After last week's class discussion on Napster and how 90% of music downloads are illegal, I thought this article was appropriate. The author, Peter Kafka, questions the reason behind digital music start-ups in 2012, which makes sense because I would too. It's expensive to license the rights to music in today's industry and it's difficult to really make money in the business. So why do it? Kafka is asking the same question.
Kafka briefly describes the business model of Spotify (estimated $3 billion valuation) and Pandora (estimated $1.4 billion valuation) and how they're different, which was interesting. Essentially, Spotify pays the music owners and labels high fees for "on-demand" rights while Pandora pays for a compulsory license for "web radio" rights. Most start-ups can't afford to do this. He believes that perhaps people hope they can start a digital music company that will eventually earn the same billion dollar valuation. He advises that if you want that though, you'll have to show you can scale and work with the major music players in order to do so. This can be very costly and difficult so be forewarned. Although, I'm curious how Pandora and Spotify did it. What made them so successful?
One music startup that I really like is Songza. The licensing rights for web radio are much cheaper than on-demand rights. Songza has a really creative way to build their product using the radio rights model, by letting users listen to playlists that are played with the rules of radio rights. Besides being cheaper, the other advantage of radio rights is that you can play any artist (even the Beatles) - unlike on-demand, where they would need to be individually licensed. Check out Songza!
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