Have We Reached Peak Tech?

In last week’s Take Five I highlighted a Vox story which reported that over the last year the number of companies using terms like ‘tech’ or technology’ in their documents is down 12%. This is an early indicator of a much more fundamental concept – we may have already reached peak in the tech sector, the business sector that has driven the fourth industrial revolution. While some may quibble whether the internet-era transformation was the predecessor to a new industrial revolution built around AI, big data and automation, the underlying factor is that tech – for better or for worse – has shaped the modern world. More in the developed world than the majority world perhaps, but it has shaped it nonetheless. Now, however, with tech so deeply ingrained in our lives and the services and enterprises that facilitate them, has tech become so ubiquitous as to render it meaningless as a way of defining business?

Tech is the modern world

When Tim Berners Lee invented the World Wide Web in 1989 he could have had little inkling of the successive wave of global tech superpowers that it would incubate. As we near the end of the second decade of the 21^stcentury it is hard to imagine daily life without it. The pervasive reach of the web and the Internet more broadly is perfectly illustrated by Amazon’s recent launch of twelve new devices, including a connected oven, a smart ring (yes a ring) with two mics and a connected night light for kids. All of which follows Facebook’s connected screen Portal, which for a company that trades on user data, raises the question: ‘Is this your portal to the world, or Facebook’s portal to your world?’ However, regardless of why the world’s biggest tech companies want us to put their hardware into our homes, this is simply the latest new frontier for consumer tech. Now that we carry powerful personal computers with us everywhere we go, we remain instantly connected to our personal collections of connected apps and services. Tech is the modern world.

The rise of tech-washing

With tech now powering so much of what we do, it raises the question whether tech is any longer that useful a term for actually distinguishing or delineating anything. If everything is tech, then what is tech? It is a question that the world’s biggest investors are starting to ask themselves, too. In fact, we have now reached a stage where a) tech is a meaningless concept – everything is tech, and b) there is the realisation that many companies are ‘tech washing’, using the term ‘tech’ to hide the fact that they are in fact anything but tech companies which happen to use technology platforms to manage their operations. In the era when everything is tech enabled, you would be hard pushed to bring a new business to market that does nothave tech at its core. Companies like Uber, WeWork and just-listedPeleton have managed to raise money against billion-dollar-plus valuations in large part because they have positioned themselves as tech companies. In actual fact when the tech veneer is removed, they are respectively a logistics company, a commercial rental business and an exercise equipment company. If they had come to market simply with those tag lines, they would undoubtedly have secured far smaller valuations and many of their tech-focused investors would not have backed them. Investors are beginning to see through the ‘tech-washing’, as evidenced by the instant fall in Peleton’s stock price, WeWork’s crisis mode sell-off and Uber’s continuing struggles.

Pseudo-tech

Calling yourself a tech company has become a get out of jail free card for new companies, an ability to raise funds at inflated valuations, and a means to persuade investors to focus on ‘the story’ and downplay costs and profit in favour of growth, innovation and of course, that hallowed tech company term: disruption. I have been a media and tech analyst since the latter days of the original dot-com boom, and the mantra of the companies of that era was that ‘old world metrics’ such as profitability didn’t apply to them. Of course, as soon as the investment dried up, the ‘old world metrics’ killed most of them off. Today’s ready access to capital, enabled in part by low interest rates, has enabled a whole new generation of companies to spin the same yarn. But whether it is the onset of a global recession or growing investor scepticism, a similar fate will likely face today’s crop of ‘disruptors’. The dot-com crash separated the wheat from the chaff, wiping out the likes of Pets.com but seeing companies like eBay and Amazon survive to thrive.It also took a bunch of promising companies with it too. The imperative now is to strip away pseudo-tech companies from the tech sector so that investors can better segment the market and know who they should really be backing through what will likely be a tumultuous economic cycle. As SoftBank is finding to its cost, building a portfolio around pseudo-tech becomes high risk when the tech-veneer can no longer hide the structural challenges that the underlying businesses face.

Tech is central to the modern global economy and will only increase in importance – at least until the world starts building a post-climate-crisis economy. It is imperative for genuine tech companies and investors alike to start taking a more critical view of what actually constitutes tech. The alternative is that the tech sector will get dragged down by the failings of logistics companies and gym equipment manufacturers.

