Sunday, November 21, 2010

WHY DEAD LABELS ARE FERTILIZER FOR MUSIC STARTUPS

Mixtape Sessions. Music for the People.
A disproportionately high number of startups fail, but music-related startups are almost statistically guaranteed to bite the dust. And frequently, death strikes because of complications related to licensing. Sure, plenty of concepts are hair-brained - Spiralfrog, BurnLounge, and iMesh among them. But others, like Pandora, have dialed into real consumer sweet spots.

But Pandora is surviving despite ridiculous licensing rates on recordings, and its recording obligations far outweigh its publishing payouts. Still, this is an above-board company that wants to compensate artists, but is also interested in avoiding a financial hemorrhage. And despite hitting profitability late last year, the financials on Pandora will always be stressed by outrageous licensing payments to SoundExchange (which often has trouble distributing the money anyway, but that's another story).

Meanwhile, the learning for investors is loud-and-clear: stay away from any music-related startup, especially if its model is dependent on label licensing. Licensing rates are too high, and simply toxic towards innovation.

Alongside all of this, we have spectacular crashes-in-motion on the major label side. EMI is the most glaring example, but Warner Music Group is not far behind. Universal is the healthiest and biggest horse, but also gutting its interior to for a leaner run.

But fast-forward about a decade (or so), and you can see where this is going. In the nearer-term, EMI becomes a fireball, and parts are acquired on the way down. Consolidation eventually continues as other majors are forced into extreme positions. Eventually, considerable recording catalogs are bought and sold, and over the long-term, market forces start to dictate more rational prices. Important catalogs are no longer held by legacy-strapped labels, but instead, companies behaving more like asset managers.

That brings recording valuations closer to the ground, and normalizes rates. Sort of like publishing right now. Maybe this eventuality will only be experienced by our entrepreneurial kids, but so be it. The presence of more market-driven, rational arbiters of recording assets will allow more music startups to play the game - hair-brained or not. So the next-generation Pandora may have a more rational rights structure to play with, and investors will feel more confident getting back into the game.

Unfortunately, it's a long, long ways away. And way too long for any investor or responsible entrepreneur to wait. So here we are, for the short- and mid-terms anyway, dealing with licensing insanity as it stands. See you on the other side.

- Paul Resnikoff

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