Analysis

The search for the next music/tech giants (#SlushMusic)


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2017 has been a fascinating year for digital music, from the growth in paid streaming to a wave of new accelerators and initiatives to help talented music startups get up and running.

A pair of sessions at the Slush Music conference in Helsinki this morning provided some insights into the music/tech world. Raine Group partner Fred Davis offered advice on ‘how to spot a giant’, while Techstars Music MD Bob Moczydlowsky provided an update on how that accelerator is approaching things.

The Raine Group has advised and invested in the likes of Spotify and SoundCloud: Davis is a board member at the latter, with a long music-industry background including founding an entertainment and media law firm representing talent; working closely with Spotify in its early years; and an EVP role at EMI Records.

“When you look back at the history of music, technology has been both a friend and a foe of music.. most of the tech advances have been significant platform changes… all of these changes advanced the user experience both for the artist, and for the listener and consumer. And advanced the industry,” said Davis, reeling off a list ranging through vinyl, 8-track, cassette and CD among others.

Then came Napster in 1999. “Although Napster was very destructive for the music industry, if one looks back 18 years later, I would argue that Napster turned out to be very good for the industry,” said Davis.

“The music industry needed to change. Recall that the only way to purchase music back then was to buy a 12 to15 song CD for 15 dollars or euros or pounds. Maybe 19 dollars. Even when you only wanted one song. Napster, as painful as it was, helped to push the industry into the future. It helped bring back a la carte choice to consumers, it helped to put music in the cloud, and it liberated music from a physical format.”

Davis suggested that the pain of Napster was in part the music industry’s fault, for not having been responsive enough to the changing demands of music fans – demands that were only satisfied by legal services after an illegal one had led the way.

“That revolution was really led by Europe. It was companies such as Last.fm, Rdio, Deezer, Spotify and SoundCloud that led the way in streaming,” added Davis.

So where are we today? “I’m actually feeling right now that we’re probably in the least creative, productive tech evolutionary period in recent memory. If you quickly analyse the current market, the streaming consumer facing leaders are Spotify, Apple and SoundCloud. All three of which were born 10 years ago or older,” he said.

“All three are operating off iOS and Android operating systems: both 10 years old or older. We are listening to most of our music on iPhones, Android phones or maybe Sonos systems at home. All ten years old or older. Yes, we’ve had the introduction of Amazon Alexa, but that is just a functional change, nothing like the changes that occurred in prior periods… Are there no great, new, fresh ideas?”

After wondering aloud whether it’s a dearth of ideas or an intimidating licensing environment, Davis suggested another option. “Is the industry simply settling into a period of growth after such a tumultuous period, that the market is just not ready for more significant and substantial change? I think all of the above.”

“Most of the changes we see now are focusing on taking advances of these past changes. Different price changes, different audio-quality bitrates, UGC and PGC [professionally generated content] variations and tweaking. All important advances,” added Davis.

He hailed the recent news of a 17% growth in US recorded-music revenues in the first half of 2017 as “a breath of fresh air after 15 years of decline” but returned to his main theme: “Where are the significant tech changes?”

Davis did express optimism about blockchain technology, and also talked about the direct artist-to-fan economy that he sees evolving further.

“On the one extreme we see virtual goifting, already a $5bn industry for peple literally tipping people they don’t knwo money for performing on mobile phones. An incredible new industry that’s blossoming. On the other hand we have artists like Chance the Rapper… fans are literally buying music directly from Chance. And in between we have direct to artist sites like Patreon, PledgeMusic, SoundCloud and Musical.ly,” he said.

“Many people mistake this advancement of direct-to-consumer as the decline of the record company. I beg to decline that assessment. The record labels are not going anywhere,” added Davis.

His view: labels are still the entities investing capital in artists, with A&R expertise and marketing and promotion expertise layered on. But they can’t serve everyone.

“Labels are for the top 5% of artists. Maybe even the top 2% or 3%. What about everyone else?” asked Davis. “In the past you were maybe on an indie label and that was pretty much it. Now we have the opportunity to create an ecosystem where we have major labels, indie labels, and everybody else can make a living… to take advantage of the tech changes, to foster the creative community, and to encourage fans who want to have a direct relationship with the music of their favourite artists.”

So, major tech changes may not happen over the next four or five years, but Davis said he hopes the industry will build on the changes that have already happen to build an “artist and fan-friendly ecosystem” of this kind. “We look at this new world of artists self-publishing, and we do see an exciting new frontier that is going to flourish as we enter 2018,” he said.

Bob Moz

Moczydlowsky’s talk focused on Techstars Music, which completed its first cohort of 11 startups earlier this year – including Music Ally interviewees Popgun, Pacemaker, Amper Music, Jaak, Weav and Robin – and will soon name its second.

The three-month ‘bootcamp’ program sees all participating startups moving to Los Angeles – “not permanently!” – with the first phase seeing them working with 200 mentors; the second focusing on product development and team-building based on the mentor feedback; and a third phase of fundraising preparation and business development roadmap planning.

And then a demo day to finish it off, with an audience of investors and music-industry executives. Techstars invests $20k in each startup for 6% of common stock, as well as a $100k convertible note. “These terms are not negotiable,” warned Moczydlowsky, stressing the value of the Techstars network. “Of all of the Series A investment rounds in the world, 4.89% go to our alumni. That’s the largest share of any accelerator program in the world of any kind.”

Why focus on music/tech? “We think music is a good investment, and we’re willing to be patient and we’re willing to deploy capital over many many years to make that come true. But we don’t invest in ‘music’ companies’,” he said. “We invest in companies solving problems for music. That sounds like we’re splitting hairs, but it’s a really important distinction.”

Moczydlowsky noted that in 2016, the recorded-music industry generated $16bn, before quoting the much-discussed Goldman Sachs prediction that this will grow to $41bn by 2030. “No matter how you slice it, that’s very rapid, dramatic expansion for the category,” he said.

He talked about some key categories that Techstars Music wants to invest in. Event and crowd safety; machine-learning and AI; rights and royalties; VR and AR experiences; and content delivery and infrastructure.

“As streaming grows, as we move from 100 million subscribers through 150 million, 200 million, maybe 250 million, a bunch of music-industry practices are going to be rewritten,” said Moczydlowsky, using rights and royalty payments as an example.

“There will come a point very quickly, if it hasn’t arrived already, where super-liquid software payment of royalties is going to be essential to powering more growth in the business,” he said. Other categories like VR and AR are more nascent.

“We haven’t made any VR investments to date. We’ve looked at a bunch of companies, but we haven’t believed in any enough to write cheques yet,” he said. The same is true of AR, but Moczydlowsky said he is bullish on both categories in the longer term.

E-commerce is also on the Techstars Music radar. “It’s very very easy to buy a jersey from a sports team that you like. It’s actually kinda difficult to buy a product from an artist,” he said.

“It’s hard to figure out how the content you’re working in one channel leads to consumption in another category. If I saw your record collection and the shelf of books in your house, I could recommend albums and movies and even shoes and jeans to you.”

“Your consumption of different categories and different media types has not yet led to great product recommendations in other categories. We think this is a great area for investment.”

Stuart Dredge

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