SXSW: Label Execs, Startup Founders Discuss Barriers to Innovation for New Music Experiences

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Dustin Downing
Vaughn McKenzie, Alex Kamins, Brooke Eplee and Ted Suh speaking on the panel "Barriers to Innovation for New Music Experiences" at SXSW in Austin, Texas on March 13, 2018.

As recently as two years ago, the music-tech landscape seemed stagnant, if not treacherous. Industry insiders pointed to falling valuations and a slowdown in venture funding as evidence of a "music-tech bubble" and a "music startup meltdown."

Some argue that paid streaming subscriptions have altered this narrative, leveraging technology to propel the recorded music industry into a period of newfound, accelerating growth after a 15-year decline triggered by Napster and other peer-to-peer file-sharing services. But are major labels really any more resilient than they were at the beginning of the millennium when it comes to technological change? What challenges remain for entrepreneurs looking to enter and grow the market and how can music companies adapt and help out?

Label execs and startup founders gathered last Thursday (Mar. 13) at South by Southwest to discuss these issues during the panel "Barriers to Innovation for New Music Experiences," in front of hundreds of audience members and overflow viewers. Moderated by JAAK CEO Vaughn McKenzie, the panel featured Vevo vp of business development Brooke Eplee, Warner Music Group senior director of business development, innovation & emerging tech Alex Kamins and Musical.ly vp of digital music Ted Suh. The ensuing conversation reflected both renewed optimism for the future of music-tech and the challenges of implementing truly tech-forward deals in corporate environments.

McKenzie began the conversation by asking the speakers for their own definitions of innovation, particularly as it applied to their current jobs. Speaking from WMG’s perspective, Kamins -- who worked on Musical.ly’s first-ever major-label licensing deal in 2016, and also serves as a Techstars Music mentor -- defined innovation as “extending the value of the label’s core products, assets and relationships” and said he sees social media and other secondary music experiences such as Musical.ly, Triller and Dubsmash as key to the wider industry’s future growth.

“The historical paradigm, even with more modern platforms like Spotify, equated scale alone with value,” said Kamins. “But what we’re seeing with Musical.ly and Facebook is a more user-centric feedback loop, where the network effects of social media allow creation and consumption to fuel itself.”

In fact, days before the panel took place, WMG signed a licensing deal with Facebook that made the label’s recorded and publishing catalogs available to users and creators across Facebook, Instagram, Messenger and Oculus. Other key areas of interest for Kamins and WMG include gaming platforms like Twitch and apps that enable microtransactions such as tipping (driven largely by China’s growing online tipping economy). Blockchain- and coin-based economies are also important insofar as they help drive incremental revenue for WMG and its artists by “unlocking value in the business that has historically been trapped,” particularly around “the issue of fragmentation in music rights,” said Kamins.

Eplee, who served as senior director, global digital business development & strategy at Sony Music prior to joining Vevo, added that a given company’s business model can have a significant influence on how that company defines and drives innovation.

“I was licensing music across the whole gamut of platforms at Sony and the main difference with Vevo is that we can let the consumer lead that experience for innovation, rather than taking a top-down approach,” she said. “Vevo’s main business model is selling premium ads around premium content. We don’t necessarily need to drive traffic back to our own platform, so can embrace and thrive on a lot of third-party partners and create experiences that are genuinely tailored for the best UX for those partners.”

Speaking to innovation more broadly, Eplee also encouraged the audience not to discount seemingly small product improvements in the broad arc of technological history. “It’s easy to think that a particular product feature of tweak is trivial at the time, but we’ve come a really long way from the ecosystem we had 10 years ago,” she said, referencing WIRED founding exec editor Kevin Kelly’s concept of “civilization as the compound interest of incremental improvements."

Kamins brought up a similar framework of “incremental” versus “substitutional” innovation -- echoing Harvard Business School professor Clayton Christensen’s dichotomy of disruptive versus sustaining innovation -- for evaluating the viability of the startup deals that come to his desk.

“The substitutional products for Warner are obvious: stream-ripping and P2P file-sharing. But everything else is in the gray,” said Kamins. “We welcome incremental use cases that are progressive and aggressive, while also being thoughtful and understanding of the implications for our business at Warner.”

Suh chimed in, asserting that one of the biggest obstacles to success for aspiring music startup CEOs should also be one of the easiest to solve: “You need to come to terms with being respectful with the rights owners,” he said. “As a startup, you need to be genuinely willing to understand what the other side of the table is really looking for and what their goals are, and how you can bring that to life.”

