Analysis

Music Ally view: the music/tech startups landscape in 2017


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This is an edited version of a talk I gave at the NY:LON Connect conference organised by Music Ally and the Music Business Association last week:

“I’ve been working on Music Ally’s ‘Startups and Innovation’ report, which will be published shortly, rounding up some of the trends and early-stage companies that we’ve covered over the last two years. Here are some of the key points in my mind after writing it.

The first thing is a common view that I’ve heard when talking to people about current music startups: the belief that ‘things aren’t that exciting right now’. Often followed by an unflattering comparison to a perceived golden age of 2007 and 2008.

That was an exciting time: it’s when Spotify, SoundCloud and Songkick emerged, as well as The Echo Nest, Kickstarter, Deezer and others. And it was also the period when the Music Hack Day initiative got up and running, which provided a central hub of sorts for these companies.

That period was the start of a transition – from downloads to streaming – and it felt like there were a lot of startups with big, disruptive ideas. So a lot of people do look back at that as a bit of a golden age, which in turn leads to their lack of enthusiasm about today’s startups by comparison.

There’s also pessimism because of two separate kinds of failure: the failure of consumer-facing music startups because they couldn’t make the economics of music licensing work; and the failure of B2B music startups – the ones selling tools and services to the music industry – because they couldn’t persuade enough labels and artists to pay for their technology.

There are two blog posts that put these arguments very persuasively: one by David Pakman in May 2016 about how “the music industry buried more than 150 startups”, and one by Brenden Mulligan in October 2015 about the challenges of getting labels and artists to pay for digital marketing tools – he founded a couple of those startups, so was writing from personal experience.

They’re well-argued posts by experienced industry figures, and they’re both worth reading to get a sense of the challenges facing music startups. Add to this the fact that several VCs have publicly announced their unwillingness to invest in any startup requiring music licensing deals, and you understand why there’s a lot of pessimism around music startups. Who’d launch one?

But… there’s a but. Actually quite a few buts.

I recently interviewed Bob Moczydlowsky from Techstars Music, the new music-focused offshoot from the Techstars accelerator. He said that he thinks it’s important to widen the definition of a music startup, beyond the D2C streaming and discovery companies that we’ve tended to focus on.

That means looking at startups in virtual and augmented reality; in artificial intelligence and machine learning; in blockchain; in chatbots; in e-commerce and analytics… There are going to be music-focused companies from these spaces, of course, but there will also be companies with a wider remit – yet who will be keen to use music to test and showcase their technology.

Something else I picked up while talking to people for our report: there IS excitement around music (and music-related) startups in 2017, and it tends to fall into one of two camps.

The first is what I’d call the ‘whizzy’ new technologies: VR and AI are good examples, but also voice interfaces like Amazon’s Echo, and the potential of bots on messaging services like Facebook Messenger.

The common attitude, I think, is ‘Here’s this new thing, it may be overhyped, but we think it has potential to change the way people to listen to music; the way they interact with artists; even the way music is created or formatted’.

There’s also a genuine desire to figure out those questions through experimentation and through partnerships. And not the kind of partnerships that boil down to ‘give us equity and a big advance and we’ll give you a licence’ that remains the common perception of rightsholder deals outside our industry.

Instead, people in the music industry are talking the talk of ‘what can we learn together’ with startups. Hopefully they’re also walking the walk.

The second camp of startups are what I’d call ‘tools’ – things that can help labels and managers market music and understand their artists’ fans.

In some cases, people are excited about these kinds of startups because there are holes that need filling. Analytics, for example: Apple bought Semetric and Pandora bought Next Big Sound, which left a gap for an analytics tool NOT owned by a streaming service. And several startups are now trying to fill it.

Other examples? It was interesting that in my research for our report, a couple of people actually apologised for not choosing something “whizzier” when saying that Linkfire was one of their favourite new startups of recent years.

Smart links to route fans to the right digital-music service might not be whizzy, but they are meaningful for the daily nuts and bolts of marketing music.

As an industry, we need these kinds of startups just as much, but their challenge is how to get the industry to pay enough for their services (see Mulligan’s blog post) and what their approach is to raising money to get those businesses up and running.

I recently interviewed Dave Haynes from Seedcamp about all this, and his view was that there could be a bunch of really useful companies whose ultimate valuation is $10m-$20m, but that these aren’t numbers that tend to get institutional investors excited.

He wondered, as do many others, what the alternative, sustainable form of funding is for the ‘tools’ category of music startups: and whether the music industry itself could be doing more to support these companies through funding that isn’t focused on a lucrative exit down the road.

(Of course, there’s also the argument that music companies could be building these tools themselves. There are startup-like teams developing tech within labels and even some publishers now. Downtown Music is a publisher, but its SongTrust is effectively an internal startup.)

But on funding: talking to people in the music startups scene, they paint a picture of a world where it’s probably easier than ever to raise seed funding. In the UK, for example, there are plenty of angel investors floating about – some of them from the music industry – while the government’s tax breaks for investment in startups have also had an effect.

But as I have said, the leap to a Series A round of institutional funding may be tougher than before and perhaps, as Haynes suggested, not the right path for many music startups anyway.

On the positive side, we have a mini-flurry of music-focused startup accelerators. Techstars Music is about to get underway in LA; Project Music in Nashville is entering its third year; and in London we have Abbey Road Red and Marathon Labs. The companies coming through these accelerators, which have a strong focus on working with rightsholders and artists, will be interesting to watch.

There is also the potential of equity crowdfunding, which has been tried by a few music startups – 8tracks in the US, Twickets and Chew here in the UK for example. It’s very hard work, but for startups with a genuine community around them, it can be a new route to funding.

So, despite the nostalgia for that ‘golden age’ of 2007-08, and the pessimism around some aspects of the music/tech startups world, there are also reasons for optimism and excitement about this world.

Two last thoughts. First, look at what happened with Musical.ly last year, when an app with music at its heart came from nowhere to grow to 40 million daily active users.

Yes, there are some copyright and licensing arguments being had around that now, but when someone tells you there aren’t any exciting new music startups, it’s worth remembering that the app craze of 2016 was all about music, and an app that could have both commercial and promotional potential for artists and rightsholders.

Second, we ended 2016 with more than 100 million music-streaming subscribers globally, and Spotify alone has more than 100 million free and paying users. That’s a platform (or platforms) with real scale that a new wave of developers and startups might be able to build on top of.

How can Spotify, Apple Music, Deezer and others encourage that? There are always risks building your startup on a single, bigger company’s platform: if Spotify is Facebook, do you want to be its Zynga?

But there’s an app to DJ with Spotify, and a racing game that creates tracks from Apple Music, and these are just two examples of what might be built on top of these streaming platforms. I think there’s a lot of potential there too.

We must always be wary of getting over-excited about the latest hot new thing, but I think we should also avoid feeling too gloomy about innovation around music. There is plenty more to do and learn.”

Stuart Dredge

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