David Pakman

Paul McGuinness, the esteemed business manager of U2, penned an essay (can we still say “penned”?) for GQ UK called “How To Save The Music Industry.” He says piracy killed the music business and he calls on tech entrepreneurs to help save it. Although it pains me to disagree with someone who helped build the career of musical icons, his argument ignores key facts important to remember about how the music industry arrived at this perilous point.

MIDEM, the largest global music industry conference held each year in Cannes, asked me to guest blog on their MidemNet site over the next year. So, my first posting over there is a response to Paul. You can read it here.

As always, I look forward to your comments.

(Here’s a link to my previous post on how the music industry could save itself, “The Sad State of The Old Music Business“.)

Over the last six months, a heated debate has raged in a small corner of the startup ecosystem pitting angel investors against VCs. Both groups have made various cases about the general usefulness or uselessness of the different investors. Some have gone so far as to predict the death of traditional VCs with the rise of angels and super angels. The truth, of course, is more nuanced. We all understand that traditional venture capital is in the midst of one of its inevitable phases of change. As a practice, it has been around since at least 1939 when Laurance Rockefeller formalized the idea of entrepreneurial capital. Since then, it has evolved through many economic cycles. In all the noisy rhetoric about whether entrepreneurs should accept capital from institutional VCs, institutional angel funds, or individual angel investors, I think the most important point is lost: people matter most to entrepreneurs.

Entrepreneurs spend a huge amount of time recruiting and selecting ideal candidates to join them as they build a company. Many sophisticated VCs hold true that people matter most in predicting a company’s likely success. Particularly in the early stages of a company’s growth, CEOs think a lot about who they want around the table with them. Shouldn’t they chose their investors the same way? The answer is, in my experience, they almost always do.

When Doug and I raised money for Myplay, for example, we chose Peter Gotcher to lead our Series A not because he was with IVP and was launching RedPoint, but because he was an accomplished CEO who had founded and built one of the most successful digital music companies (Digidesign). We didn’t chose him because we believed the economics of his industry were superior to other forms of capital, but because he had a wealth of knowledge of how other successful companies were built. We didn’t chose him because we thought Limited Partners (LPs) were excited to invest in RedPoint (in fact, I didn’t even know what an LP was at the time), we chose him because we though he would add huge value around the board table. And we certainly didn’t choose him because we thought a convertible note structure was much better for us than pricing the round. We chose him because we wanted him to help us be successful. I think most entrepreneurs think the same way.

As an entrepeneur starting and running companies, I had a bias towards investors who were once operators, who had built successful companies or those investors who had witnessed great companies get built as board members. I was never comfortable with investors who had primarily traded stocks on wall street or been analysts investigating public companies. But that was my bias and how I felt. Each entrepreneur makes her own choices about who should have a seat at the table.

So in this “debate” about VCs and angels, I think the experience, personality, point of view, track record, and passion of the investor matters most to an entrepreneur, not the name of his fund or the color of the jersey he wears or the team he plays for. Whom do you want around the table every day? Who is willing to actually do work for you, help you recruit, help make key strategic decisions, help sell customers, help anticipate competitors’ moves, help review product designs? Who will help you make the hard decisions that you will most certainly face? That’s who entrepreneurs chose as their investor.

In 1999, when Doug Camplejohn and I created Myplay, digital media consumption was just emerging. Sure, people had lots of MP3s, but there was little video online, certainly no eBooks to speak of, and the idea of the “cloud” was, well, still in the clouds.

One of the great benefits of attending the TED conference is the TED book club. Throughout the year, Chris Andersen and his team pick out 10 – 12 inspiring, timely, and exceptional books. Each TED attendee receives a package or two throughout the year filled with these hardcover gems. Given that many of us now have Kindles and iPads, very few of us want to receive a package of heavy books anymore. Last week TED recognized this and offered to make future books available directly to our Kindles. To enroll in the program, you had to submit the hardware serial number of the Kindle. Presumably, one day I will turn on my Kindle and find some new TED books to read. This got me thinking how broken this process actually is.

We now live in a world where we have multiple devices on which we want to consume various forms of media: TVs, desktop PCs, laptops, smartphones, tablets, eBook readers, and more coming. Anyone who wants to distribute media to us has a hard time providing it to us in a way that lets us, the consumer, choose how, where and when we want to consume it. TED has to send my eBooks to my Kindle? But suppose that is not where I want to read them? (Granted the Kindle software app is suppose to let me read my Kindle books on any device they support. But how does one send eBooks to someone’s Kindle app? And why should Amazon stand between someone sending me a document in the ePub format?)

