Why Epic Games Acquired Bandcamp

This week's Trapital memo is brought to you by MoneyMade

Want to invest in the music business? MoneyMade has you covered.

‍Investing definitely isn't what it used to be. Bitcoin, NFTS, stocks, EFTs. Who can keep track? With the help of MoneyMade, you now have the opportunity to invest in the music industry too. Music royalties are different from your average investments. They are a form of passive income with the potential to deliver double-digit yields.

‍Check out why music investing is the way to go.

‍With MoneyMade, you can:

- Evaluate and see performance for music royalties as well as every investable market and all major asset classes.

- Have access to insight and data platforms that let you obtain the same data tools for free that typically only institutional investors have. This includes risk analysis, projections, correlation, and more.

- See live performance data for stocks, crypto, and alternative assets all in one place.

MoneyMade is making an exclusive offer for Trapital subscribers: free lifetime membership! What are you waiting for? Visit MoneyMade today to sign up and get started.

                                                                                                    ...

Why Epic Games and Bandcamp teamed up

Last week, Epic Games acquired Bandcamp for an undisclosed amount of money. The news sparked a wide range of reactions. Some wondered why the company behind Fortnite and Unreal Engine would want an online record store. Others were frustrated that another artist-friendly company has “sold out” to Big Business, especially given Fortnite’s past clashes over music licensing. But this move felt inevitable given the position that both companies were in.

Building the creator marketplace

In a company statement, Epic Games CEO Ethan Diamond said that this acquisition helps its “vision to build out a creator marketplace for content, technology, games, art, music, and more.” Fortnite is still a leading metaverse player. Travis Scott’s Astronomical Fortnite concert in 2020 is still one of the biggest events yet in a digital environment with 28 million attendees. Epic Games’ acquisitions of both Harmonix and Bandcamp are signs that the company is still all-in on music.

Bandcamp also has a loyal customer base. The customers who use Bandcamp are proud to pay their favorite artists and buy their products. If those same artists use Epic Games for livestreams or virtual experiences, their fans may be proud to pay for products in the Metaverse too. There’s risk in treating superfans as endless pots of cash, but there’s still room to tap into that consumer surplus.

Music is still undervalued

The Tencent-backed Epic Games is the latest entertainment company to make big moves in music. In recent years, most companies have done it for two reasons.

First, they treat music as a loss leader. The digital streaming providers have all used music as a means to acquire more customers to sell them more lucrative products. Second, and most relevant to Epic Games-Bandcamp, they believe music will become more valuable over time. That can value can come from increased subscribers or additional platforms that will monetize music.

This undervalued notion is especially true for a company like Bandcamp. Its business model is antithetical to the streaming era. It had “pay what you want” features before tipping-enabled platforms were a commodity. The platform was built on generosity. But in today’s music tech industry, it means that Bandcamp is leaving money on the table.

The tradeoffs of profitability

Ethan Diamond has said the company has been profitable since 2012. The Component’s Andrew Thompson estimates that the ~200 employee company made $21 million in net revenue in 2020. Bandcamp is a rare breed, but its desire for profitability may limit its ability to grow in an industry dominated by winner-take-all empire builders.

Diamond said that this move will allow Bandcamp to build livestream functionality, expand internationally, and further develop its app and other user interfaces. Bandcamp has also wanted to push back on Apple’s high 30% cut on App Store transactions. This is a fight that Epic Games is all too familiar with.

‍Those are expensive goals! They are hard to achieve in the near term for a company with $21 million in annual profit. In a non-VC-backed world, Bandcamp could take its time and achieve all those with its own money, but that world doesn’t exist. If Bandcamp tried to do this itself, the internet might be onto Web5 by that point.

‍This situation is not uncommon. Ask any recently-acquired indie record label, music distributor, or bootstrapped startup. They often reached a point where they felt limited in their ability to maximize opportunities for the artists they support. It led many founders—especially bootstrapped ones—to ask themselves some form of the following question:

Am I content running my profitable business as is, even if we can’t take advantage of all the untapped opportunities available?

Or would I rather sell the company, add some firepower to reach our potential, and accept the tradeoffs that may come with it?

There’s no right answer. It all depends on the founder’s goals. But it’s not a surprise why a VC-backed company like Bandcamp, which has turned down past acquisition offers, would capitalize on this particular moment.

‍Read more about Bandcamp in Andrew Thompson’s 2021 essay Why is Bandcamp Profitable and Spotify Not?