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Summary:

Rumors of the death of the digital music industry are greatly exaggerated, says former Last.fm executive Matthew Hawn. While there may not be much room for profiting from recorded music any more, an entire generation of companies are building a different, more exciting future.

matthewhawn

For those of us who work in digital music, this week has delivered a nasty one-two punch to the gut. First David Pakman (eMusic, N2K, MyPlay) posted the text of his testimony during US Congressional hearings on his blog.  It focused on how prohibitively expensive it is to license music from record labels. Then  Peter Kafka, one of the best writers at All Things D,  was incredulous that anyone would even bother starting something new in the music space at all.

I’d argue that both of these very smart guys are obsessed with the wrong problem and, on this topic at least, they are as stuck in the past as major labels are.

They both make the mistake of focusing primarily on start-up business models that revolve almost exclusively on getting publishing or performance rights to stream or download music. And by getting tangled up in that mess, they miss the forest for the trees.  They’ve forgotten that the music industry isn’t — and has never been — just about recorded music.  Sure that part is hard and it’s been shrinking for the last decade, but that aspect is only a part of the bigger picture.

Don’t believe me?  Here are some forward-thinking companies who are wisely focusing on other parts of the music world and not just whining about the high cost of licensing music. So what are they doing right?

They focus on live music

Live music revenues have eclipsed recorded music revenues and while a lot of that money is flowing through LiveNation or AEG, both of those companies are ripe for disruption. Live experiences are hard to pirate and commoditize. As the money drained out of recorded music sales, money spend on music has moved products and services that are harder to mass produce and offer intimate access to their favorite musicians.  And fans are willing to pay for these experiences, in stark contrast to the smaller segment who are willing to paying for downloads or subscription music services.

This is what start-ups like SongKick and BandsInTown understand as they build communities and tools for live music.

They are making promotion and discovery better for artists

The truth is that 90 percent of musicians don’t have a piracy problem, they have an obscurity problem. The people who should love their music just don’t know it exists. The old channels of videos and radio are still there, but the internet exploded everything and diffused attention. In many ways it’s harder than ever for artists and fans to connect. While Peter scoffs at the value of a start-up based on bands without music contracts, it’s where the future Radioheads and Beyonces are going to come from. And plenty of new and old artists who DO have label deals also need these services and will pay for them.

This is what Soundcloud (CEO Alex Ljung pictured) is doing by proving easy-to-use tools for artists who want their music to be heard by more people in more places. Or WebDoc, which creates a platform for artists and their fans to collaborate and share creative projects.  Or The Hype Machine, which has harnessed the power of music blogs to amplify discovery of new music. This is also the area that my old company, Last.fm, SHOULD be pivoting toward…but don’t get me started on that.

The opportunity to partner with brands here is also amazing. It’s also a place where you can get the labels to work with you instead of sending their shark-like lawyers to negotiate with you.

They are making the whole ecosystem better

The value of music for fans isn’t just listening to it.  It’s about the connections you make with other fans and to the artists themselves. Or by disrupting the number of middlemen who take a part of each dollar an artist gets from fans. Fans want to pay artists, particularly when they understand that the artist gets a larger piece of the pie than they did with the old-school record labels.

This is what Ian Rogers has been preaching forever as TopSpin pioneered the direct-to-fan platform. Or what Benji Rogers is doing with his alternative funding platform for artists, PledgeMusic. Or what Bandcamp does when they create a better deal for artists by letting them sell direct to fans.

They created simpler and more intimate services

While the first generation of services that Pakman and his generation ran were based on the size of the catalogs they offered and on trying to be all things to all users, a music services doesn’t have to be massive and complicated to be valuable.   This is what Hannah Donovan and Matt Ogle, formerly at Last.fm, are doing with This Is My Jam, which you an think of as Instagram for music. Watch them closely.

They move their focus to mobile

Mobile phones are already the most personal technology we own these and so they have already become central to many people’s music listing experiences. The opportunities to expand that to other music-centric features like with ticketing, new music discovery, fan/artist interactions are all fantastic. Location and hyper-local services around music are also untapped. Improving and enhancing music playback of music we already own is also under-developed as an opportunity.  Apps have become a new medium for artists like Bjork and Brian Eno and there is more room for innovation here, even as it gets even more crowded.

This is what Mobile Roadie recognizes as they build a mobile-first platform for artists who want to want to reach their fans directly.

They build B2B services around the music

Every label and artist manager, large and small, is struggling to understand audiences and to collect data around how music is being used. And it’s not just labels who want this data. Brands and advertisers want it too. This is where Next Big Sound and MusicMetric live, providing important analytics and tools to create “actionable intelligence” in the fragmented music world.  The Echonest, meanwhile, is also building data-driven services and commercial APIs to help small and big companies to make their music products with data, play listing, and recommendations.

And that’s not all

Here are other areas that haven’t really been touched yet:

Sync rights

     – the licensing of music to TV, games, advertising and film  is one of the most lucrative parts of the recorded music business.  Creating a better marketplace for sync rights could make it even more valuable, particularly if you can make it faster and simpler for companies to do it.

