The Viability Of Investing In Digital Music Startups
Recently there has been a large amount of pontificating about licensing rates being way to high, make investing in digital music focused start-ups a non-starter. This focuses on only one area of digital music start-up – those that require music licensing. When in actual fact there are numerous success stories of digital music start-ups that do not require music licensing which we will examine later on in this post.
The point being that it is wrong to tarnish all digital music start-ups with the same dirty brush when the facts on the ground present a more realistic picture. Yes it is common knowledge record labels want to extract the most value possible for the rights that they own. TMV are sure it would be the same on the flip side for any investor when selling or licensing the IP that they owned?
Peter Kafta from All Things D states that even Spotify and Pandora with their billion plus valuations are in a “precarious position, because they’ve yet to demonstrate that they can afford the cost of music their either selling or giving away”. Whilst TMV does agree this is true, just look at Twitter as a prime example of receiving lots of investment but not being able to prove how it can make money yet? So why just pick on Digital Music start-ups Peter? TMV challenge you to also go out and analyse the validity of similar scenarios in all technology start-ups…
In this respect TMV believe it is the nonsensical overvaluations of companies not yet making money and/or the few that are, yet try and state a valuation of 100 times profit with a straight face (Facebook anyone?). If Spotify cannot yet afford the music it is giving away then whom are the stupid investors valuing it at $3 billion? Of course current investors and equity holders including the major label industrial complex are screaming out for such a valuation because without it they are up shit creek in a barbwire canoe traveling in the wrong direction.
Lets drill it down to plain economics folks. If your business cannot turn a profit due to supplier costs that are necessary for your product, then quite frankly you do not have a sustainable business and it is not a good investment. Investors who do invest are either stupid or have some alternative tax dodge that makes investing in your unsustainable business viable.
Yet lets get some perspective here. Labels do have a right to demand an equitable return on the rights they own. That is the IP they own and is equivalent to any technology patent based IP. They also have a duty of care to ensure they secure equitable royalty payments to the artists that they own the music rights to. The discussion should instead be focused on the fact that if an idea cannot scale with current goods and/or service supplier costs then it is not a good idea and therefore do not invest in it.
Blaming supplier costs as the reason for an industry being uninvestible is the absolute lamest excuse and on the same level as “the dog ate my homework” i.e. pathetic. Start backing digital music start-ups that have a business plan that can generate a profit from current supplier costs. If you do not do so then you are digging your own grave and you deserve to rot in it.
Going to Capitol Hill and demanding your business be allowed to pay less is obviously going to work against you – put you business on the flip side if the tables were turned. Why not instead be proactive and join the music industry’s push to have terrestrial commercial radio stations in the US actually pay some form of royalty to music rights holders?
US Radio without music would not exist and as such how has an industry so reliant on selling advertising in between the music it broadcasts be allowed to get away with paying nothing to rights owners? Quite frankly in TMV’s view that is the real crime, which most investors in this debate seem to conveniently forget.
Just maybe perhaps these same investors decrying equitable royalty payments to rights holders would get some sympathy if they joined as a coalition in fighting for what is right. To place all of this in perspective over $15 billion was spent on US radio advertising in 2011. What the music industry is fighting for in respect of a cut of that is a more worthy cause then Pandora and others winging about licensing costs. TMV do suspect many of these same investors decrying licensing costs also have investment portfolios in US radio stations that do not pay anything through to rights holders despite using their music to make massive profits.
If commercial radio stations in the United States were made to pay a small royalty on advertising revenue received then the music industry and its representative stakeholders may be open to a re-negotiation on licensing rates for digital music start-ups.
Now moving onto the more positive pastures of digital music start up successes. Despite the doom and gloom presented by the likes of Peter Kafka and David Pakman, numerous success stories of digital music start-ups exist from Songkick to Soundcloud amongst many others.
Songkick received $10 million and Soundcloud received a reported $50 million at the start of the year and boasts over 60 million paying subscribers. Many of these Soundcloud subscribers are paying more monthly than what other subscribers pay Pandora yearly.
Those businesses seem to be doing fine and have scalable revenue models that produce profit and more importantly do not have to license music for their services. On a final note there are many more examples out there if you look. Selling downloads; personalised radio and or streaming music are not the only digital music businesses in the marketplace.
The moral of the story being lots of money goes into developing artists and so licensing music for a digital music service is not cheap and nor should it be. If your business cannot function with current royalty rates then perhaps you should consider the fact you do not have a viable business and most importantly that is not the music industry’s problem.