Since it emerged in the 1990s, digital music has been hugely popular with fans, but for online music companies and their investors, it has almost never been profitable.
And yet the money has again started pouring in.
Pandora, the popular Internet radio service, filed for an initial public offering in February that would raise $100 million. Spotify, a highly lauded European service, is reportedly raising $100 million from private equity firms to help it come to the United States.
And those are just the big fish. Since the end of last year, at least $57 million in venture capital has gone to digital music startups, ending a recent financing drought and setting up an array of young companies like Rdio, SoundCloud, and RootMusic in an already crowded marketplace. The heightened interest in a field that has had few winners and a vast graveyard of losers has left some longtime executives and analysts scratching their heads. Faced with thin margins, persistent piracy, and expensive licensing deals from record companies, dozens of digital music startups have collapsed over the past decade, taking with them hundreds of millions of dollars in investment money. Even Apple, the largest music retailer, has long maintained that it makes little profit from its iTunes store, which has sold more than 10 billion songs since 2003.
“A number of the investors have not invested in digital music before,” said David Pakman, a venture capitalist who is the former chief executive of the download service eMusic. “Usually the ones who have, have learned over the decade that it’s an impossibly hard place to make money.”
Even more challenging for startups, two very big players are expected to introduce cloud-type music services this year: Apple and Google.
But more bullish investors point to technological developments and shifts in consumer behavior as signs that the business is about to turn a corner. These changes include the migration of digital media libraries from personal computers to the remote storage of the “cloud,” as well as the explosive success of smart phone applications. Pandora’s apps, for example, have been the biggest factor in driving that service to 80 million registered users, up from 46 million a year ago. (A basic, ad-supported service is free; the upgraded version, with no ads and higher-quality audio, is $36 a year.)
“Services like iTunes, Pandora and Spotify have shown that with the right product and the right business model, you can effectively monetize digital music, which is kind of new,” said Doug Barry of Selby Ventures, an early Pandora investor. “The last time around it was mostly about file-sharing and limited monetization.”