I came to this conclusion myself about 6 months ago, after Dalton Caldwell spoke at a YC dinner. I realized it was basically hopeless to start startups that touch label music, because even the ones that seem to be succeeding (in the sense of not being sued out of existence) are only allowed to live so the labels can suck investors' money through them.
But by creating a startup-free zone around themselves, all the labels are doing is hosing themselves, because they won't have startups working to develop whatever would have been the new ways of delivering and using label music. They've created an anti-platform.
What PG says is 100% true. I say this having done a startup in the space.
In a nut shell, you need roughly $1M upfront for legal fees to negotiate with the big four record labels (for an interactive service, not a non-interactive service like Pandora).
I guess I understand what you mean. Though I wouldn't use the words interactive/non-interactive. Pandora is quite interactive in a UI sense, even though you can't select tracks directly.
The situation isn't entirely hopeless. Even within the most aggressive labels (and by that I mean their legal departments) there are parties who do encourage innovation. These are the people that go to bat for artists and are trying everything imaginable to promote them. They try new advertising campaigns, are experimenting with alternate branding, and moving to the sports business model (ie endorsements). Its unfortunate that the legal departments have been the ones with all the power, but this will fade with time as current employees are replaced with ones who see the effectiveness of all these new promotional channels.
This sounds naive. The people running the labels are very cynical, and the way they're compensated makes them even more so. They don't have equity. They're motivated by bonuses that come out of this year's revenue. So they're not interested in building stuff. They just want to extract large amounts of money, this year, from whoever they can.
But why can't this change over a period of time as physcab has indicated (who by the way, works/worked for one startup leading the charge)? I believe it impossible for the industry to fail--there will always be people making music. So the big four are either going to have to get with the program (and probably significantly reduce their market cap), or get the hell out the way.
This is in someways analogous to what YC, super angels, et al. have done with venture capital. Just like ~$20,000 is about all you need to get a talented founding team started, musicians today can do things on the cheap just as well. The entire system no longer hinges on the $100M home-run in either case.
Everyones been focused on investing in the killer app that will bring the music industry back to equilibrium. The Spotify's and last.fm's will certainly play their part, but its a fundamental shift in capital structure that the industry needs. Making it as a musician is, never has been, nor ever will be easy. There's extremely talented people out there though that, given a little cash and a little support, have the drive and persistence to make a career for themselves. Sans record label.
Yes, perhaps thinking the labels changing their ways (or hoping they do) over time is naive. I'll admit that (but I'd like to say optimistic instead).
What the music industry needs is a platform where unsigned artists can go to promote their music without the help of the labels. This platform could probably act like a label, but better serve the artists and users. It would have to garner a lot of eyeballs so it could effectively break artists into the mainstream. It would have to be smart at targeting a specific demographic of listeners so artists could know where to travel and know they can fill auditoriums. Lastly it would have to be a tech company, so the Platform would be in the hands of every listener.
MySpace might be able to do this if they gave up on the social network thing. There certainly is room though for a new company to have this role, but it is going to be a long and painful process. And you certainly shouldn't do it for short term gain.
The idea of simply creating a different distribution mechanism (eg CDBaby) for unsigned artists so that they don't have to sign with a major label is popular with the tech crowd, but fundamentally flawed. It assumes that unsigned artists can all produce well recorded, popular music on their own.
Most can't.
A good producer can pick a rough artist or band and get something popular out of them, but it often involves both mentoring and investment in recording and promotion upfront before any opportunity of return. Note I deliberately use the word "popular" rather than "good" (which is subjective anyway) because clearly as a business "popular" is where the money is. The "long tail" theory is fiction. Music is a hits business where most of the money is made by a relatively short fat body of popular music.
Many of the most popular "artists" are created from scratch by producers. Where do you think Britney and the Spice Girls came from? Like them or not, the revenue from hit music funds the production of new acts who haven't become profitable yet.
Another flawed assumption is that everyone wants to listen to new music. A lot don't. So you have a large body of recorded music that the record labels will never give up or let you sample or remix without a hefty toll. And as soon as any new act gets popular, you can bet they'll be offered a seat at the "big 4" music table. It's the DeBeers business model applied to music.
Personally, I think what the radio station JJJ in Australia does with their unearthed site (http://triplejunearthed.com/) is an excellent model for identifying quality artists. The next step IMHO is a ycombinator style production startup company that invests in developing the most promising acts to become popular and then offers all the recording, promotion, management and touring services that the labels do but on just terms. Distribution is just the last piece of the puzzle.
