Launching an online music startup? What are you thinking? Digital music is a money pit that only works for people who aren’t trying to make money selling music. Like iTunes (AAPL). Or maybe Amazon (AMZN).
Not convinced? OK. Suit yourself: There are basically two paths you can choose:
- Create a legal service by raising money and then lining up deals with the big music labels and publishers. Pros: You won’t get sued. Cons: Those deals incinerate cash, and once you’ve signed them you’ll have a crippled service that won’t appease carpers.
- Don’t bother cutting deals with anyone. Just launch, build buzz and hope for the best. Maybe you’ll get sued, maybe you won’t. Pros: You get to give the people what they want. Cons: Maybe you’ll get sued.
But our favourite new service has taken a smart middle ground. 8tracks lets you listen to digital mix tapes that you or anyone else has made, filled with any music you can think of, as long as someone has loaded it into the system. And while founder David Porter, a veteran of online radio service Live365, hasn’t made a single deal with a music label, it’s all totally legal.
Here, for instance, is a mix that features jazz heavyweights like Miles Davis and John Coltrane. Here’s one with music from Britney Spears and Weezer. And here’s one with the Beatles, who have yet to licence their catalogue to iTunes or any other digital music store.
David isn’t going to get sued because he’s taking advantage of a provision in the much-derided Digital Millennium Copyright Act, which gives him a compulsory licence if he operates as a “non-interactive Webcaster”. In English, that means he can stream any music he wants, as long as he pays a royalty, and if he’s running the equivalent of an online radio station.
So that does require some compromises: You can’t see the full contents of somebody’s mix when you start, so you don’t know what you’re getting until you play it. There are limits on the number of times you use the same artist in any given mix. And you can’t go back and play tracks you’ve already listened to unless you cue up the mix again. It’s like popping an unlabeled tape into a player that only has three buttons: play, stop and fast-forward.*
And the company will have a hard time as a stand-alone business, too. David’s applied for a special “small Webcaster” licence that will keep his costs managable to start with. But if the site succeeds, he’ll eventually end up having to pay the same rates as the big guys, which basically translates to about 2 cents per listener, per hour this year, and will jump to 3 cents next year. Which means that he’ll have to generate an effective CPM of $30 or more to cover costs.
Tall order, at best. There are vague plans to try and pay the rent using a combination of Amazon affiliate fees, audio and display ads, and perhaps some sort of premium version for heavy users.
But then again, David has done this on the cheap, in classic Web 2.0 style. He’s spent about $80,000 paying part-time coders and designers to build the site, and the heavy lifting for storage and bandwidth is being handled by Amazon. And of course you, the users, supply the music and create the content by making your own music. (We’ve taken couple stabs here, here and here. Not great, but you get the idea.) So he’s got a lengthy runway to figure this out, and he doesn’t have to worry about spending time fending off lawsuits while he does it. In the meantime we’re going to have a lot of fun making mixes, and sharing them with our friends.
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