We need a locker. We need an open, authenticated location in the cloud where we can store, access, receive, organize, and share our digital media. Media is too fragmented online. Email, Flickr and Facebook serve this purpose for pictures. My local hard drive is where I store my music (and I hack together solutions to get that music streamed to me wherever I am). My video is stored mostly locally, except for the few clips I have put up on YouTube. And my eBooks? Well, they right now seem somehow buried into my iPad or in Amazon’s cloud. It’s too messy.

Various companies, after Myplay, have tried to deliver on this promise but none have caught on. I think Google might be the best company to deliver this service. They have the added benefit, at least for now, of not being a retailer of media. They would be ideal to extend Gmail to allow all documents to move in and out of their cloud. Let me designate access rules, enable sharing onto social nets, authenticate all my devices, build fast access apps for all platforms, and away we go. Digital media retailers could build on top of an access API that lets me receive my media in my locker instead of downloaded to my local device.

Yes, some content owners hate this idea because they instead want to charge me each time I access their content (think about how many times you pay, one way or another, to see a movie). But now, more than ever, we need a digital locker in the cloud.

I very much agree with Fred Wilson and Albert Wenger that we construct various social networks, not just one, to suit various needs. One’s Facebook social graph is often the group of people with whom you are comfortable sharing light-hearted info and photos. One’s Foursquare graph is often more limited: the group of people whom you want to know your physical location. Your Twitter graph is really an interest graph and I think, over time, less about people and more about information sources. Your Venmo graph is even more limited: those people with whom you exchange money and trust. Facebook, I think, could have developed additional functionality sooner to provide impetus to construct these additional graphs (often a subset of your FB graph) directly with them, but I think they missed this. They have been too slow to recognize the importance of physical location, were late in allowing asynchronous following, and are now getting around to payments. None of this is likely to impact their continued massive success, but it opened up opportunities to others.

Missing from this discussion is what I find most interesting about social media: the graph most important to monetization. There are interesting businesses being built on top of the graphs discussed above. However when you really want to build an enormous media business on top of the ridonkulous amount of social data available on the web, you find a new graph emerges: the brand social graph.

At Media6Degrees, the company has pioneered the ability to assemble custom audiences for brands from the connections between their customers and those customers’ friends. For any particular brand, the company actually computes (all anonymously, of course — no personally identifiable info is involved) a brand social graph, finding the friends of a brands’ customers most likely to be interested in actually buying the product. It turns out this is much harder than simply advertising a product to everyone in someone’s social graph. We have multiple connections between us as people, and some are more predictive of mutual brand affinity than others. The brand graph can change by the day, ad campaign, product or offer. This is a hard data problem, but one whose rewards are enormous.

The brand social graph is a big idea. I think, as social media matures, friend targeting via a brand social graph will be a significantly large business model for the largest media companies. Perhaps one qualification: the search targeting model dominated by Google is still likely the most effective form of advertising ever created: the user’s intent is entirely clear, so advertising works really well. But it isn’t great, as we all know, in building brands, finding audiences and creating demand. Brand spending and demand creation is a much larger part of ad spending than demand fulfillment is. I think these needs will largely be served by friend targeting in the future, and one which Facebook is in the position to dominate (but it not yet doing). Google, Yahoo and Microsoft all have enormous amounts of relevant social connection data but do not yet show evidence of using it. Many of Facebook’s announcements last week put it in the pole position of delivering web-wide friend targeting when they deploy an ad network on top of FB Connect one day. And Twitter’s interest graph also gives it a great position in this emerging ecosystem.

I read with sadness this New York Times profile of Irving Azoff and Live Nation. As my friend Andy Weissman asked, “How divorced is this world from reality?” The article reminds us of the way the music industry worked for many decades: a world of power by those who manage artists and run record companies. This power was derived by getting artists to agree to allow these moguls to negotiate and navigate their career decisions. Of course, the fans only cared about the artists and their music, but someone had to make business decisions, negotiate contracts and approve marketing plans. I don’t begrudge the many successful music industry executives who built lucrative careers and giant fortunes from the many good decades of music business success. They helped shaped the careers of literally hundreds of great artists.