Merchandising

     The company that really fixes the “merch-table” for bands and creates the Threadless or the

Etsy

     for music fans could clean-up.  TopSpin and BandCamp are doing this now too.

Royalties and payments to artists

      The accounting system that underlies the publishing and performance rights is one of the most rotten and complicated things about the industry. It’s only getting worse as are more digital products and services are created. A few companies like

Kobalt Music

    are trying to start again from scratch.  A music start-up built on transparency, great analytics and paying artists faster and more fairly would be the most disruptive music business ever.

Start-ups create the most value when they carve out new business models and transform the way we used to do things.  They are less valuable (and thus less viable) when they just wringing the last drop of money out of old models.  The truly great ones transform industries and build new opportunities, growing the market for everyone.

Kafka and Pakman are right about one thing:  trying to licensing music is hard and the corpses of many start-ups litter are littering the battlefield.  So be smart and don’t play on that field.  Move to a new one or make your own field.

Matthew Hawn is product development and strategy consultant based in London, and previously VP of product at Last.fm

  1. Here at RouteNote (http://routenote.com) we have been disrupting the royalties and payments for artists. We have a few very big announcements coming in the next few months which will simplify royalties collection for artists.

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  2. Matthew, I don’t believe anything in my testimony affords you ammunition to suggest that I think there is no interesting innovation happening outside of license-requiring music services. Indeed the very fact that the licensing imbroglio is so challenging for startups has led to innovation in other areas of music. My testimony was directed at the recorded music industry since they are the ones involved in the legislation relating to internet radio royalty rates.

    I would suggest, however, that most of my views about where one should look for innovation are in the markets where large, enduring and truly disruptive companies can and will be built. While there are lots of interesting companies in the spaces you mention above, I believe it will be hard to build truly large, enduring companies appropriate for venture investment. The nice thing about this discussion is that time will most certainly tell.

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    1. Hi David, I absolutely understood where your testimony is coming from and I wouldn’t presume to put words in your mouth about where the innovation starts and stops in music. My main point is that lots of attention has been focused on the difficulty of licensing music from the major label and that are interesting and viable companies who never set foot in those shark-infested waters.

      I wanted to open up the discussion so that we remember there is still plenty to change about the way music works that doesn’t involve licensing music and that the music industry is bigger than the major labels. That there are sustainable business models to be tried and explored. Some of those will be massive companies with large market caps. that will make firms like yours happy. Some of them may be smaller companies with long lives that never take VC funding or make millions but that have a positive and sustaining value for fans, musicians and the people who work with them. Some of them might even be (heaven forbid!) open-source projects like CASH Music – Cashmusic.org/ or the MusicBrainz project MusicBrainz.org. (Disclosure: I sit on the MusicBrainz board.) These may change out artists get paid, how fans connect with artists and how new music is discovered. They might create a new industry with a different set of values and cultural impact than the old one. That alone would make them worthwhile in my eyes.

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  3. Great post

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  4. I think anyone who says any industry is stagnant and not worth getting into is looking at it wrong (well, okay, maybe oil). Taste isn’t fixed. Technology isn’t fixed. Revenue isn’t fixed. x is a better way to listen to music than y isn’t fixed. While we talk about things like royalties, perhaps decision making seems narrow. But no matter what, music lovers will find the musicians, and they’re going to go where it’s easiest for them. Everything else follows.

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  5. Great post Matthew

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  6. Love this post. Two others to check out – pulselocker for DJs and Jambase for anyone that needs to find out who’s playing in their area tonight. Jambase is FAR superior to Songkick.

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  7. Good article – also, I’m trying to sell a great domain name for music startups – disco.me

    Has an obvious music connection, can be short for discover or discovery, or discount. Great for branding! Hit me up if interested (trying to fund my own projects, so I’m sadly letting this domain go).

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  8. I think this conversation does a good job of defining the divide in music today. So many innovators are caught up in concerns about record labels and publishers when, in fact, they have nothing to do with the future of music. The labels will likely be bankrupt and broken up in the years ahead and the assets may be free from the confines of their usury contracts. If that happens, some large companies and/or investors will have an opportunity to acquire the assets in auctions or sales. But forgoing investment in music start-ups is like avoiding the energy business because of oil, coal and nuclear. The future is in the future. The new model which is so often discussed is still in that far off land of some innovators imagination. Recorded music will likely have a huge place in this future version of music industry, but not the recorded music that was discussed in Congress this week (at least until the inevitable bankruptcy sale). The market is a powerful glacial force that will move regardless of laws and prejudices, the majors cannot avoid this and neither can the rest of us. The challenge for investors will be divining which solution, scaled to the realities of today, will best be suited for substantial growth in the years ahead. Hats off to you for doing the research and sharing it with us.

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  9. HI Matthew,

    Excellent article.

    Ariel

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  10. Sébastien Flury Friday, November 30, 2012

    Many thanks for this 360° analysis of digital music and its future… I couldn’t stop nodding! At Coteries, we build an orginal solution for the future of digital music and I’m sure you’d love it. Please don’t hesitate to contact me (seb@coteries.com)!

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