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Compact DiscsHaving looked already at how it is that a personal can weigh the costs and financial benefits of learning to play music, it has become somewhat clear how the music industry is able to perpetuate itself with such profitability. While we might not be personally interested in the pursuit of music itself, we might feel as though the actual industry presents an investment opportunity for a personal saver. As such, this article is going to look at the different opportunities for investors to benefit from the music industry, how it is that they produce these returns, and at what risk.

The first, and probably the most obvious way for an investor to profit from the music industry is through a record label itself. These companies earn an income similarly to a bank, in that they effectively lend money to a portfolio of musicians, using the royalties associated with the songs they produce as collateral. From there, the label stands to earn a great deal of profit based on their ability to promote both the live and recorded performances of the songs that they own. These royalties are then passed onto shareholders, and leveraged into further investments in music.

That being said, because of the way in which the probability of a musician being wildly successful is extremely small, a great deal of these returns are further consumed by searching for and promoting a new sensational asset. Regardless, investors have been made wealthy by investing in the assets of companies such as Warner Brothers, and privately in Virgin Media, because of their ability to leverage their sheer scale towards continually introducing the market to new and exciting performers.

As a more traditional investment, an individual may choose to focus their funds into the actual distribution of music, as opposed to its production. This takes the risk of ‘exploring’ for new talent away, and instead puts an emphasis on the willingness of the market as a whole to purchase music as a whole. The success of this sort of model can be seen through the rise and fall (and rise again) of companies like Sony in their ability to produce devices for recording and playing music (ie. Stereos), and more recently, Apple, in their ability to distribute music electronically to their line of I-products.

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Lastly, an investor can purchase an interest in the music industry by investing in the products that their favorite artists choose to endorse. For example, a retailer that is endorsed by a particular hip-hop artist stands to earn a great deal of return on their investment in the support itself, because of the way in which the audience of the musician will flock to the product in order to identify further with the artist. Alternatively, car companies have been known to use celebrity endorsements as a means of promoting a certain model to a specific demographic, and therefore increase their market share for future productions.

While investing in the music industry, either directly or indirectly, is a fairly risky endeavor, it is always good to know that we are able to integrate a diversified amount of exposure into our personal portfolios without taking on excessive cost. Throughout the supply chain and value web of the music industry, there are plenty of opportunities for musicians to invest in their passion.