In surveying the state of the business now, however, many of the decisions made by these very same executives over the past 12 years have resulted in nothing less than complete failure. The recorded music business, which used to be largely responsible for more than 60% of the revenue an artist generated, now brings in about 9% of an artists take (this number from Azoff himself.) The recorded music business at about $18B $17B worldwide is a shadow of its year 2000 peak of $40B. And I don’t see its fall stopping any time soon. In fact, I really think the recorded music business goes pretty close to about $6B – $8B over the next 5 years. And that’s worldwide.

The story of this decline has been well-chronicled. In fact, the mistakes of this industry are studied daily by executives in the movie, book, television and newspaper industries as a recipe to avoid. (I’m not so sure those execs have quite taken away the right lessons, as I have posted about many other times.) There are only two music industry segments in better shape than recorded music: music publishing and live music. The former hasn’t declined nearly as much thanks largely to the increased use of music in advertising and, to a much lesser extent, increased revenue from satellite and internet radio. Live music, as the NYT article makes perfectly clear, has stayed healthy for two reasons: (1) the magic of a live show can’t be pirated online and (2) huge consolidation in venue ownership, promoters and ticketing has allowed a massive increase in ticket prices. It’s hard to celebrate this second fact as a revival of an industry. In fact, I think it is the bellweather of its end.

I agree with Azoff that tickets were underpriced for many years. Scalpers have always showed us that the market had a curve to it that was not optimized by, say, two or three ticket price points. The rise of secondary ticket markets like StubHub showed us that there were more efficient and orderly ways to maximize profit. But massive consolidation and monopoly-building usually signals that there are no other growth opportunities left for a market — the market participants grow by consolidating and raising prices. Azoff’s belief that Live Nation’s upside is in selling t-shirts and fan clubs to the fans sounds like something I heard in 1997 during internet 1.0 days. It’s not only not innovative, it is precisely the opposite of what fans are looking for from the music industry.

I think, like many others, that we have been witnessing the atomization of artistic culture. The internet gives us far more choice than the limits imposed upon us by broadcast media. We know of more bands, we can get tour dates pushed to us, can sample music long before it is released and we can reserve tickets well before the show. But we are doing this across many more artists, spreading our limited disposable income around in ways we didn’t when we had fewer choices. Nevermind that we are offered billions of other entertainment choices from video games, YouTube, Facebook games and even Crowdreel and Bitly.TV.

The future of the business is atomized and decentralized. It is one where the collective power of the many fans actively engaged in discovery and sharing have more power than a few senior execs calling the shots about marketing budgets. Yes, there will always be superstars, largely gained by taking those who are bubbling up and pushing them through the mass media still remaining. But today’s superstars sell a fraction of records/downloads as the ones from years past. And yes, there will always be American Idol programming which is really more about entertainment than it is about creating great music. But the new power, in my mind, is granted to the aggregators who pull together our collective wisdom. The music business today is blogs, Twitter tweets, Facebook links, the Hype Machine, TheSixtyOne, Rockwood Music Hall, Pandora and Foursquare. Honestly, I discover far more music today from hypem.com (an aggregator of the best music blogs) than I ever will from the decisions of record execs and promoters. We will continue to pay Mr. Azoff’s company’s service charges for the privilege of seeing great live music if and when our favorite artists reach big arenas. And fewer and fewer artists will. But if you are going to bank your future on nothing more than raising prices and selling me more expensive t-shirts, the fall will be mighty indeed.

Instead, where might today’s execs focus their energy? Providing tools and assets to empower the many fans willing to do their marketing work for them. Terry McBride has articulated many times that the secret to his artists’ success is by giving fans the music and other goodies to share with friends, evangelizing their favorite artists. Shouldn’t the music catalogs be available through a click-wrap API, paving the way for thousands of new music filters on hundreds of thousands of web sites? Shouldn’t music be decentralized? Not free, but just available everywhere, especially to developers to create more engaging and relevant online music experiences. Music needs to become part of the fabric of the web, not an overlay on top of it. Like I can embed my Twitter stream anywhere, I need to be able to embed the music driving my life all over the web too. Not just the song names, the music itself. I have a need to share it, but I really can’t today. If this happened, the businesses that could be built on top of it are quite interesting. The data becomes the value here enabling the new generation of music programmers to emerge based on the collective and specific expertise of the masses.

The tech community creating digital media is filled with forward-looking businesses. In the past three weeks alone we’ve seen the launch of the iPad, new Twitter APIs, and extended Facebook Social Graph APIs. As Andy Weissman pointed out to me, “All, or none of those may work – but they are all forward-looking in their nature and in how they want users to experience them.  Live Nation is looking backwards.”

