The problems of companies like Crowdmix, Cür Music and Guvera may have made headlines in 2016, but is there a more positive story to tell about the prospects for other music/tech startups in 2017?
And just as importantly, will investors – from angels to VC firms to accelerators and even music companies – buy in to that story, to help the next wave of startups around our industry build their businesses?
These were the questions facing a panel of experts at the NY:LON Connect conference we organised with the Music Business Association in London this week.
The panel included Ben Bowler, CEO of MusicUp; Sachin Premnath, partner, global entertainment and industry group at Reed Smith; Graham Davies, director of strategy and digital at PRS for Music; and Benji Rogers, founder of Dot Blockchain Music.
The moderator was Jeremy Silver, CEO of Digital Catapult, who kicked things off by referring to eMusic boss-turned-VC David Pakman’s widely-shared blog post about the 150+ startups that (so he claimed) the music industry has “buried”. Was it fair comment, he wondered.
“Maybe it’s not the best vertical to start a startup in, in my opinion, at this moment in time,” said Bowler. “The Pakman article laid out how the industry is structured through its long history in a way that is different to a lot of industries where startup culture fosters a lot more reliable successes.”
Yet MusicUp is trying to foster better relationships between budding startups and the music industry, based on Bowler’s experience with startup Chew. “It’s a very hard industry to be successful in. A lot of that sets up this false dichotomy where labels and startups are pitted against each other in this fight over who controls how content should be used, and who decides which models should be allowed.”
“I think changes are happening,” added Bowler. “There is more interest in openness and supporting schemes. Abbey Road Red is run by Universal, and there is interest in other majors I talk to to support that digital innovation category.”
Premnath chimed in with his views, based on the new businesses he sees coming across his desk at Reed Smith. “From a legal perspective, the two big obstacles for any music startup that license music are punitive advances… and MFNs [Most Favoured Nation clauses]. If you have two very engaged labels who believe in your product, and one that doesn’t and gives you a very onerous deal, with MFN’s you’re lumbered with the worst deal.”
Premnath talked about the desire for a licensing structure that helps early-stage music startups get up and running without facing those challenges. That’s something that British collecting society PRS for Music is working on, said Davies.
“There does need to be a fair playing field in the market, so people can come up with an idea, get it out there, get some interest and start to build it,” he said. “Having said that, it’s also important that services are licensed.”
Silver warned against short-termism from the industry, squeezing each wave of startups dry of their investment capital, assuming that another wave will be along shortly. He suggested that there may be a self-destructive licensing model at work here: the terms of the licensing deals are what guarantee that the startups fail.
He asked Rogers, a veteran of the music/tech world, why he’s still launching new music startups given the hurdles outlined above.
“It’s worse than that, I’m actually investing in music startups as well!” said Rogers. “This is the most extraordinary time to invest in music startups. I think the potential is absolutely huge, because of what’s coming… We’re going to go through a really painful bit: it’s going to get worse! My prediction is we’ll be at $100bn a year as an industry in two years, but it’s going to be really painful to get there.”
He noted that startups are still in a tight spot around licences: signing direct deals may be expensive, while building on Spotify’s licences via its API “means your business relies on Spotify doing the right thing” – in the same way that startups building on Facebook’s platform rely on the social network not suddenly tweaking an algorithm and destroying their traffic.
Rogers noted that there are still lots of angel investors looking to invest in early-stage music startups – “for whatever kinky reasons!” said Silver, before questioning how we go from that healthy angel-investment scene to $100m of annual revenues.
Rogers said that the interoperability layer of the music industry is going to be “solved” by startups like Dot Blockchain, groups like the Open Music Initiative, and other entities. He suggested that this will mean the music itself will contain its licensing permissions, which in turn, will bring larger investors back who may have been running scared of music/tech startups that require rights.
“If you combined the publishing and the performance information into a tradeable asset, you can make bets based on its provenance, and licensing becomes ten times faster,” he said.
The panel talked about the gap between early-stage seed/angel investing to larger Series A (and beyond) rounds. Premnath: “It’s actually often easier to raise large numbers than it is small numbers, because VCs aren’t that interested in smaller Series A amounts,” he said, before warning that not all non-VC capital is appealing.
“I’m not sure as an industry how healthy it is to be in existence at the whim of some city guys who fancy getting into music because it’s cool,” he said. “You could also question whether music startups need investment,” he added, citing Mixcloud as an example of a music startup that has been entirely bootstrapped. “That’s the exception rather than the rule,” noted Silver, to which Premnath agreed.
Davies said that PRS has seen a swell of startups working around the “mechanics” of the music industry, like access to the data from music consumption. “Over the last few years we’ve seen a lot more organisations – Jaak, coming up later [in the conference], we’ve been working with them for a year,” he said. “Any startup starts with enthusiasm then hits the wall of complexity that sits there. But that’s part of the role that we see: helping the industry to change.”
Rogers talked about how the music industry could help startups with their investment challenges. He recounted the tale of a friend with an impressive prototype iOS app, who wanted to get music into it. “He didn’t know who to go to at Universal, or what PRS was. No concept of it… What happens is, the heartbreak starts to kick in where the developer says ‘I wanna just pay everybody, so if I make £100 can I give everybody £70 proportionally?’ And I said no, because you’ve got to talk to 800 people to make that happen…”
Rogers called for some kind of hub where this kind of developer can go in, get the necessary licences in one place, and then the licensing deals scale up according to usage of their product. Will we get there, wondered Silver?
“The bet I’ve put in with my own money, time and effort is on Dot Blockchain being the rail upon which that runs. If it works out, I think it’s going to work very quickly,” he said.
Davies was asked if he recognises this ideal scenario. “Hmm,” he said. “I agree with Benji, but I think it comes from if there’s a better way, people generally start to use that. There’s been a lot of exploration around how we can improve that data-sharing. I think it’s as much process as it is technology and blockchain… I think it’s a really big task, but I think everything from last year is pointing to there’s a lot of desire to make it happen.”
The panel talked about startup categories they’re excited about. Bowler said he’s keen to see what chatbots can do for music, citing British startups The Bot Platform and TalkBe as examples. He also said he is hoping to see some startling music-based VR content, to match what games developers have been doing with VR headsets.
Premnath said he’s enthusiastic about the potential for high-res music format MQA, while Davies said he’s looking for more innovation on the data-processing side. PRS is keen to see new technology – from cloud-computing to AI – deployed to improve efficiencies in this area.
Rogers agreed that VR is “one of the most hungry consumers of music… in the VR experience, if you turn the music off, suddenly it’s as if you’re not there”. He also pointed to what he called the engagement economy, and startups that will help artists to reach their fans directly, even if they tap in to the APIs of Spotify and other streaming services to do it.
The NY:LON Connect conference was co-organised by Music Ally and the Music Business Association, in association with Armonia.