How Labels Prevent Start-ups from Succeeding

Setting up a new digital music business is both extremely expensive and excessively complicated. Why is this, you may well ask?

On the first count, major labels expect very high advances to license their catalogues of music. Whichever label signs with your start-up first, leads the other competitor labels to suspect that this first label to commit, were paid more than they actually were. This in turn leads to excessive advance demands from the other remaining labels. This cycle continues on its merry way until the major labels have exerted so much money as a start-up, you actually need another funding round just to actually have a chance of launching your start-up to the marketplace.

As Patrick Bradley from Ingenious Media states to TMV “Actually I think we like many investors are putting recorded music in the ’20th Century media bucket’ – flattening digital sales in the US suggest music is just old media and consumers are more excited about other things. Yes, they’ll still listen but it ain’t premium – give them the experience though – live events,talent shows, and out come the wallets. But it’s short term stuff, consume immediately – just as each XFactor star is clouded out by the glow of the next one. Like MacDonalds, you feel full for a while and the hunger comes back but hey, you know there’s no shortage of burgers and they are cheap but the filings the same.”

Understandably, record companies hate digital music businesses being built on unlicensed music. And TMV also condemns such business practices. Yet the industry is now in a position whereby, some of these businesses started illegally, now dictate terms to the recorded music business – Hello! Anyone use YouTube out there? One only needs to view the UK’s PRS capitulation to YouTube to realise the weakness of the music industry in negotiations with businesses, which built their businesses by totally disregarding copyrighted content.

However, after you’ve agreed a license advance payment figure, the actual licensing of the label’s catalogue of recorded music is a complete and utter bollocks of a process that can drag on for at least a year from when you’ve agreed the advance payment figure. Why is this, you justifiably ask? In TMV’s view it is quite simply due to a business that is so fragmented and full of downright naive leaders who cannot navigate their keyboard from their computer mouse.

Obviously not all record companies’ staff are like this, it is generally the old guard who have lived off the mainlining or intravenous easy money, of the CD age. Some of these ignorant company CEOs also noted a number of years ago that they do not understand digital. So why are they still in such positions, running companies where they do not understand the methods in which their consumers want to consume their company’s products?

What does this have to do with launching a new digital music start-up? Quite simply it means start-ups are in a position whereby the big players who could not care about music, such as Apple, Google and Amazon, but actually dictate to the music business what terms and at what rates they can conduct business at. The irony being, these companies dictating terms actually use music as a loss leader to sell advertising or hardware products (where they actually make 99.9% of their profit). In effect they devalue music in the eyes of the music fan.

Because these labels are addicted to their iTunes sales fix (it’s worse than a drug addiction) they let dictator Steve Jobs dictate to them on; price point, business models and consumption channels. TMV asks: where would Steve Jobs’ and Apple’s market cap be if content owners actually stood up for themselves? If content owners actually had the courage to stand up and state, “We want a cut of every iPod and iPhone sale, instead of what, in reality, is peanuts to Apple in terms of catalogue licensing advances,”  the world could be their oyster! But labels only seem to think short-term. It’s a relic of the chart-based hit record era of the 20th Century music business.

The element that is most detrimental to new innovative start-ups is the fact that since Apple has set the retail price point standard, after licensing and technology costs there is essentially no money left in the pot for the start-up to actually deliver a profit. So what is there to invest in? According to Tom Frederikse, partner at UK law firm Clintons, “The economics of music start-ups are at a stalemate, …not to mention the long-standing infrastructure problems between publishers, rights societies and record labels.”

Companies that could not care less about music in any form now dictate to labels. These same companies are only interested in music so much as it helps to drive customer acquisition and prevent churn. In their frustration, labels then go and give a hard time to start-ups with new innovative models for two reasons; a). Because their monopoly masters tell them to do so and b). They believe they can only survive while sucking on the monopoly teat that is iTunes…

The obstacles to launching a successful digital music start-up are many, and it’s not just down to whether you have enough money to pay the labels their extortionate advances to license their catalogues – despite the fact none of these advances make it through to the artists who actually make up the catalogue you’ve licensed.

It also has a lot to do with what the monopolistic players already in the market have to say. Going further it actually suits labels as they get to keep these advances from start-ups and do not have to pay any money through to the artists – “money for nothing” a rather good business model by all accounts…

On a final note, who can blame investors for NOT wanting to invest in new digital music services, which come with such a quagmire of crap attached?

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Playing the System

SXSW: How Will We Listen to Music in 2020?

Ten for 2010: Yep, it’s Prediction Time

Supply and Demand in the Age of Infinite Supply

The Continued Devalution of Music

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3. Spotify: Labels Win, Artists Lose?
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Posted by Jakomi Mathews on Oct 19 2010. Filed under Business Models, Labels. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.