Last spring, Concord announced its acquisition of Stem, an independent artist services company led by Milana Lewis. The deal, however, didn’t come as a total surprise. Over the past few years, distribution and artist services companies have consistently been on the market, and larger players have been eager to buy into what they’ve built — and the market share gains and flexibility they can provide.

Concord is far from the only big company to buy in: Universal Music Group acquired Downtown in February, and Warner Music Group purchased Revelator in April, while Sony Music bought AWAL in 2022. But in Lewis and co-CEO Kristin Graziani‘s first joint interview about the Stem acquisition, they say these acquisitions aren’t just helpful for the larger music companies — the deals are increasingly necessary for the distributors, too. “We just always got outbid, and the majors always were able to poach [our clients],” explains Lewis, pointing to the rising cost of deals.

For many artist services firms, the fast-growing price tags for signings, brought on by a combination of falling interest rates and the majors shifting toward the indies’ traditionally more artist-friendly deal structures, had made competition basically untenable. Lewis points to the now-massive artists and labels Stem was unable to retain after this shift due to cost — including Chappell Roan, Big Loud, Rimas and Hundred Days. “We lost them because we couldn’t [spend the money needed],” Lewis says candidly.

Now, however, Lewis and Graziani, backed by Concord’s cash, believe they have the firepower needed to become long-term partners for the next generation of top artists and label executives, including current Stem signees like Nick Hakim, Jane Remover, Choker, Midrift (founded by the team behind Turnstile), Giant Music, Boomer Records, Bringin’ It Backwards and more. Concord’s coffers also offer them the resources needed to build out their team internally. “Concord really was the perfect match in terms of resources and then autonomy,” says Lewis.

In this interview, Lewis and Graziani discuss this new era for Stem, why they chose to go with Concord, the complexities and competition inside the distribution world and more.

I’m sure you explored all the options on the market when you decided you were ready to sell, so why did you choose Concord?

Lewis: The biggest constraint to our growth and retention of our clients was money. We had raised so many different types of facilities to try to stay competitive in the market, because we were working with so many talented labels and artists, and we were behind so many of the greatest success stories in the last decade, but we couldn’t retain them. We just always got outbid, and the majors always were able to poach them because we never had long-term agreements with our clients because we never had the money to make investments in them early enough in the process.

We put out the first album that had “Pink Pony Club” on it for Chappell Roan, but we barely put any money into it because it was unproven. And so when Universal came after her, we had no retention there, because we couldn’t, with the previous facilities, do deals with artists that didn’t have catalog that we could collateralize. The biggest problem we needed to solve was, how do we find a partner that understands music investing, understands the nuances of it, has the risk tolerance and can empower and unleash us with capital, and ideally, infrastructure, too, although that wasn’t something that we really needed immediately.

In recent years, major labels have started offering really flexible deals, but still with strong advances. That seems to make it much harder for indie distributors across the board to compete for talent. When do you feel you started seeing that shift from the majors?

Graziani: I would say probably in 2019 to 2020 is when the landscape started to get incredibly competitive. When we lost some of the talent Milana was mentioning, which was in 2018 and 2019, we went out to find two credit facilities, and those credit facilities were allowing us to advance up to maybe three, maybe four years maximum, and at the time, that made sense. Then, come 2021, we had them in place, and the competition just really accelerated.

There was a level of deal scarcity generally, and what that meant is the majors started to compete in the distribution space more aggressively. So they started to get a little bit faster and looser about the terms that they were offering. Then there were just more entrants, and a lot of the newcomers came around that time, too. Too Lost and Vydia started to get a little bit more competitive, and the majors and the indies and the major-label distributors are now all competing for the same exact deals.

Lewis: I think from a finance perspective, if you think about it timing-wise, these major music companies are profitable, so they have their catalog to leverage when they go and negotiate with banks. I think it was around the COVID era, when interest rates were in the 1% to 3% range. The cost of capital was so cheap. These companies had the leverage to go and negotiate a whole facility internally or a bank line that they could use for frontline stuff at low single-digit rates, which we couldn’t do. The facilities we negotiated were much more expensive because we’re smaller.

What was the process in narrowing down your search to Concord?

Graziani: We also looked into paths outside of strategic [investors]. So we looked at [private equity] firms, 65 PE firm conversations actually, and all of them thought they were interested in being in the frontline business, but when it really came to it, they didn’t have the stomach for it. So the lens we were looking through on who would be the long-term home was simply, who has enough money? Who has the risk tolerance? And it just so happened Concord was independent.

Lewis: As part of our process, we made a slide that bucketed the different types of deals that we wanted to do and that we saw happening in the marketplace that our current facility partners would never approve. We were like, here’s a bucket of baby acts that you invest $5,000 to $25,000 in, and here’s the average return profile, because we had four or five years of data of underwriting. And the thing that made all of these private equity firms, and also companies like Concord, really interested in us was our underwriting capabilities and our accuracy. Most of our deals performed, like 92% of underwritten projections, which is incredible.

