Music Start-Up Strategy 2.0

The music industry needs innovation more than most industries and yet the last two years has seen a slowdown in the number of new licensed music services coming to market and greater consolidation around the Triple A of Apple, Android and Amazon.  In this brave new world music start-ups need an entirely new modus operandi.

There are many reasons for the slowdown in new licensed music services, but a key one is the establishment of the license-advance business model in which record labels issue licenses only upon payment of sizeable, non-repayable advances in anticipation of forecasted income.  Depending on the scale of the risk to the labels presented by the licensed service these payments can range from relatively modest to downright gargantuan (Beyond Oblivion went to the wall owing $100m to Sony and Warner Music even though not a single consumer ever saw the service).  With so few services managing to make a dent on Apple’s market share investors have grown wary of investing in music start-ups that require licenses, some have effectively stopped investing in them all together.  The labels’ focus on partners with scale (and effectively using advances as means of sorting the financially robust wheat from the chaff) may deliver near-term security for the labels but it increases their long term risk by slowing music service innovation.  Hungry young start-ups are often more likely to create transformational innovation than heavily resourced R&D divisions of billion dollar companies.  Thinking ‘out of the box’ is always a lot easier when you’re not actually in the box in the first place.

Music Start-Up Strategy 2.0 Requires A New Set of Relationships

The status quo is a lose-lose for all parties, each of whom find themselves stuck in a Catch 22: labels need new services but also the safety net of advances, services need licenses but can’t pay for the advances and investors want to invest in music services but won’t do so when advances are required.  It is time to change the model, for this cycle of insufficient innovation and market contraction to be broken.

So just how can this circle be squared? The starting point is accepting the position of each of the three constituencies and then building from there:

  • Labels want market innovation but with their market contracting they need to mitigate risk
  • Services want to innovate but can’t afford to have advances as their core early stage expense
  • Investors want to invest in music innovation but want to put as much as possible of that investment in technology and people

Music start-up strategy 2.0 requires each party to think and behave differently, to accept the fundamentals of the new digital music economy.  And this requires a willingness to both embrace some new ideas and to help forge a few others:

Record labels – become investment partners: Record labels – majors and independents alike – deserve great credit for transforming their business in the last few years, but they cannot change the market alone.  Labels need to harness open innovation, leveraging the developer ecosystem.  OpenEMI is an early model of best practice but to fulfil its massive potential the approach needs underpinning with a more equitable alignment of label-developer relationships.  Start-ups are going to help solve record labels’ problem and labels need to not just tap that expertise but accelerate it.  To do that record labels need to apply A&R rules to technology start-ups. On the artist front labels already behave like Venture Capital firms, now they need to translate this appetite for risk to their commercial strategy.  To take the same sort of risks on start-ups as they do on artists. This of course means that labels will routinely require equity stakes – and sizeable ones, but instead of just being a licensing requirement, these will be in return for a new relationship in which labels establish nurturing partnerships with young start-ups, just like those they have with artists.

When a start-up is at pre-launch stage it is probably going to be more appropriate to take a good chunk of equity for licenses than it is an advance that the start-up can ill afford.  Of course it will still be appropriate for advances to be part of the mix in some circumstances – sometimes even the majority of the mix – but the balance of the relationship should be investing to become a business partner.  This means becoming active stakeholders, sitting on boards, working with the entrepreneurs to help make them successes.  In short, the relationship should change from licensee-licensor to investment partners with shared vision and motives for success.

Start-ups – understand what labels need: Though record labels are becoming increasingly confident of their own innovation capabilities, no media company is an innovation agency while technology start-ups have innovation imperatives at their core.  Unfortunately they often get the conversations with labels wrong.  Instead of going to labels with the “we’re going to save your industry” pitch, start-ups should better understand what label priorities are and then propose working with them to help them achieve those objectives, as partners. (This is something that Spotify did incredibly well right from the start).  Just as it is best practice to engage with an investor long before they actually need money, start-ups should apply the same approach to record labels.

However this change of relationship is probably going to take some time to realize, so in the more immediate term start-ups should look at ways to deliver their experiences without licenses.  No I’m not advocating the Groove Shark approach, but instead leveraging the content licenses of digital music services that are pursuing ambitious API strategies.  Music start-ups should think hard about whether they really need to own music licenses themselves to deliver a great user experience, or at least whether they need to right away.  Building, for example, a product within the Spotify ecosystem is a great way to deliver a real-world proof-of-concept, test consumer receptivity and have immediate access to millions of potential customers.  License conversations are a lot easier with proven consumer demand on the table.  (Though start-ups need to be careful with music API strategy, indeed they should treat music service APIs like mobile OS.  Don’t put all of your eggs in one API basket.)

