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The global economy melt-down happened at the wrong time for the nascent digital music industry. We had comfortably settled into somewhat of a oft-repeating pattern:

  • Someone from “outside the business” comes up with an innovative approach to music marketing or discovery using a new digital and/or mobile technology/application
  • They raise some initial seed funding, usually from friends & family, launch a beta, garner a favorable mention in Digital Music News, Paid Content or TechCrunch, then secure some first-round venture capital
  • They then either contact or are contacted by the Majors, discussions begin, and the division of potential revenues are addressed. More often than not, the negotiated split does not result in a sustainable financial model.
  • Ultimately, a significant percentage of available funds are paid out as up-front advances, leaving little to grow the business. A second round of funding is therefore required to keep the company afloat.
  • Then, one of three things happen: 1. They get that next round, giving the young company some needed growth capital; 2. They get acquired; or 3. They “go dark.”  Unfortunately, the latter seems to be the more frequent outcome these days.

World economic crisis has disrupted the dance. Venture funding has virtually dried up. Ron Conway, the legendary Silicon Valley ‘angel’ who backed Napster in 1999, allegedly recently said the following, “I will no longer fund a venture that depends on the rationality of a music executive.” Whether this is Urban Legend or fact, that sentiment is pervasive. The deals are perceived to be irrational and economically undoable.

So, a change in approach is being thrust on all of us by forces beyond our control. If the traditional music industry wants to successfully navigate the transition to a digital & mobile ecosystem, they need to be willing to enter into true partnerships, supporting innovators’ efforts & working together to grow the business. They must expand on some of their recent efforts to invest in this very promising future.

To be clear: A. labels, publishers, artists and songwriters, all are both entitled and due reasonable compensation for their investment and creativity. B. The business must change to survive. These are not mutually-exclusive statements. We can both compensate and innovate, they can work hand-in-hand. Let’s put a little more effort into collaborative solutions, they will yield the most rewarding outcomes.


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6 Comments

  1. Ralph, not every online business has to be and investment bank funded dotcom, why are you guys so hung up on finding the next big thing instead of looking at the business that are already running at a profit without the cash from those toffs in the city.
    Many of us are doing quite interesting things without ever having to ask VCs for money.
    You write ‘2. They get acquired; or 3. They “go dark.”‘ and surly you must already know that they go dark because their aim was to get acquired. Straight out of business school starting a dot.com getin acquired or going bust is almost becoming a right of passage for rich kids.
    The independent music sector could do without this if you ask me.
    In january we’ll be in the cafe outside midem talking to the people that really make things happen….
    M

  2. “A. labels, publishers, artists and songwriters, all are both entitled and due reasonable compensation for their investment and creativity.”
    Labels and publishers need to re-evaluate their role in the music industry. It is now (and hasn’t been for some time) big or clever to manufacture records and distribute them. Neither is it essential to invest the levels of cash we are used to in the recording of a record. In order to get a fair compensation, labels and publishers have to work harder for it. Marketing is one area where record labels have always been needed to bankroll huge campaigns. Focusing on this might be a good place to start. Leveraging social media should be the number one consideration.
    “B. The business must change to survive. These are not mutually-exclusive statements.”
    The business has already changed, it is the industry that has not. Lets take a leave out of IBM’s book. They invest massive amounts of money in the free operating system Linux. The profit by selling additional goods and services around the expert knowledge they have of that operating system. The same goes for MySQL. We are already seeing the start of this with a rise in live performances. Restriction of exclusive rights leads to a reduction in the creation of content. Yochai Benkler explains this very well in Wealth of Networks.

  3. Sometimes I think the legal departments are just trying to justify their existence. But sadly its also true that too many deals never make it that far.
    In this environment where we are all flailing around trying to figure out what’s working, I’ve never understood why labels and publishers don’t have a standard short term deal (1 year?) that perhaps includes a token advance sitting on their desk that they can offer to any start-up with a half way decent plan that walks in the door.

  4. I agree with the collaborative approach as the best way forward to achieving real and lasting change in this beleaguered industry. The benefits and opportunities are just too big to ignore (see my prediction – http://www.capgemini.com/technology-blog/2008/11/tech_predictions_2009_musicasa.php).
    However, there is an even greater need for getting the right cross section of stakeholders involved, and this is something I have been calling for since last year, (see http://www.bcs.org/server.php?show=category.9433), which now appears to have become a growing/urgent refrain by various notable congnoscenti e.g.: Lawrence Lessig, Judge Miriam Hall Patel (i.e. the Napster Judge), yourself and Gerd Leonherd, just to name a few. The message is loud and clear that the digital music business will survive, with or without the existing music industry. Period.

  5. The consensus is clear, change has been foisted upon a reticent industry. They ignored it, resisted it, litigated against it, and now, belatedly, have begun aggressive steps to adapt. I, for one, don’t believe it’s too late for the industry to evolve sufficiently to survive.
    Will UMG, WMG Sony and EMI ever regain their positions of strength? Maybe not, but they won’t accept a dimished role without giving it their best shot. Interestingly, EMI is showing real promise with an aggressive re-org that attempts to fundamentally address how music is now being experienced. It will be interesting to see if they’ve moved ahead of the puck.

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