Latest Episodes (click below to listen)

Latest Videos (click below to watch)

Saturday, November 27, 2010

Digital Music Opportunity Is Huge And Now, Says Rhapsody

There's been some interesting back and forth in the last couple days about whether there's any real opportunity in digital music startups.

To get a different take, I talked to Rhapsody, one of the few longstanding survivors in the space. Although Rhapsody has never reported a profit, the company has been serving music on demand for almost a decade, and has started seeing subscriber numbers grow again (from a low point of 650,000) after being unshackled from RealNetworks in May.

Rhapsody thinks the opportunity for digital music has never been better. First, the rise of mobile music services means that more people are listening to more music in more places than ever before. And second, record companies have finally come around to the fact that the CD is dying.

The debate started with a speech from Imeem founder Dalton Caldwell at Y Combinator's Startup School event last Saturday. Imeem was one of the first companies to offer ad-supported music on demand, but it essentially went broke during the downturn and was bought and buried by MySpace in late 2009.

Caldwell's talk is sobering, and worth watching for anyone considering founding or investing in a music startup. You can't sell tools for musicians because they're broke. Apple dominates downloads, and record label advances and licensing fees will kill your margins. Ad-supported and subscription services require big quarterly payments no matter how many customers you have or how many streams you serve, which makes it way too easy to get upside down. Bootstrapping a new service by posting unlicensed content first and trying to reach licensing deals later (the YouTube method) is a sure path to litigation, which sounds kind of punk-rock cool but is actually a horrible drain of time and energy.

David Hyman, founder and CEO of subscription-music startup MOG, shot back with a guest post on TechCrunch in which he claimed that the opportunity is huge, and said that the labels are willing to reach reasonable deals with companies that have a logical business model and understand the costs going in.

Brendan Benzing, Rhapsody’s Chief Product Officer, agrees that the opportunity is real and immediate.

He contrasts today’s relatively open mobile platforms with the iPod of five years ago. Back then, record labels insisted on copy-protecting downloads, and Apple refused to license its FairPlay copy-protection technology. That created a closed system--if you wanted to buy music to play on your iPod, you had to go through iTunes.

That’s completely changed in the last two years, with Apple selling unprotected MP3s and allowing multiple subscription services--including Rhapsody, Thumbplay, MOG, and (in Europe) Spotify--onto the iPhone. Competition from Android has also helped.

He also claimed the record industry has realized that the old distribution model of selling plastic discs with music on them is dying, and that they’re desperate to find an answer. You can see it in their recent willingness to let Rhapsody and competitors lower the price for unlimited music on mobile phones from $15 to $10 per month.

But Benzing agreed that it’s still a precarious space for startups. “I’d rather be in our position than in a startup’s position entering this space today, where you have to raise money on a six-month or yearly turn just to build up to the subscriber numbers we already have.” He also said record labels are looking for music startups with new business models that grow the overall music listening pie, but aren’t interested in working with me-too services. “Taking one VC’s money to kill another company funded by VC money kills innovation.”

In the end, Benzing agrees that there will be two or three survivors in on-demand music. They’ll be the services that support the largest number of devices. Even if big players like Apple and Google get into the subscription game, they'll be prone to supporting only their own mobile platforms. That gives Rhapsody and its independent competitors a fighting chance.