required to make it work. It exists unto itself and cannot be converted into another service or commodity. Its value is intrinsic, and that value can be realized and incorporated into other services. Creating something artistically motivating, much less commercially viable, requires years of experience, an innate creativity, a cultural context and lingua franca upon which to build, a medium for delivery, and an audience.

In business terms, you might describe a chain including skill development, R&D, a defined marketplace, distribution channels, and a client base. The challenge here is that the market has had a persistent problem maintaining the value of that capital while the infrastructure of the industry has changed around it. Over the course of my own career I have witnessed the emergence of the compact cassette tape, the death of the LP, the ascendance of Compact Disc, and the last flailing attempts at physical media with DVD-A and SACD against the rising tide of MP3 files and YouTube. What has been fascinating through this is the clear market bias toward price and convenience over quality, with an overwhelming preference for no cost at all.

The cassette tape, acoustically inferior, threatened the LP in the 1980s because it was a convenient and compact means to copy and carry music from LPs, and let us not kid ourselves, to bootleg for friends and family for only the paltry cost of the blank tape. The CD drove the last nail into the mass appeal of the LP with “perfect sound forever” on a 12cm piece of spinning plastic, but, the market price for an album was driven up from around $7.50 for a 12-inch LP to $12.00 for the smaller, more durable CD. As the industry expanded, the cost structure for CD manufacturing radically improved to the point the pressed disc itself was far cheaper than even the printed notes and cover art that accompanied it, and revenues for the recording industry of course rose dramatically. At the same time, it did not become cheaper or more efficient to utilize the human and intellectual capital inputs at the beginning of the chain. Convenience and quality justified the market premium, but set the stage for a significant market backlash.

Two further technology developments conspired to derail an industry expansion which shifted CD. A clever but rudimentary copy protection scheme had been baked into the Red Book CD protocol to make sure consumer discs could not be copied (pirated). This serial copy management system (SCMS) was intended to make sure a user could not make sequential perfect copies of the original content, ideally insuring that each incremental user of that content would have to pay to enjoy it. This effectively stunted market acceptance of the digital audio tape (DAT) as a successor to the compact cassette since SCMS was built into consumer DAT recorders to prevent CD copying.

Again, here is an indication that the preferred price for music is actually zero because an entire technology (DAT) failed in the retail market because consumers could not use it for their preferred application – copying music. But, along came CD-R, or burnable CD, drives attached to personal computers. With a simple bit of software wizardry the copy protection flag could be stripped and infinite generations of perfect copies could be made on what became a very cheap disc that was entirely compatible with the established CD hardware base.

A Disruption to the Market

The second computer-based development however was even more devastating. The Motion Picture Experts Group (MPEG) had employed an innovative compression algorithm in order to smash the data of an audio stream down to a fraction of its original size, effectively throwing away information that the typical human ear would have a hard time perceiving in the first place. This was baked into the MPEG-1 and MPEG-2 standards which most computer and internet users would recognize as common formats for audio/video files. MPEG-1 Layer III, or MP3, could deliver an audio file less than a tenth the size of the original, rendering a typical 650 Megabyte compact disc down to a dozen songs at 5 or 6 Mb each. As internet bandwidth for delivery and sharing of files of this size became more widely available, this technology along with the ability to strip the copy flag from CDs opened the floodgates to massive sharing of music for free. These conditions set the stage for the rise of the MP3 player and then the iPod which have been unqualified successes, but what happened to the market value for the intellectual and human capital?

To operate a sustainable enterprise, there has to be, if I may paraphrase the Journal’s publisher, a regenerative and inclusive business model. Intellectual capital has to be appreciated, valued and protected so it can be monetized, and human capital has to be similarly appreciated, valued, protected and compensated so it similarly can be monetized. There are numerous jobs and professions that exist in the constellation of the music business, from the people that work in the ticket booth to the janitors that clean the venue to the engineers that run the lights and soundboard to the marketing, sales, PR, accounting, legal, logistics, and other professionals that help deliver the music experience to the client – to the audience – whether in a stadium or concert hall, on the radio, in a record store, or on your iPhone.

