CB Insights, a relatively new site that's building a database of startup and VC investment information, recently took a look at music startups and noted that, though the kinds of deals they're tracking have risen in the last couple of years, a smaller percentage of them have been for U.S.-based companies. Unfortunately they seem to be confusing direct licensing hurdles with government regulations, the discussion does raise the question: What would happen if the music industry managed licensing in a way that allowed for early startup experimentation to establish demand before facing prohibitive fees?
Is U.S. Government Regulation Negatively Affecting Startup Investments?
CB Insights points out a streaming music startup investing trend:
If we look at the percentage of deals made in Music startups between 2010 and 2011...the US was responsible for 77% of all deals, while the remaining 23% was spread across 8 countries. Total funding share was lower, with US music startups taking 47% of total funding, as the $166M invested in Spotify gave the previously pirate-friendly country of Sweden a 29% funding share."
Though CB Insights discusses such topics as the Stop Online Piracy Act, potential U.S. legislation that could have been a concern for investors, they point to a post by famed VC Fred Wilson that discusses streaming music startups and the effects of licensing negotiations.
The Mismatch Between Early Licensing Fees & Product Testing
Wilson points out that the big problem with facing upfront negotiations with labels or publishers is not the fairness of the fees being requested but the fact that investors don't want to cover those fees for startups that haven't demonstrated user demand.
The problem with CB Insights' use of Wilson's post is that they're actually discussing two different issues. All the non-U.S. companies on which they focus, Spotify, Deezer and SoundCloud, face the licensing hurdles Wilson references.
But Wilson's post does raise a good point:
If we had a general bias in our society to let early stage startups try things and see if they work before we worry about compliance we would see a lot more innovation."
And by that he means funded innovation as he describes in a quoted email:
on today’s internet, there are no gatekeepers to pay so you can put something on the web or in the app stores for almost nothing and then see if they can get to a million users or more"
if they can do that, then you can invest the tens of millions you need to build a real business"
this process of trial and error happens over and over again and is the essence of the internet and mobile startup and VC business"
one of the reasons, for example, you see so few music startups is that those startups have to negotiate huge upfront payments to the music industry in order to even launch a service. no entrepreneur or investor would invest millions up front when the likelihood is 90% or greater that it will be a failure. so the entrepreneurs either launch without licenses and risk getting sued or they don’t even try"
Wilson is using this example to discuss Net Neutrality and also mentions a couple of other areas that have to do with governmental regulation. So that's probably what led CB Insights astray.
What If The Industry Created A Sanctioned Fee-Free Period for Startups?
But what if the music industry itself worked out a plan that could allow for some kind of program to let startups experiment within specific limits that include no licensing fees until they can show user uptake?
The startups would be required to pay licensing fees possibly even before they have revenue if users respond strongly. If a reasonable period of time after proof of concept was included, that would allow the startups to go to investors with that proof and negotiate investments if available before having to pay fees.
Since a miniature version of this scenario plays out at music hackathons where coders are often given free access to music APIs, perhaps something similar could be developed with sanctioned access.
The point of such a system would be to allow startups to test ideas in order to build the grounwork for a sustainable business rather than soaking the maximum possible out of each group of investors with the potential of killing all competitors.
Keep in mind that there's no reason to assume that any particular music tech company currently in existence will be operative in 5 years. Yet rights holders will still have rights and a need for revenue.
Creating some sort of system to support startups in finding new ways for the industry to make money just makes sense.
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