The Other Reason Why Music Startups Have Crappy Business Models

by , Dec 17, 2012, 3:14 PM
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Last.fm is going pay-only.  Spotify loses more money the more it scales. Pandora is a hot mess.

The overriding reason, of course, is that digital music startups face horrible economics -- and no matter how much money investors are willing to throw at them (and how many blogs they write), that won’t change.  In fact, when consumers are spending less money buying (remember that?) your albums, do ya really think that the record labels will cut you some slack with royalty payments?  Are you that dumb?

Anyway.

The other reason, perhaps, is that YouTube is eating away at their business at the consumer end.  Sure, Pandora/Spotify/Last.fm/Crapster will all win over the early adopters, but can any one of these wise people tell me why Average Joe consumer would pay anything when all of the world’s freaking music is on YouTube, for free, programmed conveniently in every imaginable playlist?  Yeah, just wondering.

I loved Napster because it felt so good -- because it felt so wrong (you know: how we live with cheese, wine, and other “things-gone-bad”).  Well, YouTube is Napster on steroids. 

Bottom line: any digital music startups ought to think twice about staying in business as long as YouTube is a going concern.

(Of course, as I write this, Crapster is raising $200 million at a $2 billion valuation.)

Maker Studios isn’t so fuzzy

So Ray William Johnson and Maker Studios are duking it out in public over… who knows, who cares.  The bottom line is that Maker Studios (and fellow YouTube networks like Machinima) didn’t get so massive by being snuggly.  Sure, Maker Studios’ VC Mark Suster comes across as Papa Bear, but let’s be honest: VC-backed companies (need to?) have a mob-like mentality. 

The problem is that the “network on top of a network” business is inherently flawed, no matter how amazing the network on which you’re building your network is (and let’s call a spade a spade here: YouTube is awesome, but most networks being built on top of YouTube aren’t). 

With advertising pouring money into YouTube, there’s a lot of incoming “dumb-money” in YouTube networks -- but buyer beware.  This will end as well as 99% of the other online video investments have fared.  Why am I telling you this?  Because that’s the kind of bloke I am.

Advertising is Dead. Long Live Advertising.

Let’s be honest: If you got into the media business because you liked advertising, you feel kinda short-changed.  The creativity, the fuzzy math, the je ne sais quoi.  But with the quants turning Madison Avenue into the next Wall Street (how well is that going, guys?), it’s fair to see that advertising as we knew it is dead.

Of course, by the same token, let’s be fair here: the disciplined approach and framework that technologists have brought to advertising is welcome.  As Eric Schmidt stated: “Advertising is the last bastion of corporate unaccountability in America” -- but that’s what drew us to it, right?

In any case, between “programmatic buying” and everything that comes with it, it’s clear that advertising as we knew it is… evolving.

2012: The year in advertising, digital video, content

I'm starting to work on my end-of-year series, so chime in on what 2012 meant to you in the industry and what you think 2013 has in store for us, and I'll try to include it in my upcoming end-of-year pieces.

2 comments on "The Other Reason Why Music Startups Have Crappy Business Models".

  1. Jim Courtright from Big Thinking By The Hour
    commented on: December 17, 2012 at 4:32 p.m.
    Loved the article. Especially the part about the quants. They keep backing an old content model. I was on Mad Ave for years and made the ads that interrupted the content. Now desperately trying to make branded content people want to see instead of the ads they want to zap. I think that is the breakthrough next year. Some smart brand will hire someone (like us) to make short, engaging daily content that people crave. That still connects the brand. It can be done. We have the secret sauce.
  2. Doug Garnett from Atomic Direct
    commented on: December 17, 2012 at 7:01 p.m.
    Interesting idea flow. Some I agree, some I disagree. But really, only the digital hipsters have any belief that "quants turning Madison Avenue in the next Wall Street". As a long term communication pro - it ain't gonna happen. In part, long term techies like Schmidt are far too removed from the human realities of advertising. He clearly has never understood the underlying humanity that makes accountability in advertising extremely difficult. And that he ignore that it can be accountable, but not with tech tracking (yawn). (As an expert in direct response, I've learned the limits to accountability in advertising.)

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