The Sorry State Of Music Startups

by Michael Arrington

Online streaming music startups are in one very sorry place. On demand streaming rates range from .4 cents to 1 cent per stream - this is what the startups pay to the labels every time they play a song for a user. Add bandwidth and storage costs on top of that, which aren’t trivial for services that want to stream music quickly on demand. The result is hundreds of millions of dollars flowing from venture funds to startups to labels. Little of it makes its way to artists, and advertising revenues only cover a tiny portion of the fees.

The labels don’t care if the startups make money, lose money or go out of business. All they want is to make enough money to extend the ultimate surrender date as long as possible. That’s when we’ll finally see the economic reality dictated by the Internet impose itself irrevocably on the music industry. Unless draconian laws are created and enforced that put people in jail, or worse, for file sharing. And even that probably won’t work.

Anyway, these crazy economics are making the music startups skittish. MySpace Music, the biggest player in this space, may be spending $2 million or more per week to the music labels based on their own statistics that they’re streaming over a billion songs a week. Their streaming rate is likely to be the best in the industry, and it almost certainly isn’t lower than .4 cents per song. There is no way that they’re making that much in advertising revenue.

The hope is that downloads, ticket sales, merchandise and ring tones will make up the difference, but what we’re hearing is that very little incremental revenue is being made from these other revenue sources.

That means there’s no chance for these startups to work until the labels reduce, significantly, the streaming rates they’re charging. Or agree to radically different business models. There’s no sign that is happening any time soon.

These crazy economics are making startups do odd things. I emailed one startup recently to suggest a post here on TechCrunch noting that they seem to be doing well - recent setbacks with partners didn’t hurt traffic as much as it may have, and I wanted to note that. The startup flat out asked me not to post, because they didn’t want positive press to impact their negotiations with labels. They had to present as desperate a situation as possible.

Read that again: streaming music startups don’t want more people using their service, because they lose money from every one of them, and the perceived success from having more users makes it harder for them to plead with the labels to give them better deals.

Then there’s imeem. A few days ago I had multiple conversations with the startup around rumors that they owed significant amounts of money to the labels that they couldn’t pay, and that they had failed to raise money or sell themselves. Not much information was shared, other than to say that the rumored $30 million owed to labels was too high. Now they tell VentureBeat that the number is in the single digit millions.

Whatever the number - $30 million or $1 million - imeem can’t pay it. Their business model doesn’t work and it is going to continue to not work until the labels let it work. And they aren’t going to be doing that any time soon.

Big Music Doesn’t Like Streaming Music

The big music labels don’t like streaming music because it doesn’t help them offset declining CD sales, and the evidence now suggests that streaming doesn’t lead to music downloads. Everything we’re hearing says that the labels would like to see streaming music startups just go away for now so that they can focus on maximizing paid downloads and extend that ultimate surrender date.

So when you hear about labels renegotiating streaming deals to help out music startups, be skeptical. They’re likely lowering the rates from 1 cent down to something closer to .4 cents per stream. And all that means is that these startups will bleed a little slower. But they’re still going to go out of business, because the venture firms are done investing in them.

Original here