Startups and Shit
Thinking Outside of Pandora’s Box

“And you ain’t get a coin, [Nas], you was getting fucked then
I know who I paid, God - Serchlite publishing
Use your (brain)” - Jay-Z, Takeover

Pandora, it turns out, is an awful business. While it’s unclear what Spotify’s unit economics look like and it may be better position, it’s currently losing a lot of cash as it grows and admits that its margins are lower than they need to be. The core issue for these companies, as well as anyone else who wants to create a mass-market music service, is that you you need the labels to get scale, and they take all the profits.

While I generally think this is a shitty business, today I’m going to play devil’s advocate and suggest there may be hope for them yet.

Consider that more music is recorded today annually than ever in the past. If you looked at a graph of music industry profits vs recordings over the last 20 years, you’d conclude that they were inversely related. As it turns out, they’re completely uncorrelated, but you get the idea. Great music is being recorded that is making no one money today, because no one is hearing it.

But we still all listen to the same stuff from the same record labels. Why?

As it turns out, music has a network effect. Check out this amazing article from the NYT, which describes an attempt to test how hits become hits. You may also find this Planet Money piece on hit making interesting. From the NYT piece:

In all the social-influence worlds, the most popular songs were much more popular (and the least popular songs were less popular) than in the independent condition. At the same time, however, the particular songs that became hits were different in different worlds, just as cumulative-advantage theory would predict.

Put differently, some artists are better than others, but within the realm of good music, the hits that you need to have to make a platform work are somewhat arbitrary. We like music our friends like. We want to go to the club and hear a song we know.

The advantage the record labels have had even to date, is that they have controlled discovery in the form of radio (yes, it still matters), and therefor been able to monopolize as a group — if not strictly control — what becomes a hit. Internet nerds forget the scale of terrestrial radio and its importance even today. Ask Macklemore.

But the demographics of radio aside, tech music companies have achieved amazing scale today. Spotify and Pandora have on the order of 80M users each. Apple will likely catch up in the next 1-2 years. These platforms are arguably much better positioned than record labels + radio to make the hits.

You can see this in the power of Spotify’s and Apple’s Discover features. These are compelling features for users and have the ability to put unknown music and artists in front of millions of users.  And given their current scale, it’s almost certainly the case that digital music companies at scale can make their own hits.

If I were one of these platforms, I would make the following deal with unsigned artists. Put your music on our platform and sign a non-exclusive, perpetual, royalty-free deal with us for all your future music. In return, we will pay you 100% of all profits for the first 10M plays with no middle man.

I would then start testing tracks from my stable of Macklemores, trying to find those that work for certain segments. With that as a baseline, I would have my editors attempt to create hits/stars via Discover (et al). And while my streams of Taylor help her grow her empire at near zero profit, I would be free to take 100% of the profit on these tracks, increasing my blended margin while continuing to keep the label’s back catalogs and paying them the profits on those.

And if that worked, I’d start helping my new stars complimentary products. Find service providers. Sell your merch. Book a show. Market to fans. You’re a (small) business, man. Let us help. Who needs a label? I bet there’s great margin in helping artists monetize their brands.

Is this a win for the artist? It depends whether you’re Tay Tay, or Tay-Tay-living-in-obscurity.

Is it a win for art? Probably. You make a lot more filling a bar with people who have heard of you than streaming online. No bar is too small for most artists. And the less power incumbents sitting on back catalogs have, the more innovation we’re likely to see in tech. That’s a good thing. It’s not clear more profit for labels has any impact on the quality or quantity of music.

Is it a win for music platforms? Obviously so. If current market dynamics continue, music will become a loss leader. You see it with YouTube and Apple, and it’s likely Pandora and Spotify will end up acquired if they can’t find a business with real margins. You can’t give 100% of your profits to other companies forever, regardless of scale.

The only losers here are the record label. And fuck them.

I’ll close with your obligatory reminder that artists don’t make money on recorded music, never have, and never will.

  1. siddhantpuri reblogged this from startupljackson
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    How soon can this happen?
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