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Music startups test their mettle in Europe

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According to conventional wisdom, consumer startups should move to San Francisco for access to capital, talent, and ideas. But if you’re launching an online music company, consider London or Berlin. For the past few years, a crop of internet music startups have been plying their trade in Europe, away from the glare of the major labels in the United States. Their playbook has been to achieve critical mass — with their product, users, and business model — before jumping over the pond.

Why Europe? One major reason is that it’s relatively easier to do licensing deals with the major labels there than in the United States. The U.S. is a much larger market, so new licensing models and frameworks undergo greater scrutiny because of the risk involved.

“The minute that I tell the major music labels that I am not interested in signing for rights to the U.S., the negotiations over terms become much, much easier,” said Axel Dauchez, CEO of the French start-up Deezer, in a recent Reuters story. The company plans to launch nearly everywhere but in the United States.

Entrepreneurs should also note that investors in Europe aren’t as jaded when it comes to music startups as their U.S. counterparts. Index Ventures stands out in this regard. Bolstered by their success with Last.fm, they’ve added Songkick, Soundcloud, and RJDJ to their portfolio in recent years. As a VC told me earlier this year, the reason he likes consumer music plays — as opposed to video ones — is that the licensing models are relatively well defined. There is a degree of certainty regarding the rates one has to pay for electronic sell-through, versus on-demand streaming, versus non-interactive radio, which Rolling Stone recently documented. Compare that with licensing premium video content, where the various licensing windows and unclear economics involved leads to uncertainty and risk.

All this has effectively turned Europe into a test bed for innovation in music (with the notable exception of internet radio, where the fragmented licensing regimes resulted in Pandora blocking non-U.S. listening).

Spotify is an excellent example of a digital music company that launched first in Europe and then expanded to the U.S., and their growth has been well documented. Much of their delay in getting licensed for the U.S. was rumored to be around the cash advances desired by the labels based on how “freemium” their model would be.

Before Spotify, there was Last.fm, the grandfather of European music startups. They came onto the scene just as I was winding up as COO at the internet radio network Live365. At the time, Last.fm’s look and feel was fresh, and they were innovating at an unbeatable pace. It boggled the mind that someone would invest in internet radio in 2002 given the industry’s trials and tribulations, but they persevered and CBS bought them five years later for a cool $280 million, making the company one of Europe’s biggest consumer start-up success stories.

Besides Last.fm and Spotify, these are the music start-ups to watch in Europe:

Songkick: Started by a Brit and an American, they are on a roll, having reached 100,000 activations within two weeks of launching their iPhone app. They’ve raised funding from Index, and earlier this year they poached an exec from Google to be their CTO. Songkick is centered around a concert listings service, but with social and commerce features that make it much easier to know when shows are happening near you.

Soundcloud: Billed as “YouTube for audio,” this is one of Berlin’s most prominent startups. Founded by Swedish entrepreneur, Alexander Ljung, the company is growing exponentially. It recently surpassed 8 million contributors, up from 3 million in February.

7Digital: Led by industry veteran, Ben Drury, the company is a pioneer in selling digital music. It continues to grow and be profitable, despite walking among giants like Apple and Amazon. Bolstered by its one million mobile users, 7Digital has expanded into the Asia Pacific region.

Mixcloud: Bootstrapped by computer science students from Cambridge, this startup provides a platform for sharing talk radio and music mixes. The site’s members have already uploaded 100,000 programs, and the founders have become fixtures on the Silicon Roundabout scene.

About the Author: Rags Gupta, based in London, is currently on sabbatical from the online video company Brightcove, where he has been vice president, international. Prior to that, he was an executive at Live365 from 1999 to 2004 and is currently an investor/advisor at 8tracks. He can be found at twitter.com/ragsgupta.

Image courtesy of Flickr user photosteve101.

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