Where Venture Capital Money Is Flowing In Music
-- It's ironic that Warner Music Group now gets 25% of its recorded music digital revenue from some of services that were supposedly off limits to venture capital. The company announced in its earnings call it gets a quarter of its digital revenue from subscription services and on-demand video services in addition to webcasters like Pandora.

Streaming (and download) services that require licenses are supposed to be a black hole for venture capital. "You're going to see most of the funding for digital music go away," Venrock partner David Pakman predicted at the Billboard Music and Money Symposium in March 2009. Plenty of other venture capitalists share Pakman's sentiment that digital music just isn't a good investment. Are they right?

There's no doubt many investors have steered clear of this class of company while putting money into license-free startups. But look at the hundreds of millions of dollars that have been raised since March 2009 by Spotify, Mog, Deezer, Rdio, Guvera, FreeAllMusic, Rara.com and Beyond Oblivion. That's not to mention the money invested by corporations such as BSkyB in its digital music service, Sky Songs.

They can get money but they rarely deliver. Beats Electronics acquired Mog for $14 million after receiving roughly $25 million in funding from a litany of major venture capital firms such as Menlo Ventures as well as Sony BMG and Universal Music Group. Earlier in 2012, Beyond Oblivion folded before it could even launch ( it was reported that half its $88 million of funding was contingent on unmet goals). And although terms have not been disclosed, it seems highly unlikely Best Buy's $121 million acquisition of music subscription service Napster in 2008 made a profit when it was sold to Rhapsody late last year. Over time, these poor returns could be more of a deterrent than licensing and legal issues.

But it may be a moot point. Download and on-demand services are increasingly the domain of large retailers, technology and telecom companies that can afford the upfront costs and can bear some losses if there are gains elsewhere. Venture capital firms may have to look elsewhere.

Three additional areas of the music business continue to look good for investments: radio, ticketing and artist services. Check out the millions that have recently flowed into ticketing. Ticketfly announced two weeks ago it raised another $22 million of funding, putting its total at $37 million. Eventbrite hasn't raised any money in 2012, but it raised $50 million in 2011 and $20 million in 2010. Ticketbiscuit raised an undisclosed amount in late 2010.

Radio is a perennially hot area. TuneIn added $16 million to its first round of $6 million of funding. Miami-based Senzari has raised $3 million and operates in the U.S., Brazil and Spain; it launched in December. And, of course, Pandora had a successful public offering in 2011. Radio services don't require negotiated licenses, so they're more palatable for investors.

Artist services companies -- which don't require licenses with rights owners -- are numerous and well funded. In January, SoundCloud announced $50 million and Moontoast announced $6 million; BandPage (formerly RootMusic) announced $16 million last August. Crowdfunding platforms Indiegogo announced $15 million in June -- I wouldn't be surprised to see more funding in the crowdfunding arena.

The direct-to-fan segment is one to watch, direct-to-fan platform Nimbit CEO Bob Cramer says. Cramer might be a bit biased, of course, because audio production technology maker PreSonus acquired Nimbit earlier this year. The deal was a bit of a rarity -- plenty of companies get investments, but far fewer take that next step and are acquired and allow earlier investors to cash out. Neither company disclosed the terms of the deal. Cramer declined to comment as well. But he speaks highly of the Nimbit-PreSonus combination and says the market will go through a lot of competition and consolidation in the coming years.

"I still think direct-to-fan is in its infancy right now," he tells Billboard.biz.

CD Sales Growing at CD Baby
-- The CD may be considered as good as dead, but CD sales are growing at distributor CD Baby. The Portland, Ore.-based company revealed this week that its CD sales are up over the previous year.

"We've been distributing MP3 albums since 2004," president Brian Felson said in a statement. "But we're still seeing robust sales of compact discs in the independent community -- and this year, our CD sales are actually up!"

The uptick in sales appears to be a result of improved distribution. CD Baby attributes its CD success to its recently formed partnership with distribution giant Alliance Entertainment; partnerships with resellers in Argentina, Brazil and Taiwan; and more accurate listings. CD Baby noted that its increase is only in the "low thousands of units," but an increase is still an increase.

The broader trend for CD sales is not so rosy. U.S. CD sales were down 13% through Aug. 5, according to Nielsen SoundScan. Warner Music Group's global physical revenue is down 12% in the nine months ending June 30 (from the company's Aug. 9 earnings release).

I figured CD Baby isn't the only place where CD sales are on the upswing, so I moseyed over to Bandcamp. I counted 155 new CDs for sale at Bandcamp this week alone from independent artists. It stands to reason so many independent artists wouldn't be manufacturing CDs if there weren't a market for them, right?

But Bandcamp CEO Ethan Diamond couldn't say with certainty whether or not Bandcamp CDs are following a trajectory similar to that of CD Baby. And while he said physical sales continue to increase, this could be a result of organic growth or new features such as the merchandise section added Aug. 1.

On a side note, Diamond sent me a link to an Aug. 3 post at the Atlantic with a breakdown of revenue sources of musician Zoe Keating. Diamond sent me the link because Bandcamp was the second-biggest slice on the pie chart: 30% of Keating's $84,385.86 earned from Oct. 2011 to Feb. 2012. iTunes made up a majority of her revenue (56%) while physical (10%) and digital (3%) sales at Amazon were the only other major tranches. Streaming services, Internet radio and terrestrial radio provided just a small bit of revenue. The Atlantic summed it up this way: "Keating made 97% of her revenue through people just buying her music, whether through physical sales or digital download."
( CD Baby press release)

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