I am not arguing that artists should not be paid. But the ways they build their career, reach an audience, and then ultimately sell stuff to that audience, is fundamentally being turned upside down. Ecosystems based on sharing are the future. This is what the net native generation that is the future audience of all entertainment businesses know to their core. And Mr. Azoff’s shouting at business partners and squeezing fans for a few extra dollars on a ticket isn’t going to change any of this.

My colleague Brian Ascher in our Palo Alto office coined a term several months back called the “right-time web”. The concept, as he described it, was that with the massive increase in sharing of information through social and real-time media came the need for filters to help categorize that data and make it available on demand. It’s not that useful for me to know that a friend of mine just enjoyed an Americano Misto at Joe The Art of Coffee near Grand Central. But, when I am looking for great coffee places in mid-town, it’s really useful for me to know that. Similarly, when I am in the market for a digital camera, I would love to know who in my social and information networks has recently researched them and bought one. Their opinion is highly coveted by me at that time. What is really needed is a service to collect, organize, and make available all the data shared by my networks. Some think of this as social search. Brian called it the right-time web. And I think he is spot-on.

At the Twitter Chirp conference this week, I mentioned the need for it. Kara Swisher kindly wrote about it today and credited me with the concept, but it was really Brian’s concept and our team at Venrock has been riffing on it for some time. In any case, we have examined a bunch of companies in this space and would love to meet any others who are attacking the problem. Here is how Brian eloquently describes it:

Much has been written about the Real Time Web, and the hype grows louder every day.  There is no denying the power of Twitter and Facebook and the other real time social media sources to reshape the way we create and consume information, however “real time” is not for everyone.  Early adopters of these services relish in the ambient cloud of streaming information and the interpersonal “closeness” that comes from knowing the minute by minute moves of the people you are interested in.  Most of us however, don’t care what you just ate for lunch right now, but two months from now when I am in San Francisco looking for a lunch spot, I’d be very interested to know that you enjoyed and Tweeted about the charming café in Noe Valley from two months ago.  Likewise, hitting me with the triumphant news of your purchase of a new Prius is only modestly interesting to me while I am checking my phone while in line at the airport, but extremely interesting to me when I am proactively researching my own car purchase.  So, the point is that social media content is valuable because it comes from people you care about, but it is gold when it marries with your intent and interest in a topic at a time of your choosing.  In short, combining the “intent” of Search with the impact of a social filtered endorsement is opportunity of Google-sized proportions.  Just as marketers have found search to be an amazingly effective vehicle against which to drive performance advertising, if there were a search engine that provide socially filtered search results pulling from the corpus of social media content, that is the holy grail.

In our mind, it is a hairy problem perfectly made for data geeks. The real-time web is highly unstructured. We share links, photos, tweets, status updates, buying decisions, thumbs up movie and song recommendations, restaurant reviews, and the like. Most of this is broadcasted to the world and not well compiled. Facebook’s past stream is not really searchable and Twitter search lacks the filtering mechanisms of, say, Google Shopping. It also doesn’t allow me to filter by my social/info graph/friends.

So, for all of you data science folks who like the challenge of finding signal in noise, creating structure where none exists, and designing feedback mechanisms to see how users respond, we salute you and would love to help you solve this problem.

Thoughts? As always, thanks for listening and I’d love your input.

Readers of this blog know that, for years, I have insisted that music is elastic. That is, price affects sales. Higher prices produce lower sales, lower prices produce higher sales. There are outlier examples (Eric Clapton Rarities box set?) where the title appeals to die-hards who will pay nearly anything for it. But for the most part, lower prices spur higher sales. At eMusic, we knew this quantitatively and based our value proposition on it.

At eMusic, we met with the majors repeatedly to discuss this. With the exception of Sony (and later Sony BMG), all disagreed. Warner was the most vehemently against the notion. They hired a consultant named Frank Luby from Simon-Kucher who produced a report affirming Warner’s belief that music was not elastic, and in fact encouraging Warner to RAISE prices in 2008. Their work may have been high quality (and I admit I never saw it first hand), but our data at eMusic suggested a different conclusion.

As further evidence that music was mis-priced (too high), first in 2004 (click through to see Rolling Stone article) and then again in early 2008, Walmart began pressing the majors to lower their wholesale prices. They insisted their sales data showed that they could sell far more units if music was priced around $5 – $7 (with occassional high-demand titles at $10). They contrasted this with DVDs which Walmart was selling at $7 – $15. The industry resisted, and Walmart responded by reducing the amount of shelf space they dedicated to CDs, contributing further to the dramatic sales decline of CDs.

