The Music Startup Meltdown – And it’s going to get worse before it gets any better…

After a strong year for music tech investments in 2015, things have gotten much tougher for music and music tech startups. The money tree is bearing less fruit and the sexiness of music startups has faded. But its going to get even worse before it gets any better, says Cortney Harding. photo: Ted Reiderer

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By music industry and music tech consultant Cortney Harding, author of How We Listen Now: Essays and Conversations About Music and Technology.In Hemingway’s “The Sun Also Rises,” Mike Campbell is asked how he went bankrupt. His reply (“gradually, and then suddenly”) has been widely quoted since the book was released, but the next line is almost more pertinent to the current situation. When asked what brought it on, he says “Friends. I had a lot of friends. False friends. Then I had creditors, too. Probably had more creditors than anybody in England.”For a while, every music startup had a lot of friends. There were countless events and parties being hosted and blogs dedicated to covering the latest and greatest offerings—not to mention a whole industry of consultants who sprung up to shepherd startups through the industry. And they all had creditors, too — VCs who saw dollar signs and glamour, and were willing to take risky bets.It was unsustainable, of course, and at a certain point it had to crumble. I watched it gradually fall apart starting last year, with startups unable to raise additional rounds or even get off the ground. The tipping point for me was a job ad that I saw a few weeks ago from a U.K. live music startup called ConcertFlow. It was for a senior level position that required experience and ended on this note:

Basically, they’re asking people to work for free and go into debt in order to do it. They’re not the first company to do this, or even the first in the space — for a while in the early days, Pandora employees worked for free, and if they stuck around, they were rewarded. But that was in a vastly different climate, long before the digital music sector took shape, and this job posting shows a lack of understanding of the current circumstances facing startups. And they’re not the only ones — I talked to a friend who is taking an unpaid leave of absence from his music startup because they are running out of money. Another friend who consults for startups is owed money by three of his four clients and is pretty sure he’ll never see it.Rhapsody is losing $3 million a month, according to a report in Music Business Worldwide, and while Spotify continues to raise money, it has yet to go public. Deezer canceled a planned IPO last year. A source told me about an emerging streaming startup that thought it had millions in the queue ready to go, only to be told by the people doing their fundraising that oops, it wasn’t coming through after all. Drip.fm recently announced it was shutting down, and while YouTube’s acquisition of Bandpage might have seemed like good news at first, it came to light that they sold for a third of what they had raised. Hyped streaming service Tidal just lost two more executives and has struggled to stay relevant and add significant numbers of paying users. And that’s just the tip of the iceberg — I put together a list of twenty more examples I could have included before deciding which ones to keep.What happened? Just a few years ago, the world seemed full of promise — there were music hack days everywhere you turned, big music tech conferences once every few months, and startups without revenue models were pulling in millions in VC funding. A quick glance at the 2013 MIDEM “30 music startups to watch” list reveals many have met a sad fate — 18 of the 30 no longer seem to exist at all. Others still have a web presence but haven’t posted anything new in years, or are zombie startups running out the clock, or never even launched. Only a few have actually grown into real businesses.Now, that’s par for the course in startups, and really in most businesses. But up until now the rotating door of companies was spinning — you could easily move from startup to startup without much disruption. But now all the VC money that was greasing the doors has dried up, and people are stuck — there’s just nowhere to go. Music startups seem to have hit an especially high brick wall.

The space was enormously frothy before the meltdown, cluttered with plenty of companies that developed music products for nonexistent customers. Everyone was trying to do the same thing — think of the number of music startups that hit the market that were essentially the same (music discovery, for instance, or curated playlists, or social sharing) save for one or two tweaks. Music startups attracted a lot of people who had no understanding of the market and frankly saw it as an opportunity to have fun, meet some famous people and hot girls, and then make a quick buck when they were acquired for millions by Apple or Google. Everything they know about the big, mean major labels they learned from watching VH1’s “Behind the Music” and reading stories by tech bloggers with no understanding of the music business.Secondly, almost everyone overestimated how much the music industry hadbeen disrupted by Napster. Major labels still wield an enormous amount of power, and can easily stop a startup in its tracks if they want. I talked to a label exec after Turntable.fm (remember them?) raised money in 2011, and he laughed about how much they underestimated the industry, and its uncanny ability to read Techcrunch stories about big funding rounds and ask for just that amount of money for licenses. To this day, I still hear music startup founders say that “a lawsuit is the new handshake,” a phrase coined after Napster that has been proven to be false time and time again.For a while, all a startup needed was one major to sign on before the others followed suit. Now, SoundCloud has two of the three signed up, with Sony holding out. Major labels have also started turning down licensing opportunities from even major players who have the cash — they’d rather keep the market small and let the companies they have equity in win the day. The way we access music might have changed from the nineties, but that might be about it.Startup founders also overestimated just how much music matters to the average person. When you love music, you surround yourself with similar people, and that creates a confirmation bias — everyone wants to share playlists and discover new bands just as much as you and your friends! But really, they don’t. The average consumer is happy to listen to the radio or Pandora, see a few concerts or a festival once a year, and leave it at that.Founders also overestimated the amount of money in the indie music space. While there’s certainly a layer of unsigned bands with professional aspirations, many more of them are just playing music for fun, or to meet people and be part of a community. They take it seriously, up to a point, and might release music and tour and want to cover costs, but they also know it’s a hobby and passion and will never be a viable living.Being in the middle of the music startup meltdown right now is terrible, full stop. It’s never fun when people lose jobs and companies close, and it’s going to get worse before it gets better, and the next few quarters are going to reveal even more turmoil in the sector. But it’s not like the internet is going to be turned off for all time; plenty of startups rose out of the web 1.0 collapse, and just as many good ones will come in the future (even in the midst of the downturn, startups like Jukely, Crowdmix, Vadio, and Patreon were funded and are moving forward).What this does mean is the music startups have to be ten times better, and smarter, and more focused on profit than they were before. In the long run, the space might be smaller, but it’ll be better, with more fully-realized products. We just have to hold on tight as we pass through the eye of the storm first.