Napster’s Children

Want to know what’s up with new music startups? Read on. Great coverage by Paul Bonanos from The Deal. So good to see mainstream financial coverage of our music industry.

Striking a chord

A decade after Napster, a new crop of Internet startups is challenging the music industry’s dominant companies. Their instruments of choice: social networking, discovery, ad-supported streaming, marketing and other tools that change how business is done.

Source: Tech Confidential

U.K.-based We7 Ltd., which has drawn funding from British musician Peter Gabriel, along with VC firms Eden Ventures and Spark Ventures plc, both of London, offers free songs that contain short advertisements that vanish after a few weeks. We7 recently added songs from a third major label, while SpiralFrog signed up only two of the four majors, meaning that finding free songs can still be something of a wild
goose chase.

Nashville’s NoiseTrade, a bootstrapped startup, provides a way for artists to give away music in exchange for the e-mail addresses of prospective new fans, while angel investor-backed TrueAnthem Corp. of San Francisco connects brand advertisers with musicians, who introduce tunes with short, personalized ads.

Consumers less inclined to possess a virtual copy of a song also have more options. That includes subscribing to libraries of music content and Web sites that allow streaming songs on demand and limited downloading. Publicly traded RealNetworks Inc. of Seattle has emerged as a clear leader among such products with its Rhapsody service, while the existing Napster, which purchased its trademark from the original bankrupt startup, has lost subscribers and remains far from profitable. Both companies offer several tiered plans, ranging from roughly $10 to $15 per month, that provide access to millions of songs from all four major labels, as well as “tethered downloads,” or DRM-restricted files that expire once a customer cancels his subscription.

The market for free music “streamed” on a Web site is more complex, with some startups relying on subscription services to supply songs through their own user interfaces. Most streaming services are married to some other Web utility, whether a social networking site, music discovery service or
paid-download store.

With investment from VC firms Sequoia Capital and Morgenthaler Ventures, both of Menlo Park, Calif., as well as from Universal Music and Warner, social music site Imeem Inc. of San Francisco has built the fastest-growing free streaming service. All four major labels now supply music to Imeem, which lets users play songs on demand.

Imeem’s growth highlights the pressure on “old music” companies, like other old media firms, to change with the times. And the legal battles between upstart music firms and incumbents have been no less intense than the fights in other quadrants of the media industry, such as the ongoing court dispute between Google Inc. and Viacom Inc. over the search giant’s use of protected video on YouTube. Warner sued Imeem in 2007 over alleged copyright infringement, only to later buy a stake in the startup after settling the case.

“Sometimes a lawsuit is foreplay to a licensing deal,” says Norwest Venture Partners principal Tim Chang of startups’ path to legitimacy in the age of free music. “They infringe so that users get what they want and advertisers pay attention, scale so that you have some leverage against labels, get sued and then settle.”

The digital-music business is entering a phase common to many emerging high-tech sectors. The land rush of startups that follows any significant technological shift, such as file sharing, is already starting to thin out as winners stake their claims and losers get consolidated, if they’re lucky, or simply disappear.

For example, Last.fm rival Pandora Media Inc. faces a fight for survival despite having attracted prominent venture investors and a slew of good publicity. The Oakland, Calif., startup employs music experts to create a recommendation “engine” for Internet radio. But an upcoming regulatory change that will result in a doubling of streaming royalty rates for Web radio companies could spell the company’s doom unless it elects to charge users a subscription fee or finds a way to add advertising that its audience will accept.

Like Pandora and Last.fm, music discovery site iLike Inc. of Seattle has become popular, if not consistently profitable. One key to its success in attracting users has been its availability over Facebook Inc. of Palo Alto, Calif., through which more than half of its 30 million users connect to the service. Through a partnership with Rhapsody, iLike allows users to stream as many as 25 songs per month and download selected others for free while examining their friends’ tastes and recommendations. The startup has raised $15.8 million in two rounds of funding from former Time Warner Inc. executive and MTV co-founder Bob Pittman, star venture capitalist Vinod Khosla, and the Ticketmaster unit of IAC/InterActiveCorp of New York.

“There’s a natural propensity for social networking and music to go together,” says MySpace founder Brad Greenspan, who left the social network in 2003. “When you’re surfing people’s profiles and everything starts to look the same, the only way to differentiate among them is their individualization. And if you add an image of an artist on a site, you will bring in people who want to be close to that musician’s energy, whether by blogging, chatting, befriending or following them.”

Drawing on such desires, music-blogging hub MOG Inc. of Berkeley, Calif., wants to tap into fans’ efforts to spread the word about their favorite artists. Universal and Sony BMG joined the Angels’ Forum of Palo Alto in putting $6 million into the startup, which compiles the musings of volunteer bloggers writing on given musicians and bands. MOG, which also offers on-demand music, represents a one-stop version of the musical blogosphere, where songs are commonly shared without compensation for content owners.

Also harnessing the power of the blogosphere are music-focused search engines such as the bootstrapped Hype Machine Inc. of New York and angel-backed Seeqpod Inc. of Emeryville, Calif., which index thousands of music blogs where MP3s often reside for a few weeks so users can sample them.

Another area where Internet startups are encroaching on the record labels’ turf is marketing. Launched this summer, Los Angeles-based Topspin Media Inc. enables artists and fans to communicate directly, offering a sort of customer management technology package for musicians that allows sales of songs, albums and merchandise. Under one subscription option offered through the company, a fan can pay a flat fee for a musician’s entire recorded output over the coming year — income a musician might otherwise have to share with a label. Venture investors are on board, with Topspin having raised funding from Redpoint Ventures of Menlo Park and Foundry Group of Boulder, Colo.

But rampant music piracy continues to dwarf legitimate sales, cutting label revenues by as much as half since the mid-1990s. Meanwhile, work that had long been the province of music companies has been gradually appropriated by newer, fleeter Internet companies or, as with marketing, “disaggregated” out of existence. Other competitors also have emerged. LiveNation Inc. of New York, a publicly traded live music promotion company spun out of Clear Channel Communications Inc. in 2005, has signed top acts, including U2 and Madonna, and has sweetened its deals by letting artists maintain ownership of their material.”

If so, what will the business look like? A dying era of superstar acts may give way to a music scene carved into myriad niches, with proliferating media channels creating room for more voices — the “middle class” of artists, as Rogers puts it. Artists and fans will operate in closer proximity, with more tools in place to help them connect.

How, then, will music derive its commercial value, and where should investors place their bets? The future is likely to include more sponsorship and patronage. Imagine liquor companies, fast-food joints and other advertisers paying the band of the moment for rights to its music before it’s recorded rather than after it hits the charts. Alternatively, rich benefactors — or legions of fans — could support artists in exchange for early access to a new album or even a shout-out in the liner notes. Tie-ins with other media such as video games will also create opportunities: People may not buy the album for $15, but they’ll pay $39.99 for the “Guitar Hero” version.

The old ways, reinvigorated by technology, are made new again.

Read the complete article at The Deal.

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