Yesterday at YCombinator’s Startup School at Stanford University, the founder of the now-defunct music sharing startup Imeem laid out a very grim assessment of the future of music startups. In his words, “every time a founder does a music startup, a likely more successful startup dies.”Dalton Caldwell founded Imeem () in 2003 with the goal of reinventing the music industry through free, advertising-supported streaming music. At its peak, Imeem had 95 employees, $24 million in yearly revenue and was one of the 100 most popular sites on the web.
In November 2009, Imeem was acquired by MySpace for a paltry $1 million. News Corp. shut Imeem down a month later.
Caldwell has had a year to reflect on his company’s dramatic fall, and his thoughts on the entire music industry are not pretty. Caldwell shared some of those thoughts with an audience of students and entrepreneurs while providing his assessment of what’s next in the Internet () music and radio industry.
The Challenges Music Startups Face
Imeem’s founder went slide by slide to different music startup models and explained why he believed each and every single one faced almost insurmountable challenges. He first railed into startups that create tools for artists, claiming that the market is extremely saturated with strong competitors like TuneCore and Topspin.
Caldwell’s next target was music download store startups. His argument was simple: that iTunes has more than 90% market share. He also claimed that ad-supported music business models were just as difficult to maintain. In order to secure the rights for streaming music from the big labels, these startups have to pay quarterly minimums and advances, along with per-play minimums. In addition, Caldwell claims that the labels have soured on ad-supported music because “it devalues music and is a slippery slope.”
What if you want to start a subscription startup? Also a bad idea, according to Imeem’s founder. To secure the subscriptions, you have to give up 10% to 30% of your company, pay quarterly minimums, deal with licensing restrictions country-by-country and still pay your employees and bandwidth bills. In addition, the subscription market is already crowded with the likes of Rdio, MOG, Napster, Rhapsody () and Spotify.
Then there are the problems that affect all music startups: an antiquated legal framework, poorly defined rules for music online and desperate music labels trying to find ways to make up for billions in lost revenue since the 1990s. One of the biggest issues he brought up though is the mergers and acquisitions catch 22 for music startups. Essentially, music startups have to sign non-transferrable deals with labels to get access to their music. If they get acquired, those deals go away, destroying the value of the startup. If they don’t have the deals, then they won’t grow big enough to get acquired.
Basically, if you were to sum up Dalton’s Caldwell’s presentation at Startup School in four words, it would be this: music startups are screwed.
The Outlook for Music Startups Is Bleak
Two years ago, Pandora was on the brink of folding due to a proposed rise in music royalty rates that would make its business model unsustainable. As you may know, Pandora survived and is now profitable. Still, for every Pandora (), there are dozens of Imeems that flame out and perish.
The music industry is clearly in need of disruption, but with a few music labels controlling the world’s most popular music and artists, nobody has really succeeded. Spotify () is a prime example; despite promising a U.S. launch for more than a year, Spotify is nowhere near a U.S. launch, mostly due to a breakdown in negotiations with the U.S. record labels.
Caldwell argues that until Congress expands statutory licensing frameworks and artists finally abandon the labels, music startups will continue to struggle. Neither of these things are likely to happen for years to come though, so the struggle will continue.
In the meantime, start an online music company at your own peril. Being the founder of a music startup isn’t something we’d wish even on our worst enemies.
Do you agree or disagree with Caldwell? Let us know in the comments.http://mashable.com/2010/10/17/imeem-music-startups/
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