Money in a Sinking Ship? - Competition Week


Photo by Spark Mark.

Nobody buys music anymore, which begs the question: “Who would want to invest in it?” Yet some do as the growing field of digital entertainment has given rise to an assortment of entrepreneurships, all demonstrating a taste for invention and a craving for the next great idea. Pandora pioneered algorithm-based Internet radio, Turntable.FM made music social, and Spotify eliminated the need to own anything. There are also companies like The Echo Nest, which provide the insight and tools necessary to move forward with such digital platforms. What’s more, these ventures have all found ways to make money through alternative resources, thus ascertaining investors willing to risk on a measure of blind faith and intuition.

Arguably, the result has been good, though Pandora’s precarious stock price has raised additional concern. Furthermore, the debate over copyright laws pits the traditional music business model of the record label against its hipper cousin, the tech company. One argues for tighter restrictions that stifle innovation while the latter pushes to maintain flexibility despite waning revenue. For venture capitalists, the risk is high, and a little riling.

“In digital music, rightsholders begrudgingly license their disrupters in exchange for very large advances and equity grants, and provide poor economics for the licensee,” explains David Pakman, a partner at the venture capitalist firm Venrock in New York City and an Internet entrepreneur. “For these reasons, digital music and other licensed entertainment industries are not appropriate industries for VC investment, especially when so many incredible opportunities exist in others… As a VC, I have not invested in a single music startup. I have not seen a worthy investment opportunity relative to the many other industries in which we invest.”

That’s not to say Pakman isn’t an avid supporter of the music business. Conversely, he’s spent many years overseeing development of new media in the industry. In 1999, he co-founded Myplay, which introduced the “digital music locker.” He later served as CEO of eMusic, the world’s largest retailer for independent music, and previously served as Vice President at N2K Entertainment, which created the first digital music download service. Presumably, Pakman has been ahead of the curve every step of the way, yet he admits to great hesitancy when it comes to actually fronting money on the trade. He’s not alone either. Others have similarly expressed doubt and lack of clarity with the structure of music tech startups, noting that licensing regulations and varying interpretations of them make it hard for an investor to comprehend how their assets will generate a profit. (See BTR’s recent coverage of the Billboard FutureSound Conference.)

Pakman remarks, “In the US, there are only two licensing models available to music companies. The DMCA statutory license allows only limited Pandora-like functionality, which we think only delights users in limited cases, and voluntary negotiated licenses provide untenable terms and poor economics to the startup.”

In lieu of navigating these unchartered and rocky waters, some would argue investors should put their dollars into more traditional models of music, returning money to record labels that rely on established economic paradigms. Top artists like Rihanna, Kanye West, and Katy Perry still bring in generous revenue, and independent labels showing signs of success under smaller schemes of business. If Wall Street is any indication of sentiment however, investors show even less faith in going in this direction. As a recent article in The Music Void observes, Live Nation, the touring and music management conglomerate, has a stock value hovering at a trifling $7 despite the fact it is run by one of the most astute men in the business. One reason for the discrepancy, as the article goes on to suggest, is that investing in a more conventional company subjects the financier to higher licensing fees, whereas tech companies manage to avoid these rates through the DMCA.

The long and short of it all – economic fluidity is convoluted on either side of the fence.

Pakman agrees. “Internet investors look for disruptive technology companies poised to significantly disrupt large markets and their incumbents. Industries largely dependent on content controlled by a few large rightsholders, while easy to disrupt with new technologies, struggle to create companies of value since they often come quickly to depend on rights licensing from the very same incumbents they aim to disrupt. This perverse partnership structure almost never works for either party.”

In many ways, he’s referencing the perpetual argument between the old and new industry — the conservatives won’t submit and the young guns misappropriate. If either aims to find solid backing, nevertheless, a little more reason and elasticity seems essential.