But, what about the composers and musicians who are the essential human capital and provide the intellectual capital to this enterprise? Years of training, studying, auditioning, rehearsing, and performing are in every artist’s background, and for composers and writers a similar history before putting pen to paper to write the song or symphony that the performing artist can them illuminate and bring to life. They are the front and the back of the entire industry, and yet the last to feed at the revenue trough. Musicians are typically contract or session workers with few if any benefits, and work is entirely episodic with no security. The meme of the starving artist is sadly not that far from the truth, as is well documented by the Recording Academy’s MusiCares initiative. Symphony orchestras are imploding around the country, storied music venues like CBGB and Maxwell’s have closed, and the downward financial pressure from the remaining brick and mortar and internet retailers on physical media combined with the rampant (illegal) sharing of files conspire to make the picture bleak for the beginning of the supply chain.

Somehow the invisible hand of the market has failed to rectify the situation. Music surrounds and permeates every aspect of our daily existence, so there is clearly a marketplace for it. It is a skilled trade that requires human qualities that are incredibly difficult to systematize or automate. It similarly is not something that can be easily sent offshore because of the extensive training and cultural context required to deliver a product marketable to a particular consumer community. A unique and popular artist can only be in one physical place at a time and a popular writer can only produce a finite number of compositions of any lasting worth. With a proven marketplace, persistent demand, and finite availability of resources and inputs, why do the economics for a regenerative and inclusive business model not work? Why does the industry of music struggle to adequately monetize the intangible, and is there a sustainable approach to music that can drive the “S” and “G” of ESG?

The technology that stressed if not quite broke the back of the music recording industry has presented the market with potential solutions. Two principal models have emerged that have legitimate revenue structures and a decent level of market acceptance. Radio has merged with MP3-style audio file transmission to give us streaming services which derive revenue either from advertising, the old commercial radio model, or from subscriptions, more akin to the satellite radio model. The all-you-can-eat buffet approach to music access appeals to the market bias toward free access if companies can calibrate the pricing or the intrusiveness of ads to a level that is unobtrusive to the psyche of the consumer. The second model is a deconstruction of the physical media model where consumers can buy full albums or individual tracks a la carte with a pricing structure akin to that of a CD. This appeals to the continuing belief in acquisition and ownership of the intellectual capital on the part of many consumers who want to build collections around their specific preferences that they have the unfettered right to listen to any time or way they please.

From a fundamental business perspective, there are a few issues with both models. Technology has proven incapable of preventing piracy. The market wants free music, and every attempt to technically license and protect the content is defeated sooner or later. That has led the industry to attempt litigation to protect content. Unfortunately for the industry, this came at the cost of reputational harm because the optics of prosecuting high school kids and grandmothers for copying music were poor. It looked like hunting quail with a rocket launcher and cast the industry as lawyered-up copyright trolls vs. small-time individual consumers, all the while everybody missing the individual artists who were really being hurt. There have been some attempts to hold technology companies themselves to account which did effectively bring about the end of certain companies as viable ongoing businesses, but they were very quickly replaced with other solutions, legitimate and underground, to satisfy the market demand for free content.

A Look at Business Models

How do we discern as ESG investors how to allocate investment capital with awareness of these challenges? Look for companies that get the “G” and “S” right. Companies should be able to demonstrate business models and revenue structures that put an appropriate market value on intellectual and human capital. In positive terms, is management constructively engaged in cultivating and leveraging talent?  Is human capital able to derive reasonable compensation and opportunities for their work?  On the flip side, are companies looking for ways to reduce or eliminate input costs by transitioning from high quality original content to pre-packaged commoditized material which may display a lack of respect for or value placed on the expectations of the end consumer?  Is the success of the business model predicated on not compensating the appropriate parties for access to or use of human and intellectual capital?

Forget for the moment that we just danced. In the previous paragraph did I use the words music or artist? These questions can be posed in any industry that uses human and intellectual capital, from technology to pharmaceuticals to agriculture. The restaurant business is not sustainable if its workers are not provided with a safe and healthy workplace and reasonable compensation. A medical devices business is not sustainable if the market can freely copy its R&D. A publisher is not sustainable if their writers cannot afford to write the next article or book. A sustainable business is one that can withstand and adapt to the pressures of an evolving marketplace without requiring some aspect of its supply chain and inputs to be no longer viable.

In music and the broader allied arts, intelligent allocation of capital will go to where there is a framework which includes regulatory support and incentives for “good behavior” on the part of customers, a revenue model that encourages the market and businesses to fairly price talent and quality, and overall where investing in human and intellectual capital fuels the virtuous cycle of creativity and innovation that leads to a healthy and growing enterprise.


Mark Sloss, is Executive Director and Head of Premier Portfolio Services, Senior Portfolio Manager and Head of Socially Responsible and Sustainable Investing, UBS Wealth Management