Thursday, August 20, 2009

3 Ways In Which Music Start-ups Can Still Innovate

In PaidContent's damning but mostly accurate assessment of the music start-up space, editor Rafat Ali writes that iLike's unspectacular exit indicates the party is over, and investors should retreat to sectors offering greater opportunity and higher multiples. At this point we've all come to accept that music is/should be free, and for a variety of reasons, nobody really seems to be benefiting from it.

Is this reason enough to quit? Or should we think of 2009 -- ten years into the digital revolution -- as halftime, with two quarters left to turn the game around? Think how many Superbowls and NBA Championships would have gone the other way had the team down at the half just packed up their lockers and left. The global music industry is losing nearly $20B/year in revenue. That this represents failure or opportunity depends on whether you believe the commercialization of music in general -- which began in earnest 100 years ago -- was part of a natural evolution, or represents a Darwinian detour.

Let’s start by looking at whether music is truly "free". Industry panelists and venture capitalists have been touting this theory for a while: that music has become a commodity, like water. Free and ubiquitous.

We should be so lucky!

With water I can check into a hotel room in any city, go to any public restroom, turn the spigot on any gardenhose, and my expectation is that the H20 will be free-flowing. Not so with music. With the exception of the iTunes/iPod/iPhone ecosystem -- now 25% of U.S. music purchases—none of the currently available services or devices are compatible. Really, if we've innovated as far as we can, why can I STILL not load my to my Palm Pre or send it wirelessly to the cute girl at Starbucks? It seems that while the digital revolution has rendered music creation and consumption irrevocably democratized, the music itself is not at all ubiquitous.

While PaidContent points out numerous hurdles, at some point creators, rights owners, technologists, legislators and publishers are gonna have to sit at the same table and hammer something out. Until we solve this fundamental compatibility problem, the true monetization of all types of intellectual property is at stake.

One of the raps on the music start-up space is there’s way too many “me too” services getting funded, and the sameness drives down exit values. There is a lot of truth to this, and it doesn't just apply to digital music. In the VOD space, how is Vimeo better than Veoh better than Vuzu better than Vevo better than.... Focusing on feature enhancements is not a sustainable growth strategy. I'm sorry but there's a nerd in Sunnyvale trying to out-innovate you in his garage right now.

Instead, here are 3 areas in which digital music start-ups could be moving the ball down the field: (1) Perfect microtransaction standards, software and processes so copyright owners can be fairly compensated; (2) Perfect the analytics of music experience and “consumption” in order to improve and better quantify music’s value proposition to brand advertisers/sponsors; and (3) Perfect music recommendation software to take into account the myriad behavioral and contextual reasons why we prefer one track over another. Sorry, Pandora, but just because two songs are in B-flat and are played in a "lively" tempo doesn't mean I'm gonna love 'em both.

Whoever writes this clever piece of code will sell for a lot more than $19MM.

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