The new mix: Technology, music & VCs

by Emmanuel Legrand

[This story was originally published in Record of the Day]

It is fascinating how the thesaurus of words used in the music industry has evolved in the past decade. A whole new jargon – usually borrowed from the digital world – has entered the day to day working vocabulary of music executives. Take the recent SF MusicTechSummit which took place in San Francisco October 1. The buzz words there were, among others, ‘freemium models’, ‘scalability’, ‘customisation’, ‘personalisation’, ‘intuitive experiences’, ‘superfans’, or even ‘stem track music publishing’.

The SF MusicTech Summit is one of these “boutique” conferences that – because of its location, next to Silicon Valley, tries to bring together the music and the tech world, according to Brian Zisk, Executive Producer of the event. And technologists there were aplenty, and some good ol’ music biz executives too. But – and again, it has probably a lot to do with the location of the conference – there was a genuine enthusiasm from all participants who view innovation as a key factor for change, and music as the driver for innovative digital solutions.

One such enthusiasts is Fred Han, Director of Marketing and Communications for Pulselocker, a web-based service for DJs. “What makes San Francisco so special for music services stems from the combination of two key social and environmental elements,” Han tells RotD. “First, SF is a hot bed of technological innovation and full of very bright people who aim to create products that improve our lives, be it marginally or substantially. Second, the music scene is embraced and supported by a vivacious community. This acceptance of virtually all forms of music has fostered a culture that empowers people to find the genres and styles that fit their unique tastes. The combination of these two elements has created a unique eco-system where people can build products that feed both passions.”

This eco-system was under the microscope at the SF MusicTech Summit. Streaming services, for example, got a thumbs down verdict by a panel of “enablers”. To sum up, the Pandoras and Spotifys of this world are seen as good music services but offering poor consumer experiences. “Do these services get it right?” asked moderator Stephen White from Gracenote during the panel Making streaming work: The Enablers. “No” was the answer from the panel. “There are people out there for whom Pandora or Rhapsody is the answer, but we are not yet to the point where the user can customise the music and also the experience. These services need to work on personalisation,” said Daryl Ballantine, CEO of LyricFind. “Too often there’s just the music and too often it is not a good experience.”

Streaming services could display a wider range of services that would help enhance the experience, explained Ballantine, citing artist bios, imagery, lyrics, information about the recording, liner notes as some of the perks that could “create a compelling experience for users.” Added Michelle Engel, Director of Content and Programming at Samsung, “If all is integrated in a way that stands in the way of the music, it is a loss.” And it also has to be made simple and attractive. Speakers agreed that streaming services will have a sound future if they manage to fine tune their offer to consumers, mostly through better customisation, rationalising their business models, especially by pushing users to premium services, and achieving greater scale by adding users and subscribers. As for scale, well, it’s about being global, said Ballantine. He elaborated, “Being able to reach scale beyond one country is a big differentiator. All these services need to achieve massive scale to reach profitability. It’s really tough to do that in one country. You need massive scale to support the royalty structure and a truly high quality streaming service. With scale, all the complaints about royalty rates will go away. The problem now is that not enough people are paying $10 a month.”

Scale was also a key word on the panel titled Music, Tech & Money which saw a handful of representatives from VC firms explaining what made them tick as investors. And guess what? Music is not on top of their priorities. Even though they professed their love of music, only a few of them were investing in music-related projects. Probably the best way to summarise the VCs attitude to the music industry was when not-so-neutral moderator Hany Nada, a partner in GGV Capital, brought his hands to his ears and said, “Every time I hear licensing I go ‘la la la’.”

It was a sharp contrast from an earlier panel during which Omnifone’s Bolte responded to the question ‘Is the process of licensing content getting in the way of innovation?’ by stating that blaming the licensing process for not being able to develop music services as “an easy way out” for some digital services. “Rights holders have been very engaged and have tried to facilitate innovation as much as they could. They want to grow the pie and at the same time protect their rights. It’s about working with them [digital services] closely and close the perception gap. Everybody is looking for ways to grow the pie.”

Larry Marcus, MD of Walden Venture Capital, identified two areas of potential development for music services: The “virtual space” where he believes a lot of will take place, although he did not really explain how, and “stem track music publishing”. And to really allow streaming services to develop, Marcus called for “a statutory licensing for ondemand streaming [that] would create a lot of innovation in the streaming field,” under which regime services would not have to negotiate single deals with each category of rights holders and would be able to use all the music available under a blanket license, similar to the one for terrestrial radio.

Tim Chang, Managing Director of Mayfield Fund – who once featured in Forbes magazine’s Midas list of top venture capitalists – was very pragmatic about the music sector. “We may be passionate about music but the business models do not align with this passion,” he said, identifying three primary types of services for music: 1) those based on self content, but their “margins are low;” 2) those based on building mass communities and monetising them with advertising, but “it’s hard to achieve;” and 3) those that create and sell tools to those who aspire to be in the music field.

“It is cheaper to launch a [music] company but it is difficult to scale these businesses,” said Chang who also warned aspiring start-ups: “You have to be careful with us because we can mess up your business big time because this is how our business is structured. We’ll push your business off the cliff because we’ll want it to be a $1bn business.” And how many digital music services have reached a billion dollars? That is probably why many music start-ups exist primarily because of angel investments, before VCs step into the game. “We are all super happy about how much angel investment there is because it gives us more options as to where to invest,” said Marcus. “But the hit rate is very low."

[Typed while listening to Arctic Monkeys's brilliant new album 'AM' (Domino) and vintage soul from Freda Payne's 'Band of Gold' (Invictus).”