Manatt Digital

We at Manatt Digital are not only die hard music fans, we put our passions in our business and are invested and advocates of the ever evolving and seriously complicated business of music. This month’s newsletter is dedicated to digital music as a theme. We are proud to share and highlight a few of our Manatt Venture portfolio companies in the industry. Additionally, one of our digital music lawyers from our award-winning music law practice, Jordan Bromley, published an infographic to help simplify the complicated economics in digital music streaming. We’ve included it along with our Manatt Digital analyst, Jordan Pritchett’s take on the evolution of digital music. Fresh off of reports that streaming drove U.S. music sales up by 11% in 2016, growing concern over YouTube’s rocky relationship with artists, Pandora’s introduction of a premium subscription service, the possibility of Spotify to go public without an IPO, and record breaking attendance at Coachella, we are excited about the industry and all the opportunity that arises with further disruption in the business of music. Rock on, Eunice.

Manatt Venture Fund—Portfolio Highlights

By Jacob Carlson

The Manatt Venture Fund is the investment arm of Manatt, leveraging our significant involvement in the digital space across media and entertainment, advertising, healthcare, fintech, and frontier technology to inform our investment profile. The music industry has been an important part of Manatt’s identity for decades and that experience has translated to a number of our investments in the digital music sector. With this month’s focus on digital music, we would like to share highlights from three of our portfolio companies: Stashimi, LiveList and Faction.

We are very excited about each company’s opportunity, as well as their growth and management to date.

Stashimi

Stashimi is a technology company that provides content distribution, fan engagement, and intelligence for artists and chatbots. Stashimi fixes the broken link between artists and fans by tapping into the massive opportunity of delivering real-time updates via artist branded messenger and voice bots to fans. Stashimi has recently launched its Bot1 product, which enables artists to directly control all of their digital content for marketing and distribution through its proprietary technology platform, including related merchandise such as tickets or VIP experiences. Stashimi’s ability to quickly integrate and launch new artists within the platform allows the company to scale fast and reach prime audiences in the highly engaged mobile messenger space.

CEO Jürgen Kurz has a strong track record, having successfully led audio and video technology company Nero as their chief executive for many years. His prior experience building and running a tech company and the powerful underlying technology that powers the Stashimi platform provides an attractive combination to artists and investors alike. The new Bot1 product already has over 30 artists using it and exploring the capabilities for themselves and their fans. To learn more about Stashimi or the Bot1 product, please visit their sites at https://stashimi.com/ and http://www.bot1.com/.

LiveList

LiveList is the premiere partner for major festivals and venues as they continue to create a path for monetization of live streaming content. The company provides distribution channels and audience engagement for live events and is quickly becoming a go-to partner for professional productions, which differentiates itself from the user-generated content found on Facebook Live and YouTube. LiveList helps audiences find and watch live performances online with curated channels as well as notifications for favorite artists.

LiveList is run by Co-founder and CEO Allen Sanford, who owns the music venue Saint Rocke in Hermosa Beach, CA. Allen has produced over 1,000 live streamed concerts, including shows from notable artists such as NOFX, Bush, Amos Lee and Toots & the Maytals. LiveList’s partners include KAABOO, the Knitting Factory, Spaceland Presents, Voodoo Fest, Cali Roots and Gasparilla Music Festival. They recently executed a national campaign alongside Skull Candy and the Warped Tour and have attained monthly recurring revenue in Q1. You can see LiveList in action at their website https://www.livelist.com/.

Faction

Faction was launched in early 2016 to address the pain point of artist managers being tasked with more responsibility and day-to-day work for their clients as labels reduced their resources for activities such as marketing, promotions, product and brand management. Managers were being asked to do more with less, which is where Faction meets the opportunity. The company is able to leverage its committed stable of artist managers with backend and behind the scenes services to augment the managers’ roles and responsibilities. Faction helps fulfill various marketing, admin, business operations and development, strategy, finance/accounting and technology needs for managers and artists, allowing them the freedom to focus on higher priority and creative activities. The digital aspect of the company allows for greater efficiency and communication between managers and their teams, saving valuable time and money.

Faction was founded by Robb McDaniels, former principal with INgrooves. McDaniels’ deep experience in the industry allowed him to quickly find a foothold in the space, as evidenced by the company’s 25+ managers and 120+ artists under the management services entity within the first year of operation. Established acts such as Thievery Corporation, Ministry, Ryan Bingham and Slightly Stoopid are all accessing the breadth of resources at Faction, and up-and-comers like Caroline Jones, Common Kings and Armors are also benefitting from plugging into a tech and digital focused team. Faction has over a dozen preferred commercial and promotional partnerships that their managers and artists access to help increase revenues and awareness.

