Venture Capital Talks Music @ MusicTech Summit
Late Last week in San Francisco, the
MusicTech Summit sought to bring together music and
the tech
industry. This panel asked what VC’s think about the digital music business. From
the panelists:
- Most music 2.0 companies can’t generate a high enough rate of return to satisfy venture funds. However, that doesn’t mean they can’t be viable, profitable businesses. Entrepreneurs in the digital music space are more likely to find funding from angel investors or in some cases smaller VC funds.
- Funds are typically hesitant to invest in music 2.0 companies because 1) there is no money in selling music, and 2) if the company hasn’t properly licensed music from l
- labels, the risk of expensive litigation down the road is very high.
- Generating traffic for your music 2.0 website is great, but only if it’s the right kind of traffic. It’s
essential for businesses to understand who their users are, and why
they use the site. If 80% of your users are overseas, for example,
advertisers won’t be very interested. If you’ve built an audience
around free music, what makes you think your users will stick around
when you stop giving away music? - There is currently an oversupply of entrepreneurs in the digital music space.
- There is no future in the business of owning intellectual property.
Businesses must shift from selling music to consumers to selling
services to musicians. - Recorded music is a static product and therefore worth little in and of itself. Value is created by using music to accessorize or enhance other products.
- From an investor’s perspective, selling mobile music is
unattractive because margins are extremely low – carrier fees, label
licensing fees, advertising costs and operating expenses leave very
little profit. Mobile sales will not save the music industry.
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“…If you’ve built an audience around free music, what makes you think your users will stick around when you stop giving away music?”
there are so many things wrong with this sentence I don’t know where to start – businesses have been giving away samples of their products since time began – do you really think the smack dealer is gonna charge you for that first hit – or even the second? Is in store sampling in food markets and halls just a tool to throw money away?
What I am reading here is that the current music model can no longer sustain the cherry picking and rich rewards that smart VC cash is used to. Great. There may be no business in owning intellectual property – but there’s always a business – in fact – it IS the business – in creating intellectual property.
Good post. This summary is pretty accurate to my understanding of the space. I think you underestimate the destructive influence of the labels somewhat who, as a recent example, refused to do any rational deal with Gerd Leonhard’s company Sonific. And Gerd is a friend to the labels.
You also didn’t mention some of the notable over valuations in the digital music space that are well known in the investment community. The confusion over appropriate valuations has plagued the digital music business since the begining.
Last.FM went for something like $18 per user. It is pretty hard to see how one might earn a multiple of that from these users. And don’t tell me CD sales or t-shirts…
Frankly this part of the problem rests squarely on the shoulders of the entrepreneurs and not the recording industry. IMO many digitial music services would make nice mom and pop operations, they could earn an individual a fair (i.e. multiple six figures) income. But as larger ventures they just don’t work for a variety of reasons.
The confusion over reasonable valuations that results makes these companies an even harder sell to investors who don’t see good odds of significant mutiples given the existing entrenched players, legal complexities, crowded field, etc. which you already outline. Instead entrepreneurs should consider launching as an ultralight startup with minimal or no outside investment.
Services that required a server room full of machines can be delivered with a hand full of high end PCs today. And many of the new generation of web and back end tools facilitate rapid development. Turn your closet into a server room. It might even be fun.
FWIW I formerly was CTO of Live365.com…
Thanks for sharing such informed comments with our readers. Please keep ’em coming.