Your analysis is flawed in that you're only assuming the popular ones are successful. Do you also think successful companies are only those that are used by millions of users?
Its true that the endorsement approach only works for popular artists, but everyone else can take the Youtube approach and let their content speak for themselves. Plus, not every artist wants to be mainstream popular. A lot of artists just want to get their music heard and know more about the people who listen to them. They make their money by touring and merch just like the popular ones do.
And artists don't need a lot of capital anymore. Yes, labels sink enormous sums into the production and marketing of a track in the hope they have a Lady Gaga hit, but I think you'd be surprised by how many successful artists there are that have chosen to go their own way and do just fine.
Hell, I'm looking at the data right now its its quite convincing.
I think we're discussing different things. Clearly there are plenty of independent artists - punk rock has a long tradition of independent label publishing going back decades for example. Anyone who just wants to put their music out there now is well served by distribution providers like CDBaby.
I'm talking about successful disruption of the established music industry and the oft mentioned suggestion that simply offering artists a distribution alternative will do it. It won't. We've had a decade for grassroots indy web publishing to take over and it hasn't.
My point about the long tail isn't that it doesn't exist, but that it's largely irrelevant. Just as Youtube has barely scratched Hollywood, indy music publishing isn't moving the profitability needle of big music enough for them to care. They still have the back catalog, they continue to acquire the vast majority of popular artists and they're still driving the creation of the most popular music which is where the money is.
http://soundcloud.com definitely forms part of this. Especially when you link it up to Facebook via the http://rootmusic.com service. These three are basically the holy trinity when it comes to unsigned bands promoting themselves these days.
What I've been wondering is why Apple doesn't pony up and do just that.
They could say "Hey artists not [yet] on a label, join the iTunes Label. We're a great distribution channel, and we'll give you a 70/30 split."
OK so it's a bit far-fetched, and it really depends on what iTunes-as-a-label would provide (but with GarageBand/Logic/CuBase who needs tons of financing?). Really the only thing iTunes doesn't have a great story for would be touring (but even then, what better way to sell concert tickets than through iTunes/Ping?).
Because record labels are more about promotion than distribution (anymore). Amazon, cdbaby, etc. can all already do this.
Honestly, the artists don't even need those people anymore. I've seen artists who sell their music directly on their own site, and I don't see why more can't.
Also, as part of this cynicism, the labels are very good at having people that seem like the kind of people that are on your side. I.e., the kind of people that "will go to bat for the artists."
I'll believe it when I see it. The labels are largely just a copyright exploitation system designed by lawyers; certainly, this is where the money comes from, and until that changes (which I would imagine would happen approximately never), the fundamental behavior will stay the same. Even as their profits are shrinking, the individual incentives to behave monstrously remain in place. I think that the majors are going to end up as 50 person (all lawyer) holding companies suing the bejeezus out of everyone; and promotion and marketing will end up more evenly distributed, albeit much crappier on the high end. I wouldn't touch a music startup with a 1000' pole -- thankfully, I'm not an investor.
Yes, these people exist, they work for independent labels... The music industry doesn't just suck the money out of start ups, they also suck the money out of artists!
Don't be fooled by the crowd that says the music industry is "investing" in talent, they are lending money (and producers, which of course they charge to the artist again)! There are some ridiculous stories about the music industry.
Just curious: Do you think popular music as a whole is a hopeless area or specifically companies that are looking to stream music? I agree in regards toward streaming music services, but there are a lot of startups focusing on other areas of music that seem to be successful:
"I realized it was basically hopeless to start startups that touch label music"
there's a key word missing in your sentiment. the companies that are streaming music require licenses. there's a number of great companies that are extremely innovative in the music space. the echo nest just raised a $7mil round today. tunecore and indaba are two more varying types that have very nice business models.
from the article:
"There will be no new players of significance to enter the business. Investors don’t want to entertain the remotest possibility of funding any start-up that deals with music"
once again, it's not fair to think of all startups related to music as synonymous with the struggles of the streaming startups. as one who has been involved in the music space for a couple years, i still believe there is potential as more & more music is being produced --> how do we sift through all the noise?
We figured this out at the end of 2008 when we closed our digital music startup, Mixwit (yc w08).
