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— Venture Well —
As a result, startups have proliferated, and venture investors have lined up to back disruptive companies that have either set changes in motion or rushed in to fill the voids newly created by those changes. Dozens of startups such as Imeem Inc. of San Francisco, Pandora Media Inc. of Oakland, Calif., and SpiralFrog Inc. of New York now offer consumers nearly limitless choice in the online music arena, enabling free song-file downloads, streaming tracks online and personalized Internet radio and music discovery services.
Yet in the past couple of years, few of these startups have managed to reach full flower and generate liquidity for their stakeholders. Only Last.fm Ltd., the London-based social music site acquired by CBS Broadcasting Inc. for $280 million in May 2007, has provided a noteworthy exit for its venture investor, Index Ventures of Geneva. With all these startups in play, but none anywhere near large enough to go public, who will buy them and generate a return for VCs -- and when? "A lot of these companies are still pretty young," offers Jim Feuille, a general partner with Crosslink Capital Inc. of San Francisco. A predictable answer, perhaps, but Feuille, who sits on the board at music discovery and personalized radio site Pandora, also argues that buyers are not necessarily ready to commit their M&A dollars because royalty and licensing structures are still evolving. "On the content side, there are still a lot of moving parts," he says. "It's hard to tell what will happen because every offering is subject to a different standard." Pandora has built a popular product but has struggled to stay afloat, shutting down its service in many countries while negotiating to stave off a potential doubling of U.S. royalty rates by 2010. It isn't alone: Even many of the most popular music Web sites haven't turned out to be profitable companies and may have a hard time pitching themselves as attractive acquisition targets despite their large audiences. The role of the Big Four music labels -- Sony BMG Music Entertainment, Universal Music Group and Warner Music Group Corp. of New York and EMI Group plc of London -- has evolved over time as well. In many cases, their initial hostility toward new distribution technologies has given way to acceptance and, at times, investment. But while labels have taken stakes in startups such as social network Imeem, streaming site operator La La Media Inc. of Palo Alto, Calif., and music blogging site MOG Inc. of Berkeley, Calif., they are unlikely to emerge as buyers. "The buyers are still traditional media companies -- radio and broadcast media and companies making the print-to-online transition," Feuille says. In addition to Last.fm's buyer, CBS, those candidates include Viacom Inc., NBC Universal, Time Warner Inc. and the Fox division of News Corp., all of New York. For the time being, IPOs remain highly unlikely for most music startups. Even before the credit crunch, the banking crisis and whipsawing market volatility, small and midcap IPOs were becoming infrequent, and companies without robust cash flow weren't reaching the public markets. A few companies in the sector, such as RealNetworks Inc. of Seattle, the purveyor of the Rhapsody music subscription service, have seen their shares publicly traded for many years. Its chief rival, money-losing Napster Inc. of Los Angeles, had been listed since emerging from an earlier incarnation, Roxio Inc., but was acquired by Best Buy Inc. earlier this month for $121 million in cash. But given the cost of conducting an offering in today's regulatory environment, neither one would seem like an attractive IPO candidate if they weren't already public companies. Ultimately, Feuille says, any company that can generate significant revenue and cash flow and maintain a loyal audience will find itself well positioned for new opportunities. "At the end of the day, anywhere in the Internet media business, if you can build a good product or service and monetize it, you're going to have a lot of flexibility," he says. |
Over the past decade, the music industry has been vulnerable to the rapid changes set in motion by the growth of broadband Internet technologies. Record labels have diminished in importance, Apple Inc.'s iTunes retail store has emerged as a market leader and consumers have increasingly turned to the Internet rather than the radio to find new music.
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