Are there opportunities for startups in digital music?

The possibilities of music in the internet environment have been discussed in the technology and media press for some time now, and not only because of the Napster case. During the heady days of 1998/99, numerous music start-ups were created to capitalise on the perceived opportunity to offer digital downloads. Since then, it appears that many of these have made slow progress and some are having difficulty raising money. So, will digital music happen?

Durlacher has developed a clear view of the way in which the digital music industry will evolve. At one end of the four layer structure lie the rights holders and artists. For the foreseeable future, the big five record labels will continue to own rights to the vast majority of desirable / mainstream music. At the next layer lie business to business aggregators. We believe there is room in the market for only a few large aggregators who negotiate rights from multiple labels to offer digital downloads from their extensive databases. These firms will host and stream digital content and store meta-data allowing users to search by mood, genre, lyrics etc. The aggregators will supply their services as the back end to hundreds of branded consumer-facing music sites, lifestyle sites, communities and retailers who will want to offer digital downloads as an option to their customers.

So what role will internet start-ups play in this value chain? Unfortunately, many existing music start-ups fall outside of this chain &endash; their current business models do not reflect the direction in which the industry is moving. For example, some sites offer unsigned artists the ability to reach consumers directly, bypassing the record labels (some are even trying to become record labels). While this is a viable niche, unsigned artists will always remain a small part of the market, and we do not believe new entrants can enter the big league of record labels. Other sites negotiate directly with mainstream artists for the rights to offer digital downloads. While some artists are testing this approach, it is not viable in the long term for artists to negotiate directly with hundreds of niche consumer facing sites.

There are, however, opportunities for start-ups to be involved in the creation of consumer facing sites focussed on particular genres or interests. They can supply content, community and commerce elements surrounding the a genre, for example, and can outsource the digital download section of their sites to the B2B aggregators.