Music startups: your entire product is probably just a feature

If startups have a one in 10 chance of surviving, music startups’ odds must be one in 10 000. The industry’s most famous success story, Napster, is also its most famous failure. And aside from Last.fm, which sold to CBS in 2007 for US$280-million, few have successfully exited since. It’s a prickly, difficult industry that’s as attractive as it is impossible.

Peter Kafka noted as much last week when he questioned the logic of anyone launching a music startup in 2012, citing the incredibly high burn rate it takes to get to any sort of scale. This is true — the cost to license music and stream it in the US is insanely high and somehow artists don’t seem to think it’s high enough. Incredibly, after more than 10 years of music industry declines and digital innovation, they’re making Pandora and Spotify into a Napster-like villian. Spotify and Pandora are hoping the movie ends differently this time around, but it’s a very big bet.

As VC and founder of eMusic David Pakman explained in his post about who has the power in media, Spotify will never have leveraging power over the record labels because of the industry’s concentration of supply. There are only three major labels controlling around 70 percent of the world’s music catalogues. “Highly concentrated popular content allows owners to extract unprofitable rights deals,” he wrote.

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