Not soon after we shutdown the founder of a similar service, Favtape, was sued. Yes you read that correctly, Favtape the business wasn't sued, the founder (Ryan Sit) was sued personally. I'm not sure what ever came of that lawsuit, but I'm fairly convinced our name was on their too until we shutdown since we had received threatening letters from the same label a few months previous.
At the time we looked up to imeem as a beacon, thinking if we made a kickass product we could be be on crest of a new wave of successful digital music startups. Fast forward a year later, at 16m users strong Imeem was "acquired" by Myspace for $1m (compared to $50m+ invested) and turned into a redirect to MySpace Music.
Looking back I'm happy we figured this out when we did.
It's hard to say exactly where the line is that you can't cross without getting killed. Industry experts know more precisely. I suspect the fatal combination is (a) a music focused startup that (b) touches label music and (c) makes money.
I suspect this is exactly right. If you make money, they'll send their lawyers in to extort some of it off you.
And so what's happened is that digital delivery of music has largely been via alternative channels such as P2P. And a new generation of music fans is growing up, liking this, and hating the music industry.
The only way out of this that I can see is for artists to sign onto digital-friendly (ie, small-time, currently) distributors. Which loses anything you'd get from signing with a big label. It's a nasty situation; with luck, the music labels will kill themselves off entirely, and something new can rise from the ashes. I doubt they'll actually embrace digital distribution for a minimum of several more years, which is murder to artists.
I remember watching a video of a talk you gave at startup school 08 and near the end during the Q&A, you said something to the effect of "we fund what people apply with, which usually ends up being some form of facebook or something to do with independent music".
It seems that if the labels have positioned themselves as unfavorable toward startups to the point of making an anti-platform, that there would be demand for an independent, label-free music buying/selling experience for startups to work with. Yet the only thing I think of that comes close was the old version of thesixtyone's marketplace.
Are the startups that apply to ycombinator in this area trying to build something outside of the current music ecosystem and failing (and why)? Or is everyone just trying to work with the current system and finding that it isn't feasible/profitable?
I think if the startup has to do with helping bands survive independent of record labels, there's plenty of room. Once the secret formula to finding success as a musician without a major record label is discovered, all bets are off for the suits.
Not all music startups have to be arms of the labels right? Do you think it's possible to develop a music startup independent and free of any association with record labels?
The way I see it is that if it's possible to do this then the reward would be huge since the system is so broken.
No, it's not really possible, since the labels have a government supported monopoly (with pretty serious enforcement, and lots of laws in place to prevent most clever workarounds) on pretty much all the music that anyone wants to listen to.
Even people who like to listen to indie music usually have some more mainstream music owned by the big labels that they want to listen to. The problem is that most people won't stick with a service that doesn't offer the range of music they want to listen to.
And of course, the other issue with an all-indie catalog is that then you have a lot more players to negotiate with, many of whom will be just as clueless as the big labels.
So, you might be able to start a business with a small fraction of the indie labels represented, and appeal to a fairly small demographic, but there just isn't much room for growth there. I remember trying to use Emusic back in the day; while there was some music on there that I was interested in, it didn't even begin to cover most of what I was looking for.
While yes you'd be safe, you'd also much reduced interest. Your service would likely revolve around people using your site and getting told to go elsewhere to find it to listen to.
only allowed to live so the labels can suck investors' money through them
That's true, but not as true as you might suspect. Pandora is profitable. Yes, they are certainly pumping a large amount of money to the record labels, but they're able to exist without driving their users away with over-advertising.
I wouldn't do a (label) music-based startup today, though. Sad.
I don't know the details of Pandora's finances, but present profits tend not to be the whole story here. Many if not most of the startups that have deals with labels also have large debts to them. Plus the labels can change their terms. So you pretty much live on sufferance, for as long as you're useful to them.
AFAIK, Pandora is classed as radio, and doesn't have to do direct deals with the labels. They pay royalties to SoundExchange, which in theory distributes the royalties to the content owners. The rates they pay are a lot lower than the rates companies like Rdio, Spotify, and MOG have to pay to the labels directly for on demand streaming rights.
Absolutely true. I was making the point that they've survived and are apparently thriving. However: Pandora and similar services have had to work far too hard to do such a straightforward thing.
But by creating a startup-free zone around themselves, all the labels are doing is hosing themselves, because they won't have startups working to develop whatever would have been the new ways of delivering and using label music. They've created an anti-platform.