Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions
Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions

Was 2012 a good year for music startup fundraising? It probably depends on your definition of a music startup and how many companies you'd like to raise the millions of dollars required to operate a licensed, on-demand music service. But make no mistake: a lot of companies raised a lot of money this year.

A post at Digital Music News says $619 million was invested in music startups in 2012. In reality, far less was invested in companies involved specifically with music, and even less was invested in companies that actually license music -- less than $400 million using a strict definition.

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First, a few companies should have been left off the list. Gumroad ($7 million) offers an online direct-to-fan solution that is marketed to labels and musicians but is not strictly a music service. Backplane ($4,500,000) is an online social network backed by Troy Carter and Lady Gaga that's no more a music company than is Twitter or Foursquare. Fanzy ($500,000) is a social loyalty network for brands, not just bands. Qvivo ($1 million) is a cloud storage service that covers all media, not just music. Sonic Notify ($4.5 million) creates hardware and software for concerts as well as other settings.

Some other companies may or may not be considered digital music companies. Sonos ($135 million) makes affordable hardware for streaming digital music in the home that integrates many popular subscription and Internet radio services. Roku ($45 million) creates hardware that allows people to stream audio and - mainly, because of the popularity of Netflix - video to their TVs.

Ticketing companies offer products that can be used be a variety of clients, including music venues and concert promoters. Ticketfly ($22 million) has mostly music-focused clients, but it also serves non-music clients like the Kentucky Renaissance Fair. Online ticket search engine SeatGeek ($1.65 million) caters to sporting events as much as it does concerts. Ticketfly might get the benefit of the doubt because of its music focus, but SeatGeek could hardly be considered a music company.

Take out those companies mentioned above and focus on the companies that do music in a more traditional sense, and you're left with $398 million.

Of that $398 million, over half --- $230 million -- was raised by on-demand services, Spotify and Deezer, in an era when startups "supposedly" can't raise money for licensed services. It's true that not every startup can raise the millions of dollars needed to launch and operate a service that requires negotiated licenses. But companies -- precious few companies -- can indeed raise the required money. It's a small, select club.

The $230 million raised by Spotify and Deezer represents most people's notion of music startup funding, the next-generation platforms that will disrupt the status quo and change the way people listen to music. This is the money that is going up against Apple, Amazon and Google. This is the money that will result in the most revenue and the biggest mergers, acquisitions or IPOs.

While few companies that actually license music got funding in 2012, investors spread $168 million in on music startups that don't require negotiations with rights owners. Radio services accounted for $20 million: Senzari ($1 million), TuneIn ($16 million), and Soundrop ($3 million), a social radio service that runs on the Spotify platform.

Artist services continued to grab money in 2012. SoundCloud raised $50 million to expand its popular platform for hosting audio files. Gobbler, a platform for efficiently transferring files, raised $1.75 million.

Business-to-business companies did well in 2012, too. Music intelligence company the Echo Nest raised $17.5 million. Music analytics startup Next Big Sound raised $6.4 million.

It's unlikely, although not impossible, that any digital music services other than Spotify or Deezer will raise big money in 2013. But more money could be raised on the backs of those services. Just as Soundrop raised $3 million for a radio service that currently operates exclusively on the Spotify platform, additional startups will become more established as these streaming platforms become more established. Digital innovation is sometimes defined as anything tied to licensed music services. With companies like Soundrop raising money, that definition carries even less weight.