When it came to Musical.ly's agreement with WMG, Kamins agreed that open dialogue and understanding between the two partners was key to closing the deal. “Fortunately, my team isn’t viewed under the same stringent microscope as my colleagues on the global streaming strategy side historically have been," he said. "It was easier to have a more fluid and honest dialogue with both partners and internal management and allowed us to build the case that Musical.ly would be a powerful tool for Warner’s business that saw music as its jet fuel, rather than simply a substitutional product for people with eight-second attention spans.”

As for other barriers, geography is no longer as relevant to success. Suh pointed out how Musical.ly was founded and is currently headquartered in Shanghai, “far from the major music markets of the world” (although that may be changing swiftly, as the biggest Chinese music services ink landmark licensing deals with Merlin and the majors).

Instead, in addition to simply understanding the market, the life-or-death battle for many music startups centers around the increasing complexity and steep costs of content licensing -- arguably the major labels’ core business. McKenzie pointed out the contradiction that even though “music is now being offered as one, centralized global product” in the form of subscription streaming services, “the licensing backend is still extremely fragmented," prompting the question of "whether the music industry's structure can actually support its ambitions."

“There are tens of thousands of publishers out there and fractional ownership issues around a song are only going to get worse and worse,” agreed Suh, who claimed that Musical.ly is currently "trying to navigate and approach these direct deals by coming to the table more as a partner, rather than just as a licensee. This is sometimes hard to do because formal agreements are very much structured like a license, but we’re thinking more through how we give more shine to publishers and writers, through songwriting competitions and other campaigns.”

Because of this complex licensing landscape, many music startups find themselves in a catch-22 situation: they cannot commit the cash for a content license without proving the traction of their business models, but cannot actually have the opportunity to show that traction without the right content. What's worse, not even millions of dollars in funding will solve this problem: Suh confessed that Musical.ly, which Chinese tech company ByteDance acquired for a reported $800 million in Nov. 2017, has yet to find a viable monetization model and “is still in growth mode.”

This creates an equally fraught conundrum for major labels, which by default want to mitigate risk while maximizing the value of their assets. Eplee mentioned that over the course of her time working at Sony, the contribution of the top 10 licensing deals increased from 70 percent to 90 percent of overall deal revenue, a function both of continuing industry consolidation and of fewer startups entering the space due to rising costs.

“If you’re in a role like mine at Sony, you’re on the hook to drive revenue on behalf of the label within a limited amount of time, so you’re naturally going to focus on the larger revenue opportunities, which is fair,” said Eplee. “But what actually thrives and succeeds in those environments? Only the established business models, and the largest companies. They’re the easiest to understand and the quickest deals to pull off. It’s a difficult exercise to figure out the right revenue structure for a deal with a startup that’s completely new and whose business model is unproven and might not even be proven within six months.”

Eplee tried to alleviate this catch-22 at Sony by helping launch a bespoke content license for early-stage startups, which granted full access to Sony Music content for one year for a significantly reduced fee in exchange for equity. “That structure doesn’t solve everything, but we were trying to do our part in solving the chicken-or-egg problem, at least from the master licensing side," said Eplee. "As a startup, you would ideally secure licenses from other labels, and you also need to get the publishing licenses, which is a whole separate exercise. These barriers still exist, but it’s not that the industry isn’t trying to solve them.”

Kamins added that ongoing internal education and cultural change within labels will be key to driving more innovative projects going forward. “We’re trying to educate senior management on why over-extracting cash for our content means we’re not cultivating a robust dynamic ecosystem for incremental use cases for the future,” said Kamins. “Cash is fungible, but music content licenses are not.”

As Spotify, Facebook, Musical.ly and a wide range of streaming and social platforms that continue to lay the groundwork for the industry's growth, major labels and other music companies also arguably need to tweak their approach to fan relationships in order to stay competitive and attract more founders into the music ecosystem.

“There tends to be a wholesale mentality at labels -- they're used to selling products to physical retailers, or sometimes more à la carte for digital -- but the servicing nature of subscription models today demands a much more direct relationship with the customer,” said Eplee. “There’s a whole set of enabling technologies and services that can help labels be better at this, to help shift their mindset away from simply being a transactional party. That extends from better connecting and serving content, to preparing content for voice-controlled user interfaces that require entirely new categories of metadata.”

In other words, the music industry might be its own biggest barrier to innovation -- but there are a growing number of execs and founders using their successful track record in bridging music and tech to make incremental, systemic changes behind the scenes. We may not see their impact tomorrow, but they will facilitate and govern better music listening experiences and more fruitful ecosystems of tech visionaries, for future generations of music fans.

Festivals 2018


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