The company is still growing, so please visit https://factionent.com/ for more information if you are an artist or manager looking to more effectively manage your business.

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The Evolution of Digital Music

By Jordan Pritchett

It is no secret that digital disruption has turned several anachronistic business models upside down in recent years. However, if I were pressed to select a poster child that is illustrative of the long-run effects and adaptation process that is inherent to the ongoing digital transformation, I can think of no better example than the music industry.

Unlike other segments within the sphere of media and entertainment (namely film and television) which have only recently begun to witness foundational changes to their stalwart business models, the music industry has been reacting to the drastic effects of digital disruption since the late 90s. During this time there have been three critical junctures that have come to define the evolution of music consumption in the digital age.

1. Peer-to-peer sharing

The first and arguably most important progression was the advent of peer-to-peer sharing in 1999. “P2P” or piracy as it is more commonly known transformed physical sales from a cash cow to a dying cow practically overnight. Thanks to the likes of Napster, Limewire and Kazaa among others, consumers were able to download individual songs in an à la carte model at zero cost. It has been said there is no such thing as a free lunch, but most people’s music libraries at the dawn of the new millennium would certainly suggest otherwise. As the feeding frenzy ballooned, profits hemorrhaged and the industry scrambled to find a solution. The majority of the sharing platforms would eventually have their day in court to answer for the damages inflicted, but the consumption of music would never be the same.

2. I-Pod/I-Tunes one-two punch

Despite the legal action, the issue of piracy would never be fully resolved. It became clear that a broader digital solution for consumers to legally purchase and store music was necessary and would be the most effective way forward in salvaging profitability. Enter Steve Jobs. Fed up with the labels’ half-hearted attempts at creating digital music offerings (see MusicNet and Pressplay), Apple began crafting what would ultimately become the iTunes Music Store. Introduced in 2003, after some heated negotiations, Apple began offering digital albums at a reduced price point of $10 and the ability to purchase individual tracks for 99 cents. By 2011 Apple would go on to sell 300 million iPods. By 2013 25 billion tracks had been sold on the iTunes Store, cementing Apple as the world’s biggest music retailer.

3. The age of streaming

2016 was an important year for the music industry and one that is indicative of the digital disruption lifecycle coming full circle. U.S. recorded music sales increased 11.4% and marked the first time since 1998 that the industry had witnessed a double-digit increase in revenue. This is a result of the surging popularity of streaming music platforms, which now account for more revenue than both downloads and physical sales combined. Streaming is music’s new primary revenue source. The scales have balanced back to a more equitable relationship between the labels and the consumers. After years of charging upwards of $18.99 per CD for albums with one big hit, the consumers tipped the industry in the opposite direction with rampant piracy. Today’s $9.99 monthly subscription services allow the industry to generate steady income for a product that keeps happy audiences coming back repeatedly.

This migration from downloads to streaming is easy to understand from the consumer’s perspective. Not only do these platforms offer access to an immense library of content but are even freely available in certain cases thanks to ad-supported streaming. However, this explosive growth has yet to translate to profitability. Spotify, one of the global leaders in music streaming, posted an operating loss of $195.5 million in 2015. As such, the most critical factor in moving the streaming business from red to black lies in swaying users away from the free tier in favor of paid subscriptions.

While there are a number of carrots in place currently to encourage this switch (such as no advertisements and early access to new releases), it appears that things are moving in the right direction. In 2015, revenues from paid subscriptions grew three times as fast as ad-supported revenues. This is particularly encouraging given that the “expectation of free” is a mindset that the industry has been struggling against for decades now. Yet, considering what the average yearly expenditure on music would have been for a consumer at the industry’s height in 1999, $10/month for access to virtually any song or artist in addition to all the perks that come with a premium subscription appears to be more than a fair trade in the eyes of most consumers. As a result of this uptick in subscriptions, the average per-stream rates are also increasing. Whether it will be enough to recapture the full $14.6 billion that recorded music generated at its peak is unlikely, but it should be sufficient in creating a happy medium. The process of digital disruption can be a cruel beast, but it certainly has a knack for creating added market efficiency in the long run.

For further insight into the economics of music streaming see Jordan Bromley and Nicole Sollberger’s breakdown of royalties, released in October 2016.

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