And then there was the artist who put out a year’s worth of songs, where it’s not enough data to really accredit them, but they have enough traction where you can start predicting the next few releases and what those deals were going to look like for us. Then there was another bucket of an artist that has catalog that they want to collateralize, and then they want to put out new music, so the check size is more valuable than just the catalog because they’re going to commit to new music. That was a bucket that we could do before, but the cost of capital was too high for us, so we needed to get it lower to be more competitive.

Then there was a whole other bucket of big labels leaving another competitor distributor, where they have a bunch of catalog, they have a bunch of new releases, and they need overhead money, because we couldn’t underwrite for overhead before. How do we do those deals? And then there were the super-speculative deals where we looked back and we were like, if we would have put a couple hundred thousand dollars to work with Noah Assad when he started Rimas, or when Seth England started Big Loud, or when Ben Persky started R&R Records, or when Ben Klein started Hundred Days — which were all clients that were using our platform, where we put no dollars in — [we could have] actually retained them and then been able to continue to deploy money alongside them to help them grow. And we lost them because we couldn’t.

Every PE firm we met could maybe check three out of those five boxes. We talked to every major music company. We talked to Warner, Sony, Universal. All of them obviously would do these deals, and they saw us as a really attractive partner, but we didn’t want to clean up their mess, and we also didn’t want to go inside an existing company that had a distribution offering that we would need to compete with.

The beautiful thing about Concord was that they checked the boxes in terms of the deals we want to do, they have incredible access to capital and scale — and by scale I mean size of cash flow to be able to leverage — and they had no internal distribution company for us to have to clean up reputationally or integrate with or do anything with. So Concord really was the perfect match in terms of resources and then autonomy.

Right now, a lot of distributors and artist services companies are on the market and ready to sell. From your conversations with investors, what did you find that these buyers are actually looking for in an acquisition?

Graziani: It’s all over the map. In some cases, it’s to take players off the map. I think in the case — just speculating here — with Warner and their recent acquisition of Revelator, it’s probably some technology that they’re looking for, less so than a client list. And then some of it is the opportunity to play in distribution, because everyone sees that as the fastest-growing part of the recorded segment. So it’s like, how can we play in that in a real way, and what bets do we want to place there? And as you can see, some of the majors are placing many bets.

Lewis: I think for the private equity firms, they have fully bought into the narrative that music, as an asset class, generates reliable returns. So in addition to buying assets, which a number of them have done, they see distribution as another avenue to participate in the upside of these durable revenue streams without having to own the music.

A lot of artist services companies are used as a funnel for a larger record label. Once an artist succeeds, they have the option to “upstream” to a big label. Now that you’re with Concord, do artists ever graduate from Stem into somewhere else?

Graziani: Not right now. It’s not really the thesis, and also we’re protective over the notion of the funnel, in that we want to continue on with the strategy of being selective. It’s the strategy that has allowed us to get here, and I think it’s the strategy that’s going to be even more important in the future, just given the amount of music out there and the lack of attention and bandwidth a lot of the other labels and distributors have. So we don’t see ourselves as a catch-all funnel. We see ourselves as wanting to bet on really specific artists and labels, invest in them deeply, and grow with them over the long term in a way that we haven’t been able to before.

The deals we’re putting in place today are twice as long as the deals that we put in place before Concord acquired us. They’re at rates that are 50% more, and it’s because artists want to be in business with us. They want to use the capital that we have. They’re willing to pay for the services we have. So the hope is they’re not a pit stop along the way.

Why are a lot of distribution and artist services companies being acquired right now?

Lewis: A lot of these companies were created around the same time. Us and Revelator and FUGA were all born within two or three years of each other, and we all took various forms of capital investment, and I think investors expect returns within an eight-to-10-year time horizon, and I think that is a driving force.

That was a driving force in Downtown, because their investors were ready to get out. I don’t know if that’s true for Revelator, but they had been around for 10 or 12 years, too, and I think they saw an opportunity within a conversation with Warner and thought that was the right timing.

But I think for companies like Too Lost that took in a bunch of equity and debt, they realized they needed money to compete, and that’s why they did that [deal]. But then you look at companies like EMPIRE, who haven’t transacted at all and have just been hell-bent on growth and are able to sustain that on their own, which is fantastic. Create also needed money to continue to grow; their growth strategy is less about building from the ground up and more through acquisitions. It definitely just worked for them.

One of the biggest stories of the year has been the BMG-Concord merger. What does that mean for Stem?

Lewis: We don’t know exactly yet. There hasn’t been much discussion between the two companies about the go-forward, because I think they’re not allowed to do that yet. But BMG doesn’t have a distribution business like ours, so I am fairly confident that we’re going to continue to be autonomous. I think the question is, how much of what we’ve built for our own business can we make available to them so that they’re as efficient and as tech-forward as we have been?