How is cooperation and competition between startups and big corporations in the music industry evolving? That was the topic for a panel session at the Midem conference this afternoon.
The panel comprised Mark Piibe, EVP of global business development and strategy at Sony Music Entertainment; David Hoffman, co-founder of Next Big Sound; Sitar Teli, managing partner at Connect Ventures; and Romain Amblard, acceleration director at NUMA. The moderator was Bluenove president Martin Duval.
Hoffman kicked off. “Our willingness to look at new technology and take risks is certainly there,” he said, of the wider music industry. Piibe noted that Sony did a deal with Next Big Sound when it was a small startup. “If you think about Spotify, which is now this 800lb gorilla, when they did their first deals with major content firms in 2008, they didn’t exist. They didn’t have a product,” he said.
Amblard suggested that after the music industry was one of the first media sectors to be seriously disrupted by digital tech “they are now ahead in the open innovation process, by listening, collaborating and investing in the ecosystem”.
Teli agreed that the music industry was hit much harder by trends like filesharing than other content industries. “One reaction was to be more distrustful of technology companies… some of the deals that have been done have been collaboration, but have not been sustainable for the startup,” she said.
“The music industry: there’s really only a handful of people to negotiate with, so they have a lot more bargaining power than a startup ever will. And unlike film or TV where someone like Netflix can say ‘we’re going to make our own movies’. Spotify is at the point where they could, but the nature of music doesn’t really lend itself to taking artists already signed to labels and having them make a whole other album.”
She noted that startups are trying to build businesses that are “not wholly dependent on some of the more powerful aspects of the music industry” – if a startup is relying on using a big catalogue of music from rightsholders “you’re probably never going to be able to build a [sustainable] business,” she said.
Teli said that some of the most interesting music startups are focusing on music education: teaching people to play instruments, where the rights negotiations are very focused on sheet music.
What advice would the panel give to startups to better prepare for partnerships with major music companies? “Business is key,” said Amblard. “Startups must bring something in that is not just innovation, but real results.” He added that “there is a certain amount of risk that the copyright holders are not willing to take”.
Hoffman said that it shouldn’t be assumed that because a startup is small, the corporation is going to crush them. Another mindset is healthier: that startups and corporations can grow together.
“Where one of the companies is getting clearly trampled by the other, or where the startup isn’t playing nice for whatever reason with the corporation, that’s where you see things go off the rails,” he said.
Teli said that as a VC, she defines success as companies to have scaled to become independent and profitable. “I actually can’t think of a music-tech company that has done that. Which is very worrying,” she said. “Music is one that VCs generally avoid. Even the largest, most successful company in this sector is Spotify, and it lost a couple of hundred million dollars last year, so it’s still not there.”
Piibe gave Sony Music’s view, suggesting that startups need to be able to solve a genuine problem for the industry. “Understand the market dynamics and go in with a credible story about how you’re going to add value or solve something that needs to be solved,” he said.
Teli praised the Abbey Road Red startup incubator, and noted that Universal is running a program for startups. She also referred to the EMI Sandbox initiative, where a certain amount of music content was made available for startups to play with.
“One of the biggest issues when you’re doing a startup in the music industry on the consumer side is you don’t have any content that you can legally work with,” she said. Piibe was involved with the EMI initiative.
“You definitely have accelerators that are music-focused,” he said, citing Project Music in Nashville as one example. “In terms of in-house accelerators, I think you might see that too,” he said. “That kind of thing is going on. At Sony, one of the things we’re working on now is this summer we’re going to be running along with Sony PIctures and Sony Entertainment, with the University of Southern California… to do a virtual reality innovation program.”
Could telcos start launching incubation and accelerator programs that could benefit music startups? “Most telcos are trying to save their own businesses right now. I think they’re distracted,” said Teli, with a grin.
The panel were asked for advice for social-music startups, and Teli didn’t mince her words on the startup scene in general. “I see very very few companies that actually have an excellent product. And almost none of them are social,” she said.
“We’re now at this stage where you can get companies that have 10, 20, 30 million downloads and millions of monthly active users, and they’re all in chat and communication… None of them are monetising very well… If before, 50 million was an interesting number, it isn’t any more, actually.”
What about the growing question in the music industry: that if Spotify, Pandora, Deezer and other pureplay independent streaming services can’t become profitable, the music industry will be left in the hands of Apple, Google, Amazon and (maybe) Facebook: even bigger corporations for whom music may be a loss-leader.
Teli said that even these companies will not stick around with music if they do not see a path to profitability. “The question is more is it profitable to do any of this. At what point will it be profitable, if it takes $10bn in funding?” she said.
“On the other hand, the counter-argument is a compelling one… Globally, very few people subscribe to music. That either means it’s not a compelling product or there’s a lot of room to grow.”
Piibe had his own views: “I don’t think you can conclude that music distribution companies in the digital space are never going to make money,” he said.
“These companies make choices in how they manage their P&L. Their priority may be expansion rather than profitability. Or getting a user base as large as possible as opposed to profitability. So these choices are being made every day at these companies.”
He pointed to satellite-radio firm SiriusXM as an example of a company that went through tough financial times. “They’re exceptionally profitable, they had to go through hell to get there, but they got there.”
Teli said that in music, some of the biggest problems are on the B2B side of the business: they may not be as “sexy” as the consumer startups, but there are huge opportunities. “I think making money is pretty sexy!” she laughed. Hoffman agreed that Next Big Sound’s analytics tools may have seemed dry initially, but they fulfilled an important need.
“Look at music metadata. That has been a space that has been a mess for a really long time. A lot of smart people in companies have tried to solve that, and it’s still a mess,” he said. Piibe pointed to the failure of the Global Repertoire Database (GRD) project, and wondered whether startups might take another crack at that problem.
“Most of the startups that we are welcoming in our acceleration program, they arrive with B2C – they love music and they want to create something with friends – and they go back with a B2B product. They discover the competition is too big, they don’t have anything viable, and we encourage them to try to deep-dive into more complex B2B problems,” said Amblard.
What about apps like Musical.ly and Dubsmash, which are helping people make user-generated videos and share them, and which may or may not have a full set of licences before taking off?
“We do have deals with a lot of the companies, Musical.ly is one, Flipagram is one. And frankly with respect to this kind of thing, we see every kind of scenario,” said Piibe.
Sony sees well-funded startups coming in pre-launch and signing all the necessary licensing deals, and it also sees those that have launched, taken off quicker than they expected, and only then realised they need licences.
“We muddle thought… typically these things end up in licensing relationships rather than litigation,” said Piibe.
“What we all want is for the music industry is to keep growing and growing… these relationships are another experiment that we can add, and learn from it,” said Hoffman.
Teli gave her view. “About seven years ago after I first invested in SoundCloud, in every label there was a small group of people that were digitally positive – pro working with startups – and a much larger group within the label which was everyone else, who was pretty resistant and didn’t really trust it because of some of the things that had happened in the early days of the internet,” she said.
“Over the last seven years there has been a shift, more and more buy-in: they [know they] should probably find a way to work with startups in a way that is repeatable and encouraging. There has been more and more buy-in, even if there is more to be done… I see more and more small companies being able to do deals with the majors where they can get access to their content. It can be expensive, but at least you can get it done.”