Raja Jasti’s Blog - Renaissance Thinking

Mike Arrigton has an interesting post on the sorry state of affairs of music startups.

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. They’re 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.

If the large music companies are in trouble and the web startups that are disrupting them are also in trouble then there is a problem. I guess the only company that seems to be making money in music is apple. Is it possible that the internet disruption would swallow the whole music industry? I don’t think so. What we are seeing is the period of uncertainity where the industry is trying to adjust to the radical shift brought upon by the internet tidal wave. It sure is taking a long time for the industry to adjust. A great deal of  that has to do with music labels trying to control the distribution using legal strong arming of consumers and small partners. The sooner they embrace the internet and create an ecosystem where small companies thrive the better for the industry. Until then apple will be eating labels lunch.

Update: FT has a nice article on the squeeze that web startups are facing from advertising and labels.