scale panel

Silicon Valley is always keen to understand how scaleable a startup’s business model is: what will make them the next billion-dollar unicorn and beyond? But in music, is that line of thinking problematic?

A panel run by Music Ally at the by:Larm conference in Oslo today explored the question of whether the search for the ultimate scaleable global music-platform risks a race to the bottom, devaluing music and stripping jobs and value creation from the creative community.

The panel included Helienne Lindvall from Auddly; Henriette Heimdal from WIN; and Thierry Baujard, investor with Media Deals and Peacefulfish, and chairman of Musimap. The moderator was Music Ally’s Patrick Ross.

Ross defined a scaleable business as one that’s successfully generating revenues; is built for the future; and is part of a sustainable society – “the sustainable business can’t be working in an unsustainable economy,” as he put it.

The panel gave their views. “As a songwriter looking at companies that are using my music, sometimes there’s been companies that have scaled a lot on the back of not actually paying the people that made the music. And I think people in the music industry are very wary of companies like that,” said Lindvall.

“If we look at something like Spotify, obviously their scaleability has been fantastic, and they’re licensed as well, but there have been serious problems on the songwriter side in terms of licensing. With them doing their public offering, now songwriters feel a little bit left behind.”

She said that Auddly is looking at scaleability not as a way to do a quick exit, but to solve a problem: the licensing and rights issues for the music industry.

Heimdal talked about Spotify’s commitments to pay royalties through their licensing deals with major labels and Merlin. “On eof the really big problems that Spotify has now, they now have shareholders and they have investors who want to see a profit from the business. They have never made a penny of profit from the business,” she said.

“70% of their revenue goes out to paying rightsholders, which is fantastic… but this is a little bit scary. Now for them to turn a profit they need to develop their business model further to make some money – profit – and one of the ways potentially that they could do with is scale back on royalties that they pay out to rightsholders.”

Baujard gave his view. “By definition the creative industry is not scaleable… every time you have to create a new song. Scaleability is normally the incremental cost, the marginal cost of creating a product again should be at no cost, or very limited cost. Which is not the case. All of the creative industries is based on you do a song, you make a film. And every time, you don’t know the risk of it. That’s not scaleable,” he said.

But the aggregation of that music or those films – by services like Spotify in music’s case – is scaleable, he suggested. Lindvall noted that the difference between the music and video sectors is that the music-streaming services generally have the same catalogues, whereas in video Netflix will have different content to Hulu and other rivals.

She also said that for 10 years, the standard price for a monthly music subscription in the west has been $9.99 / £9.99 / €9.99, and it has never gone up (unlike Netflix). “In fact, it’s probably gone down with the addition of family plans,” she said.

Ross asked whether there’s a risk of music becoming a commodity under these models. “I think that’s already happened!” said Lindvall.

“I think it’s a very natural progression for any industry or sector to develop over time. More importantly, the question from our point of view in the independent sector is how do you nurture talent to make sure that [commoditisation] doesn’t happen… What do we teach songwriters so that doesn’t necessarily happen?”

The conversation turned to technology and its impact. “Yes, music is starting to be a commodity: it’s everywhere. But for me the main question is really about this 80/20 rule. We are always listening to the 20%, always the same thing, and we don’t really have access to the rest of the catalogue… most of the time we don’t listen to it. So there are potential value-added services that could be sold,” said Baujard.

He thinks those could be one example of a scaleable music business in a positive sense: technology creating even more ways to discover (and thus generate royalties for) music.

“The filtering part is not a new thing. If you look at a label like Ministry of Sound, they would put together compilations,” said Lindvall, pointing out that even this form of curation may not have been scaleable – since it now competes with curated playlists on the streaming services.

Is the digital space a winner-takes-all environment? Google dominates search, YouTube dominates video, a handful of social networks dominate that space… Lindvall wondered whether there isn’t a diversity of competition between these big digital services, while Heimdal suggested a challenge as music-streaming services scale is how smaller music companies can interact with them.

“All the big companies talk about having a global strategy, global plans, but the majority of the programming is run from one major market, which makes sense for your business. But that interrupts diversity and creates more homogenisation. Access to get to the people: the curators, indies really struggle. That’s what we’re working on to help the independent sector,” said Heimdal.

The conversation jumped around quite a bit, with ‘scaleability’ fuelling a number of different paths. Ross wondered whether blockchain technology – verified credible people providing information on music that can then be used to speed up payments for its usage – could be a good thing for digital music’s scaleability as a whole. Lindvall disagreed, citing the music industry’s basic challenges around metadata.

“Blockchain will not solve that problem. It’s a red herring. We need to solve the metadata problem across the world, across all the different siloes, which are the PROs and the publishers, and actually also getting the right information from the start,” she said. “The blockchain idea is not something that will solve it. Maybe when we are solving the communication between rightsholders…”

Heimdal: “It’s a little bit sad, this idea of trying to circumvent all the middlemen. Musicians are really good at creating music. Distributors are really good at distribution… that’s the key to creating a sustainable business, having all the experts involved in the process. All the pieces of the puzzle need to be there.”

She added that scaleability for the music industry also includes getting data – and money – from countries that haven’t provided it in the past. For example, Merlin getting a million dollars of revenue out of Peru for its members where it hadn’t been getting anything before. “More money is flowing back to the rightsholders,” she said. Which in turn helps them grow, and fuels new jobs.

Baujard talked about tech’s role in helping investors feel confident about the music industry – because they can predict revenues and growth with more certainty, but Lindvall suggested that scale may bring a lack of risk-taking within the music world too.

“The issue that has happened in particular with the bigger record companies bought by companies looking to get a return very quickly and more predictably is that there’s less of a tendency to sign something that is maybe going to become big after two or three albums,” said Lindvall.

“But some of our biggest stars today had unsuccessful albums at the beginning, but they had people sticking with them… those people who believe in the magic that an artist has, that it will shine through in the end, is the only way we can get an artist a sustainable career… but with streaming, the middle class of artists and songwriters has been decimated, because streaming tends to favour the big hits.”

“What investors want is to build value in the mid-term basis, and to resell that for a higher price,” responded Baujard. “There are all types of profiles, so it’s difficult to generalise. But generally what they want is to build value, and they know that building value takes time… The revenues are not really important for VCs. What is important is value: to be able to sell at some point. A lot of people in between don’t understand that, but it’s really about building this value… I think if there are ways to show the sustainability in the mid-term to investors, that’s something they will be able to understand.”

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