Everyone wants a music startup. After all, somebody needs to fix the industry, it's hard to discover new music and we're all experts in our own way. Plus, it just makes you seem cool. But are music startups viable businesses in today's turbulent music industry?
Dalton Caldwell, founder/ex-CEO of imeem, says no. Digital music, he argues, is nearly impossible to monetize in any number of formats: Tools for artists don't work because artists have no money to spend; Selling music is tough because you're competing directly against iTunes, Amazon and soon Google; ad-supported music doesn't generate enough revenue to meet monthly minimum licensing payments; subscription-services take enormous amounts of upfront investments and time to develop the necessary licensing agreements.
David Hyman, CEO of premium music service MOG sees things differently and points to success stories like Winamp, Pandora, and Guitar Hero to prove music products sell in a variety of formats. Hyman agrees that providing music content is a small-margin business, but the market is massive and music consumption is at an all time high. He describes how MOG has evolved from a site providing tools to music bloggers, to a music network providing ad sale resources, to its current subscription music service. The implication that Hyman is making is that success in the constantly changing music industry requires adaptability.Imeem only ever tried to be an ad-supported music service. Caldwell himself admits that attracting traffic is easy when you offer free premium music to consumers. Imeem's 21 million monthly unique visitors in 2008 said nothing of its viability as a business. Even with a $24 million annual run rate, imeem could not keep up with the monthly minimum licensing fees and they failed to adapt their business model until it was too late. Dalton is aware of this and says he was in the process of implementing a new strategy to offer broadly available, legal APIs for others to build upon when the company was forced into a fire sale of its assets late last year.
MOG, on the other hand, didn't rely on music content to build a viable business and has only recently, and carefully, entered the subscription music business. MOG started by providing tools to music bloggers. This morphed into the fastest growing music network, providing ad sale resources to over 1,300 blogs and music sites, reaching over 35M monthly uniques. Only after years of digital music experience and a revenue cushion from ad sales, did MOG make the leap to digital music distribution.
As to Caldwell's other points, I have to disagree. Artists don't have money to pay for artist tools? Protools has shown that artists will pay steep prices if they believe it will help them realize their dreams of “making it”. Tunecore has done very well charging users $20 to put their music on iTunes - $20 for the sense of accomplishment that your music is selling on the shelves next to Arcade Fire and Broken Bells. As to quarterly margins being impossible to meet, MOG says they have realistic quarterly margins that they have consistently hit. And although subscription services have yet to prove profitable in the long term, Hyman points out that the nature of subscription services is changing and they can now be incorporated and tied into established billing relationships like phone bills, car payments and cable television.
The music industry is tough, but there are plenty of passionate entrepreneurs and artists who have made their careers out of it. Perhaps if you had asked Caldwell a few years ago about the viability of music startups, when imeem had a $24 million yearly revenue run rate and had just acquired SNOCAP, he might have had a different answer.
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