Is There a Music Tech Bubble?
The stock market is faltering. The heavy flow of venture capital funding constricted sharply in the fourth quarter. Some high-flying technology companies, bloated with easy money, are starting to fall back to earth. The coming hangover might affect some digital music companies, but experts say not all valuations are suspect and that good ideas will continue to find financial backers.
What could be more emblematic of a bubble than overvalued technology companies? Turn to any technology blog or financial outlet and you'll see talk about "unicorns," those private technology companies with valuations over $1 billion made possible by easy access to money. Fortune's "The Year In Unicorns" recounted 12 months of warnings and irrational exuberance. The Economist warned of a coming "techquake" for the 150 unicorns currently on the planet (according to CB Insights). Prominent venture capitalist Bill Gurley spent 2015 predicting imminent doom for highly valued technology companies that lack financial fundamentals.
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Now investors are starting to pull back. Fidelity wrote down its investment in Snapchat, a photo-sharing service most recently valued at $15 billion, by 25 percent. Blackrock did the same with its stake in Dropbox, a cloud service for hosting and sharing files that was last valued at $10 billion. Square, a mobile payments platform co-founded by Twitter co-founder and Chief Executive Jack Dorsey, had a November IPO at a $2.9 billion valuation, less than half of the $6 billion at its last private funding round just 13 months earlier. Venture-backed companies raised less money in the fourth quarter than they had in any of the four prior quarters, according to the latest Venture Pulse report.
While some unicorns will undoubtedly fall, not all startups are necessarily overvalued. Artist manager Troy Carter believes some technology companies are actually undervalued. "We're seeing a lot companies that are living up to their valuations, when you look at growth and you look at revenue," says Carter, who has invested in a range of tech startups -- including Spotify -- through hisAF Square angel fund. Notable investors from Mark Andreessen and Sam Altman of Y Combinator agree, dismissing the idea of a bubble and arguing taht many tech companies are actually undervalued based on their proven ability to lead a growing market.
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Perhaps unsurprisingly, market leaders, the ones either creating or reshaping industries, are faring the best. Uber, the ride-sharing app that's changed transportation in many cities, "is valued at 4 times the total value of taxi spending in the world last year," Max Wolff, Chief Economist at Manhattan Venture Partners. "They argue they are creating a bigger value by making it easier [to get rides]."
Spotify could be one of those undervalued companies. Its proponents could argue the company will not only disrupt the existing music market, it will make the market large enough to merit an $8 billion valuation. "The idea is people are valuing these companies, in hot spaces like music, based on markets these companies are building as opposed to their cash flow today," adds Wolff. "That always lends itself to aggressive valuations." He believes Spotify and its competitor Deezer should get credit for convincing fans to pay for streaming. Spotify in particular converts about 35 percent of its free users. "[A] five percent conversion rate on freemium is generally considered good," says Wolff.
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These sky-high valuations aren't based on a company's current financials. "They can be profitable if they want to," adds Santosh Rao, head of research at Manhattan Venture Partners, which valued Spotify at $5.7 billion a year ago. "Right now they're investing." And why not? Rao believes the market is sending messages to mobile-first companies like Spotify that growth is more important than profitability. This strategy routinely receives criticism within the music industry from people that want Spotify to better compensate the creators behind the music. But in purely financial terms, the strategy could pay off soon. Rao forecasts Spotify will reach profitability in late 2017 or early 2019.
Spotify and competing subscription service Deezer, which just announced $109 million in new funding, are just two of thousands of companies to take advantage of readily available capital. Last year, global funding for venture-backed companies grew to $128.5 billion (from $89.4 billion in 2014) and more than doubled the $50.2 billion spent in 2013. In the United States, total funding jumped to $72.4 billion from $57.4 billion.
Runaway funding has lost momentum, however. After more than tripling in the previous three years, global venture funding fell to $27.2 billion in the fourth quarter of last year, the lowest level since the third quarter of 2013 and 30 percent lower than the third quarter of 2015. Funding in North America followed the same trend. It's probably not a coincidence these declines occurred as bubble fears spiked and tech unicorns were being put on death watch.
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Yet for every Spotify or Deezer or even SoundCloud, which just raised $32 million in debt funding, there are dozens, if not hundreds, of smaller digital music startups looking for capital. These budding companies won't be immune from the problems at larger companies, says Jon Vanhala, a former digital music executive now with Crossfade Partners. "It gets a little a bad at the top, worse at the bottom. That's always been the case."
A slowdown in music investments would come at a bad time. The streaming marketplace is rather established at this point. Spotify is one of a handful of standalone streaming companies competing with Apple, Google and Amazon. New market entrants -- successful ones, at least -- are unlikely. That said, there are a variety of segments, from live music to virtual reality, that need funding to adapt and evolve. There's ample room left for business-to-business services that improve how music fans find concerts, buy merchandise and concessions at venues, and receive information within that environment. Virtual reality can offer an entirely new way of experiencing music. The industry should be thinking about life after streaming.
The current market and investment slowdown doesn't mean innovation will greatly suffer. Less of the easy money that drove valuations skyward will merely separate the good company from the mediocre one. One digital music investor, who asked not to be named, says funding will continue in a correction -- for the right companies:
"High quality can always find financing."