Investors – work with labels as partners and embrace the API economy. Investors might have some reservations about working with record labels at start-up board level but they shouldn’t fear losing influence.  The odds are investors will still make the same scale of Seed and Series A investments, it is just that their money will be working smarter, helping build great technology and hiring better people at those crucial early stages of a company’s life.  Investors and labels often find themselves on opposite sides of the argument.  There is no inherent reason the relationship should be adversarial.

Investors should also think about how well their investment strategy harnesses the capabilities of the API Economy. Of course it is always preferable to invest in a business that owns all of the fuel that powers its engine.  But in the era of integrated music API’s it is no longer crucial for a music service to have its own licenses.  An investor wouldn’t expect a mobile app developer to own Android, iOS or Windows Mobile so they need not expect a music service to own music licenses.

Laying the Groundwork for Transformational Innovation

Some of these changes are already beginning to happen, others are a long way off from being realized.  But this change is needed to enable to next wave of transformational innovation that the music industry so desperately needs.  Freeing up precious and scarce early stage resources leaves start-ups able to focus on developing great, innovative technology.  Which in turn will mean better products, better user experiences and more revenue for everyone.

I first discussed some of the themes covered in this blog post in the Giga Om Pro report ‘Monetizing Music in the Post-Scarcity Age’ which can be found here


OpenEMI, an Innovation Files Case Study

Following on from Part 1 of the ‘Innovation Files’ series, this post looks at EMI’s OpenEMI initiative and how it could drive transformational innovation within the major record label and publisher.

EMI today announced an interesting developer initiative that aims to revolutionize the way in which developers work with EMI.  Securing licenses from record labels is a notoriously resource intensive and time consuming process that can leave some apps still born: many smaller developers – especially the one man outfits – often simply can’t spare the resources, time (and money) that can be required.

EMI have inserted themselves into the developer value chain

To streamline the process EMI have inserted themselves directly into the developer value chain. They have partnered with the Echo Nest to build a ‘sandbox’ where developers can access a repository of continually updated EMI content including music, videos and artwork. Developers need only sign up to EMI’s API to start working with the assets.

Developers can either proactively develop their own ideas or respond to briefs and requests sent from EMI, who will funnel combined requests from artists, managers and labels.  Developers however do not get to simply build Apps using EMI’s content and then go take them to market.  Instead every app requires EMI approval, and EMI hopes to encourage best practice of developers submitting requests as early in the process as possible.

Clearly not all apps will get approved and there is certainly potential for log jams.  However the process will most likely streamline organically – assuming all partners have the right attitude and willingness to be sufficiently agile.   It will also be a great platform for all the extra content that 360 artist deals now deliver and that major labels too often just aren’t utilizing well enough.

Open EMI can, and should, go way beyond artist apps

Although initially this set up will principally act as an innovative alternative vehicle for sourcing artist apps – with developers playing around with EMI’s APIs replacing the traditional tender and quote process – it has much bigger longer term potential.  The name EMI has given this initiative speaks volumes: OpenEM.  It is a statement of intent.  Even though what we will see in this initial phase is relatively modest, it takes huge amount for an organization like EMI to take what is for them such a radical approach to their content.  More importantly I expect this to be an opening salvo in a broader strategic move.

An API for EMI’s own innovation

EMI have not just built an API framework for developers, they have built an API for their own future innovation.  The challenge for EMI is the degree to which they can fully harness this new innovation toolset and respond to the new approaches and mindsets it will require.

These are the three things I would like to see EMI use OpenEMI to deliver:

  • Learn from the OpenEMI developer community to help start building the next generation of music product, not just Artist Apps
  • Seed the culture and mindset of the OpenEMI community throughout EMI
  • Learn and implement innovation best practices throughout the entire EMI organization

OpenEMI is a brave step that has the necessary senior executive support to be a success. To help ensure success, OpenEMI’s champions will need to win support across all levels of the organization, and to do that they will need to demonstrate clear benefits to the most sceptical of opponents.

Driving Transformational Innovation

Transformational innovation is never easy to implement because its path is littered with the corpses of the products, processes and jobs associated with the old ways of doing things.  But it is exactly this difficult path that all media companies must take if they are to emerge intact out of this unprecedented period of disruption.  The Terra Firma debacle was an unfortunate distraction for EMI at exactly the time they didn’t need it, leaving them at distinct market disadvantage. They need an unfair advantage to start re-levelling the playing field.  Driving transformational innovation through the entire organization, commercial partner relationships, artist relationships and product strategy  is the fuel for that advantage. If harnessed to its full potential OpenEMI can be the first step on that tricky path.