Who's To Blame For Music Startups' Bleak Outlook

David Pakman in Medium:

(The) bleak outlook for profitability among standalone digital music companies is a direct result of the high royalty rates incumbent upon startups who wish to license digital music for use in their apps. Whether you negotiate voluntary agreements or avail yourself of the existing compulsory licenses, you will not turn a profit. At least, no one ever has. The few that refused to pay these rates were often sued out of existence.

The end result of these perilous market conditions is that the only companies who can afford to be involved with digital music are the internet giants prepared to subsidize their digital music services with profits from their other businesses. The high royalty rates and up-front cash advances required by the record companies prevent profitable, sustainable businesses from emerging. As a result, the recorded music businesses is left only with these giants: Amazon, Apple, YouTube and, to a lesser extent, Spotify and Pandora.

But this is a “crisis” of their own making. Many of us argued for years that it was in the industry’s best interest to create a healthy ecosystem of hundreds or thousands of successful companies, all enjoying successful businesses around music. But those arguments fell on deaf ears, and instead the industry fought repeatedly to raise royalty rates over and over again, despite evidence that not a single company ever achieved profitability.

In my mind, it would have been in the best long-term interests of the recorded music business to enable the widespread success of thousands of companies, each paying fair but not bone-crushing royalties back to labels, artists and publishers. But the high royalty rates imposed upon startups, even after clear signs over the past 19 years that the strategy killed companies, has prevented a healthy ecosystem from emerging. It’s a bed the music industry made for itself, and now it is left to lie in it.

On the other hand, via Hypebot:

The indie music community has embraced Bandcamp and its suite of direct to fan monetization tools. And unlike most music tech startups, Bandcamp, which launched in 2008, has been profitable “in the now-quaint revenues-exceed-expenses sense” since 2012.

Bandcamp grew 35% last year, according to new stats just released by the direct to fan music platform. Fans are paying $4.3 million to artists monthly using the site, including 25,000 records a day.

Subscription-based music streaming “has yet to prove itself to be a viable model, even after hundreds of millions of investment dollars raised and spent,” the company wrote in a blog post. "For our part, we are committed to offering an alternative that we know works.

Update; There’s now a rebuttal to the original piece, via Medium’s Cuepoint:

More and more artists have chosen to go independent, direct to consumer, self-release their art. Stuff like Blockchain is exciting. If the labels are so impossible to deal with, then shouldn’t the investment be in platforms that will succeed in a post-label world? Shouldn’t the new startups, or the established players, be investing in content and talent development directly with artists, in a more substantial way? Shouldn’t they just take their great ideas and bypass the stubborn major labels?

Update 2; via Music Business Blog:

The music industry is in a transition phase. In such periods, the old and new worlds co-exist and collide. There are statistics that both sides of any argument can hold up in their defence, in fact they can often hold up the very same numbers to support opposite perspectives. Similarly, the comparisons you chose to benchmark with, can paint entirely different pictures. Such is the nature of transitions of human and business behaviour. For example, 83% of Spotify’s gross revenue going to rights is clearly too high and unsustainable, yet $0.00098 per song going to artists is also clearly too low and unsustainable. Something needs to give, for both ends of the value chain.

Maybe if/when Spotify gets to 50 million subscribers it will feel it has enough clout to compel rights holders to rethink licensing economics. Perhaps it will take Spotify getting to a 100 million to make that happen. Perhaps it will never happen. But if it doesn’t, the economics of streaming will remain so broken that only companies with ulterior business objectives will remain viable players, enter stage left streaming’s Triple A: Apple, Amazon and Alphabet (Google). The labels need to ask themselves whether that is the streaming future they want…