SONY IS NOW THE LAST MAJOR RECORD LABEL HOLDING OUT ON SOUNDCLOUD
Germany-based music streaming company SoundCloud has struck a licensing dealwith Universal Music Group, the music industry giant that represents some of the industry’s biggest names. The new deal is similar to previous ones that the streaming company has inked with Warner Music, the National Music Publishers Association, and Merlin.
The new deal gives SoundCloud access to the Universal catalog, and allows artists who work through Universal, such as The Weekend and Sam Smith, to receive revenue for plays via ads on the free streaming service.
SoundCloud currently boasts around 175 million monthly users, and is employed by many popular artists as a means of promotion for new songs, upcoming albums, and other audio-based marketing. This works because the company allows its artists, who currently include everyone from world famous musicians to bedroom hobbyists, to upload and take down material at their own whim, rather than tightly controlling a central catalog of music.
Although most of the world’s major music publishing arms are now officially working hand-in-hand with SoundCloud, there is one notable holdout: Sony Music. The company has yet to work out an official deal with the streaming service, and that is likely the last piece of the puzzle before SoundCloud is finally willing to launch a paid version of its currently free music service, which executives have said is coming in some form by the end of 2016. Sony pulled all of its music off the service last year.
Part of the reason Sony could be reticent to ink a deal with the German company is because of its past issues with royalty payments; Just two weeks ago, SoundCloud settled a lawsuit with U.K.-based publishing group PRS Music over royalty issues.
For SoundCloud to move forward with its planned paid subscription-based rollout without a big, gaping, hole in its offerings, it will have to strike a deal with Sony. And with Sony as the only big fish left, the Japanese company’s catalog could now cost a pretty penny.
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Tech Visionary David Bowie Foresaw Individual Branding; Limitless Music
David Bowie, the legendary glam singer, fashion icon, gender provocateur and cultural touchstone who died Sunday at the age of 69, was also a business entrepreneur of formidable foresight. As we remember him today, it’s worth looking back at one of the roles likely to be eclipsed by his stratospheric status as the most important glam rocker of all time: tech visionary.
It’s not just that David Bowie changed things or grokked that change is inevitable — hey, he wrote some songabout it! Bowie understood changes decades before they happened, when others rolled their eyes. “Digital natives” who remember the artist primarily as the uber-mulleted Goblin King of Labyrinth may be surprised to learn he both understood and prepared for the radical transformation that would be wrought by a nascent Internet ages before the entertainment industry or lawmakers attempted to wrap their heads around it.
“The Internet carries the flag of being subversive and possibly rebellious, and chaotic and nihilistic,” Bowie told British journalist Jeremy Paxman in a 2000 interview that resurfaced on YouTube following his death. Between Silicon Valley heralding the Internet as the savior of humanity and naysayers who decry it as our hateful doom, it’s refreshing to hear Bowie speak intelligently and honestly about this morally neutral development.
“Forget about the Microsoft MSFT -1.96% element,” Bowie told Paxman, taking for granted that the reign of the antitrust-embattled Ozymandias could not last because the brand is the individual, not the corporation that disseminates her work and takes a slice of the revenue. ”The monopolies do not have a monopoly,” he says, foretelling the massive changes coming to the music industry. “I embrace the idea that there is a demystification process going on between the artist and the audience,” Bowie continued. “It’s about the community. It’s becoming more and more about the audience.”
By then, Bowie was already making a significant investment in his audience, or rather, allowing them to invest in him. Bowie Bonds, launched in 1997, gave his fans creditor stake in his song royalties — $55 million worth were sold. Despite post-Napster challenges to music industry profits, investors made out big. Heavy Metal band Iron Monster and Funk legend James Brown issued their own bonds.
In 1998, the year before Napster launched — notoriously crashing high-speed networks in college dorms across the United States — Bowie launched BowieNet via the tech company he co-founded, Ultrastar, which specialized subscription-based private ISPs for niche fan communities.A combination AOL AOL +%competitor/artist-and-fan connection, BowieNet offered users their own @david-bowie.com email and a Second Life precursor, BowieWorld, a 3D version of the virtual interactions only hinted at by Usenet obsessives like myself.
BowieWorld system requirements: Minimum configuration is a 90 MHz or faster processor, Windows 95, 98, 2000 or NT.
BowieWorld took so long to load on what can now only be laughably described as “high speed” connections, it was advisable to have some corporeal reading material on hand while you waited. Once in, you got your own avatar to control through the 3D environment for however long it took until the computer inevitably crashed. For those of us with patience, it was worth the wait to get a look at was was also promised in Bowie’s music and groundbreaking videos — the future.
Unlike, say, Metallica and Trent Reznor, Bowie saw as inevitable the changes wrought by Napster — the peer-to-peer service which allowed fans to share music files of even the most hard-to-find recordings. Prior to its legal woes over copyrights, this “community” had 80,000 registered members at its peak, an astronomical number in 1999. On the UK morning show The Big Breakfast in 2000 — three years before Apple AAPL -2.06%launched iTunes — Bowie predicted the unequivocal end of the album era, with MP3s a technology the music business would have no choice but to embrace.
“’I don’t even know why I would want to be on a label in a few years, because I don’t think it’s going to work by labels and by distribution systems in the same way,” Bowie told the New York Times way back in 2002. ”The absolute transformation of everything that we ever thought about music will take place within 10 years, and nothing is going to be able to stop it.”
Bowie was always avant-garde in all things, including business.