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Imeem Founder: Music Startups are Doomed

If you want to have a successful music startup, then you’d better be either very lucky, or have one crazy ace up your sleeve. Otherwise, you’re doomed to failure, according to Imeem founder Dalton Caldwell.

Onerous fees, antiquated licensing systems, money hungry labels, and market domination by Apple’s iTunes Store are some of the hurdles that a music startup needs to overcome, Caldwell told tech’s best and brightest at the YCombinator Startup School in Stanford on Sunday.

“Every time a founder does a music startup, a likely more successful startup dies,” said Caldwell, who’s own streaming music startup Imeem died on the vine in 2009.

Caldwell listed various online music business models and systematically picked them apart: Music download stores have iTunes’ 90% market share to deal with. Subscription music services have to pay expensive minimum fees to the labels and wade through licensing restrictions on a country-by-country basis. Not to mention existing competition from the likes of Napster and Rhapsody.

Music startups are often forced to sign non-transferable licensing deals, according to Caldwell, which means that if the music startup is sold, the buyer can’t use the license. A serious problem for startups hoping to attract a big money buyer.

Caldwell’s Imeem was once valued at $24 million, and managed to sign deals with all 4 major U.S. labels. However, the financial hurdles proved too much. MySpace bought the company for less than $1 million and promptly canned it.

We’ve seen other music startups fold as well. Music marketplace Amie Street was bought out and shut down by Amazon.com in September.

Music businesses based on the streaming radio model have the best chance of making it, according to Caldwell. Popular online radio startup Pandora, which is now profitable, was in a battle for its life against high online broadcasting fees just a couple of years ago. After hard negotiation and legal wrangling the company was able to get a royalty rate that allowed it to stay in business, however it was still higher than traditional broadcast fees. And following the Pandora model may already be out of reach for small startups, he added.

The struggles for online music startups will continue until governments work out some sort of international licensing framework, musicians abandon music labels, and the industry creates some sort of distribution and measurement system that tracks song popularity, said Caldwell. And that’s not going to happen any time soon.

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