With so much music being created and licensed, there is a growing need for companies that add organization and context to it all. Because of this, service-based companies, not streaming or download music services, have emerged as the hottest music startups. (Companies that own or license content are involved deals with more value, but service companies have landed a greater number of deals.)
In 2008 and 2009, there were 49 deals involving 45 companies that provide services, typically to artists or other businesses. The 36 deals with known amounts totaled $417.5 million. Venture capital deals amounted to over $101 million. Billboard tracked a total of 136 deals over that two-year period.
A digital service company is different than a company that licenses content, as iTunes or YouTube must do. They encompass a wide range of business models: providing analytics to artists and labels; offering search tools to consumers; and creating technologies that improve existing music services.
One segment of digital services that has momentum is artist services. Companies in the segment nabbed 14 deals in 2008 and 2009, plus another two in the first two months of 2010. Artist services companies are part of the change in retail, distribution and gatekeepers. They provide direct-to-fan tools (Topspin, Nimbit), career development tools (Hello Music, Ourstage, Reverb Nation), online collaboration tools (Soundcloud) and fundraising tools (SliceThePie) to artists and, in some cases, labels.
Echo Nest, which landed $1.3 million in venture capital funding in January, helps companies deal with digital music's information overload. Its music intelligence technologies are used by everyone from the major labels to startups such as MOG, Spotify and Thumbplay, to understand catalogs and make sense of consumer activity. "We solve a wide array of data problems for a wide array of stakeholders in digital music," says CEO Jim Lucchese.
For a music streaming service, for example, consumers expect a personalized experience like that of Pandora. That basic requirement for entry into a market creates a demand for Echo Nest's technology. Investors look at a company like Echo Nest, Lucchese explains, and see value in proprietary technology and the way it can scale to support multiple revenue channels. "There's a high barrier to entry," he says. "It's hard to do what we do."
Hello Music, a startup that announced $4 million in funding in January, seeks to capitalize on the abundance of digital music by providing A&R services for undiscovered artists. Artists send music to Hello Music and are connected with personalized radio station Slacker, for example, or featured in a special section of Pump Audio's music licensing service. Zack Zalon, co-founder of Hello Music, says the marketplace needs tools and products to help new artists break out from the pack and find the right ears.
Zalon and his partner at Wilshire Media Group saw enough value in A&R services to create Hello Music. He says it made sense to invest early and continue to invest as the ecosystem takes form and profitable businesses emerge. "This is the time right before it starts to become a very valuable set of business models," he says.