In response to David Pakman's piece on the difficulty of building a successful music industry startup, Jim McDermott looks at why it is that so many of these startups have failed, and don't seem to grasp how labels work in the music business.
Guest post by music and entertainment industry consultant Jim McDermott
David you’re one of the smartest guys on the block, and I have massive respect for your opinions, but in this case you’ve left out one very important question: Why? Why did the labels “bury” so many digital music startups?
Perhaps it is because most of these startups did either not know or not care about how the music business worked, and were more interested in a big IPO and payday for themselves and their investors than building sustainable businesses.
I’m not trying to defend the music business here (and I expect to get flamed because nobody wants to hear anything other than “the labels are clueless slimebags”). Like any industry dealing with massive disruption, lots of mistakes were made, some of them stupid. But remember that the music business was “Omaha Beach” for the kind of disruption that hit many industries years later. Look at the controversy AirBnB and Uber are facing in a world where disruption is far more pedestrian than it was in 1999. Here are some of the things I noticed in sits with literally hundreds of startups over a decade spent in new media at major labels:
- Music tech startups have always wanted music at reduced costs/higher margins vs what labels were getting with retail. They said this was because the costs for technical needs and customer acquisition were so high. I can’t count how many times some startup told me how expensive bandwidth was, or rent in Silicon Alley, a Superbowl ad was, as a rationale for why labels should lower costs of music. We asked: Why don’t you ask the server companies or your landlord for a big discount? “Because what they charge is what they charge,” they replied. “You should lower the cost of your product to us, so we can lower the cost to the consumer, so we can have a business,” they said. Nobody came in the door and said, give us the same deal as you give retailers, the same costs and margins, and we’ll make it work (Liquid Audio were an exception, they got it and I think we fucked up not working with them earlier and helping them). Let’s not forget the music business was transacting billions of dollars with retailers, who worked with similar margins and thrived. The retailers had productive and profitable relationships with labels for decades. I guess we’ll have to see if Pandora lives longer than Tower Records did.
- Tech startups wanted labels to be sensitive to their costs and timetables, but totally dismissed how much money and time it would take the labels to completely transform their industry. Labels needed to clarify rights with artists whose contracts in many cases had no digital language. They needed to completely rethink their releases processes, prepare massive catalogues for digital sale with the required attention to quality, educate not only employees within the companies but also all the artists and managers, many of whom were not on board with their catalogues being cherry picked, no matter how much consumers wanted it. There was a perception by the startups and the media that digital distribution would cost the labels nothing, require no investment, and hugely increase margins for the labels, which was simply not the case. The costs didn’t go away because of the shift from physical to digital, they just changed. But all the media and the tech industry believed was that a CD cost something to make, a download cost nothing. This perception fueled the “you should charge us and consumers less for your music” argument.
- Most music tech startups didn’t know shit about how labels worked, or what their concerns were, and neither did their investors. I saw dozens of startup powerpoint presentations where the first eight slides were doom and gloom overviews of the music business, followed by another 15 slides of why said startup was going to save us. And more often than not, the assumptions made by these companies were incorrect, with huge foundational flaws, and the meetings turned into an educational process. I don’t know how so many of these companies got funding from angels with such obvious fundamental problems in their business models, but always, always there was desperation to get an agreement in place so the startup could go get more money. And as a label, when you understand the leverage you have, when you see that the thing cannot exist without your assets, you squeeze the best deal you can. Isn’t that what VCs do, too? People need your money desperately, you fund them, and you negotiate the biggest chunk you can get while still leaving them viable. If you have a music startup, you need music it make it work. To get the music, you have to make it work for the labels and artists. If you’re unable or uwilling to do this, then you’re not going to make it. Just like you won’t make it if your investors don’t see consistent growth.
- 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? Can’t they bring great art to life, starting from almost nothing like Leonard Chess or Ahmet Ertegun or Berry Gordy — record people who didn’t have big catalogues behind them to get scale, who didn’t have angels raining down millions on them, who didn’t custom build opulent offices spaces in Gramercy or the Meat Packing District stocked with Hermann Miller chairs, who lived and died on how their records actually sold week to week? Today we venerate people like Daniel Ek, who succeeded in large part by giving music to people for free and who then tells the industry he’s their savior while needing a billion dollar credit line to keep the fucking lights on.
- I might be misreading the intent of your piece, but it comes across at least in part as regret that the labels ruined the chances for the huge payoffs VCs would have received if these startups were successful. There’s not a line in it that ponders the impact on artists, who’ve watched billions of dollars go into music business disruption over the past 20 years, very little of which went to them and instead eroded their livelihood. And the real truth is that the investor’s insatiable hunger for growth and a big ROI is just as responsible for the death of these companies as the labels are. Perhaps more so.
If the labels aren’t happy, then boo-fucking hoo. But I’d say the same thing about investors and amoral tech companies who point fingers at record companies while doing exactly jack dot shit for artists. In 2016, they have no excuse.
Me, I’m here for the music, and I’m with anyone else that is.