I applaud Jim Urie at Universal for responding to the demands of the market and altering CD pricing. The industry will be rewarded with increased sales. This move could have occurred years ago and brought further relief to a declining market. None of these steps will save recorded music, and the adjustments will continue to put pressure on the cost structure of the labels, but they will come closer to finding the optimal market price for CDs and thus help to maximize profit. The same must happen for digital tracks, something eMusic has demonstrated for more than six years now.

At eMusic, I saw up close how painful, time consuming and expensive it was to translate our site into other languages. Like most sites, at least half of our inbound traffic was from non-US and non-English-speaking sources. But our site was all in English. Our only choices were to hire expensive tranlsation service agencies, pay them gobs of money ($100K – $300K per language), and wait 3-6 months while we integrated with their proprietary systems. No thanks. So we did what everyone else does: we punted.

Enter Smartling, Venrock’s newest portfolio company. They have approached the problem in an ingenious way. You simply make a small change to your DNS record (i.e., you point www.yourcompany.cn traffic to Smartling) and they start translating. They receive all of your non-US or non-English speaking traffic and they translate your site for you, pulling all the english text from your site, and letting you still serve all the non-text. They serve the translated text from the cloud. They can crowd-source the translation, using you own customers to do the work for you (very cheap!), they can use Google’s or anyone else’s automated algorithms (fast, but not of the highest quality) or they can use a virtual workforce of hundreds of the most professional translators in the world. They translate only the pages receiving traffic and within a few hours or days (depending on the size of your site), your site is translated. Voila.

Aside from speed and literally no integration time or costs, they operate in real-time. If you make a change to a single word on any page, they know about it and translate it right away. You no longer have to worry about multi-lingual work flow. They are also dramatically less-expensive (by two orders of magnitude) than the existing service providers. You pay a monthly fee.

They have been up and running with a bunch of exciting customers like Drop.io with great results so far (Check out drop.io in Chinese and Spanish.). The costs of using them are much lower than the increased revenue and engagement you’ll get by offering your site in the native language of your visitors. And none of this could be made possible without the power of the cloud.

Think of Smartling as yet another must-have web service you will choose from the Chinese Menu of cloud-based services we will all use to build our sites now and in the future. Congrats to Jack Welde and his team! TechCrunch wrote about the funding here.

Would love to hear your thoughts below.

In 1997, developers didn’t have the benefit of open source software, let alone cloud services and pre-packaged javascript widgets. We had to license lots of on-premise software, buy a bunch of hardware (app servers, database server, expensive storage), rent co-lo space, buy switches, routers and load-balancers and hire lots of people just to manage the netops infrastructure. Man, has it changed.

First, open source applications and frameworks arrived, allowing us to skip the delicate task of conducting licensing negotiations with vendors and letting us get the benefit of thousands of other users contributing fixes and extensions. As AWS and other cloud services proliferated, we no longer needed to buy and configure machines, invest in quickly-outdated storage systems, and become a netops expert just to keep our sites up.

Now, a new simplification of launching web businesses has taken hold, and it is very exciting. Cloud-based services allow us to pick and choose a number of standard web site components and add them to our site with a few lines of javascript (or some other new innovative integration approaches I will discuss in a future post.) Google provides AdSense ads, BazaarVoice provides reviews, Disqus provides commenting, Google provides analytics, GetSatisfaction provides customer support, Facebook Connect provides log-in, etc. What makes these outsourced services even more powerful than their ease of adoption is the cross-site benefits they bring. BazaarVoice’s product reviews are an amalgamation across hundreds of ecommerce sites, achieving critical mass that any single (non-top 10) retailer could not achieve on their own. GetSatisfaction’s support network spans literally the entire internet, integrating crowd-sourced customer support ideas from your brand’s customers no matter where they are online, not just from who shows up at your site. There are many more examples of this.

So, as we build sites, the non-proprietary (but still critical) features are available to us with a few extra lines of script. We pick and choose which cloud-based services we need like a Chinese menu. The pressure is still on to develop something unique beyond these, but this evolution allows entrepreneurs to focus on key areas that will build value for their startup, not on must-have but non-differentiating features. It’s an important trend enabled entirely by the cloud, since a relatively small startup can provide one of these services without having to build out huge network resources to support all their (bigger) customers.

At Venrock we frequently survey this landscape and think further investment opportunities exist here. So, anyone working on the next one? I welcome your comments below.