Spotify’s New Rules of Engagement

It is easy to feel that the pervasive obsession with Spotify overplays its importance to the recorded music industry. On the one hand it may only represent 27% of global recorded music revenues, but this compares to a peak of around 10% that Apple enjoyed at the peak of the iTunes Music Store. So, whatever label concerns existed back then about market influence – and there were plenty – their apprehensions have now multiplied. The assumption among many investors and label executives is that Spotify’s market share will lessen as the market grows. However, Spotify has thus far held onto its subscriber market share as the market has grown and looks set to do so in the foreseeable future.

If revenue is Spotify’s ‘hard power’ its real influence comes in its ‘soft power’. This takes two key forms:

• Cultural influence:Despite being less than a third of revenues, record labels, artists and managers typically see Spotify as the proving ground, the place where hits are made. Marketing and promotion efforts are centred around getting traction on Spotify, knowing that success there normally leads to success elsewhere. Thus, Spotify’s cultural influence far outweighs its market share. As is so often the case with soft power, those affected most by it are those who inadvertently ceded it.
• Innovation / disruption / innovation:Since embarking on its DPO path Spotify has been talking out of both sides of its mouth at the same time. On the one hand it positions itself as a safe pair of hands for the records labels, and on the other it lays out for investors a vision of a future world were artists don’t have to choose to work with labels. Labels have long feared just how far Spotify is willing to go and also, just how quickly. Spotify is now showing signs of going full tilt.

 

A rabbit out of the hat

When Spotify reported its Q1 earnings, the music industry consensus was a job well done. It delivered nearly on-target revenues (though they were down slightly on Q4), solid subscriber growth, improved margins and reduced churn. But it wasn’t enough for Wall Street. Spotify’s stock price fell to $150.07 down from a high of $170 in the days building up to the earnings. So what went wrong? Investors were expecting Spotify to pull a rabbit out of the hat. They’d been promised an industry changing investment and had instead got an industry sustaining investment. Such fickle investor confidence so early on in the history of a public company can be fatal. So, Spotify quickly searched for that rabbit; it announced that it will do direct deals with some artists and managers. Guess what happened? Spotify’s stock price rose to $172.37. The rabbit was bounding across the stage.

Investors want the new world now

These are the new rules of streaming music. As the bellwether of streaming, Spotify has been dictating the narrative for years, but always with the focus of being a partner for rights holders. Now that it is public, Spotify has found that tough talking trumps sweet talking. Even if Spotify does not intend to go fast on its next gen-label strategy, it now knows it has to talk fast. Speaking from the experience of months of deep conversations with large institutional investors, Wall Street has pumped money into Spotify stock not because of how it will help labels’ businesses, but because they expect it to replace labels, or, at the very least, compete with them at scale. Spotify’s stock was not cheap, so to deliver to investors the returns they crave, it has to show that its influence is as disruptive / innovative (delete depending on your perspective) for the music business as Netflix has been for the TV business. They are investing in the potential upside on a future industry changer, not a present-day industry defender.

Spotify needs to speak boldly but act responsibly

Spotify cannot of course go all guns blazing yet, as it simply cannot afford to operate without the major labels. Netflix could get away with what it did because the TV rights landscape is fragmented. Therefore, Spotify will have to tread carefully until it can pick away at major label market share through various forms of direct deals. But it also has to do this cautiously (as I explained in this post). If it is too quick and bold it will incite retaliatory action from the labels. So, the new rules of engagement for Spotify and rights holders are a bit like international diplomacy: make bold public statements to keep domestic voters happy but adopt a more conciliatory approach with partners behind closed doors. Let’s just hope that Spotify opts for the Justin Trudeau school of international diplomacy over the Donald Trump approach.

Why the Music Industry Should be Watching Twitter’s Stock Price

This is the chart that the music industry needs to be paying close attention to over the coming weeks and months (it’s Twitter’s stock price).  How well Twitter fares will be a bellwether for digital consumer service investments. Two of the music industry’s biggest bets (outside of the big tech trio of Apple, Amazon and Google) are Spotify and Deezer.  Both of whom are performing strongly (Deezer just hit 5 million paying subscribers and Spotify could be edging towards 10 – see my prediction from last year).  But both have also taken very significant amounts of investment resulting in valuations that markedly narrow the pool of potential buyers.  For Spotify in particular a flotation looks like the best route of realizing a strong return for its investors, particularly the later stage ones.

Facebook’s flotation rattled a lot of the investment community.  Although it eventually recovered and is now trading solidly, it sowed fear and uncertainty about the ability of digital consumer companies to translate business plan valuations into actual market trading value.  Those of a certain age recalled painful memories of the dotcom bubble bursting and the near instantaneous disappearance of billions of dollars worth of dotcom company valuations.

If Twitter’s stock price falters over the next 6 weeks or so then it will make an IPO all the more challenging to sell to the market.  But if Twitter does well, some of those lingering doubts and concerns will be assuaged, paving the way – in a best case scenario – for a new dawn of digital consumer company IPOs.

The stock market is a fickle beast and though underpinned by some of the most sophisticated financial modeling on the planet, is easily swayed by investor sentiment, which in turn is driven by that equally ineffable of qualities: momentum.  If Spotify can report 10 million paying subscribers some time over the coming months it will have a clear momentum story to tell.  If Twitter’s stock price holds up into the start of 2014 Spotify will be able to translate its momentum into market sentiment and build towards an IPO.

There is of course no guarantee Spotify, or Deezer, will IPO, but the option looks like a strong commercial and strategic fit given the direction of travel of the digital music market and the companies’ current valuations. If one or both companies successfully IPO or successfully exit via a trade sale or some other route then the music industry will be able to breathe a huge sigh relief and brace itself for a resurgence in digital music investment.

Right now digital music is not a great investment proposition for professional investors, especially VCs.  They see sizeable chunks of their investment disappearing straight onto the bottom line of record labels in the form of advances and guaranteed payments; a congested market that still remains predominately niche in reach; and the CD still lingering as the world’s largest music sales revenue source.  But get a couple of high profile exits under the belt and the music industry will appear a far more compelling investment proposition, with investors more willing to tolerate the costs of doing business in music.  First though, Twitter needs to deliver the goods. Keep watching that chart!

Announcing the Music Industry Blog Start-Up Showcase

Over the last few months I’ve had conversations with a lot of really exciting early-stage music start- ups with a refreshingly diverse array of products and propositions.  Many of them though share the same problem: the challenge of getting from great idea and team to market awareness.  So, as this blog is read widely by investor and music industry decision makers alike I’ve decided to do my little bit by launching the Music Industry Blog Start-Up Showcase.

Over the next month I will be taking submissions for inclusion from *music* start-ups.  I’m specifically interested in early stage music start-ups, so if you are pre-funding, seed and / or chasing Series A then you could be just the sort of company to be featured in the showcase.  (There might be the occasional case for a later stage company to be included but there will have to be a very strong case).

The most important criteria of all though, is that your business is interesting, exciting and is doing something different.  That doesn’t mean you have to be a unique service or business model (though that would be great).  It does however mean that you must at least have a unique approach, a novel twist.

If you are interested in taking part then please answer the questions below and send them to me directly at musicindustryblog AT gmail DOT COM

Closing date for entries is 31^st May.  I will only be selecting the best of the entries for inclusion so I can’t guarantee your inclusion.  I will also be strict in applying impartiality, so that means even if I’m working with your start-up in an advisory capacity it doesn’t mean that you will necessarily be included, (sorry!).  For sake of full disclosure I will state clearly if I am advising for, or have been so at any stage, any of the start-ups selected for inclusion.

If you have any questions, queries or concerns please feel free to send me an email or reach out to me on Twitter @mulligan_mark

Music Start-Up Criteria

If you would like your start-up included in the showcase please answer and submit the following.

What capacity are you representing the company in?

The express elevator pitch (what you do in *one* sentence)

What problem are you solving / why does the music industry need you?

What is your business model?

What is unique about what you are doing?

Who do you see as your main competitors and why can you do things better than them?

Why do consumers and / or businesses need your service(s)?

Where do you want to be in 2 years’ time?

What investment stage are you at (boot strapping, seed, series A) and who are your investors?

250 words on your company (include things like management team, value proposition, go-to-market strategy, clients/partners, etc.)

Company URL(s)