One in every 43 venture-capital dollars in 2012 was invested in music-oriented startups, according to Digital Music News. "Is this a simple case of dumb money," the site asks, "or the beginnings of a totally new industry?"
Why can't it be both?
The music business drew about $620 million in VC financing, according to the site's analysis (for which it didn't show its work). That's a tiny amount compared to the usual investments in software, biotech, etc. But while total VC financing fell in 2012 for the first time in three years -- by 10 percent -- financing for music startups rose by 34 percent.
Most venture-financed startups fail. That's just how the business works: Investors spread their money around to a whole bunch of companies, hoping that a couple of them will take off in a big way, more than making up for the failures.
But the music business is as broken as an industry can be, and nobody knows for sure how musicians and music marketers will make money in the future. They're not making much now, as the industry has imploded since its late-'90s peak.
Streaming services like Spotify are attracting the most attention and money at the moment. But for now, at least, streaming music isn't anywhere close to making up for music sold on CD or even as downloads. The streamers pay big licensing fees, and their margins, when they exist at all, are tiny. Musicians get a pittance in royalties -- even songs that stream more than 1 million times yield only a few thousand dollars to the artist.
Still, Pandora was able to go public in 2011, and Spotify, which drew $100 million in venture financing in 2011, is supposedly valued by its investors at $3 billion. Of course, Pandora's stock has fallen by half since the IPO, and stock analysts are jumping over each other to downgrade the shares. And the streaming business in general is still contributing very little to the industry's total revenues.
Venture capitalists are counting on that changing. When CDs first came along in the '80s, musicians made very little from them -- they were considered a product for audiophile hobbyists (which is amusing in retrospect), and royalties were low. After CDs caught on, royalties rose, and the music business was renewed.
DMN's list of the top money-getters of 2012 is dominated by streamers, though it is led by Sonos, a maker of multi-room sound systems. It got $135 million. No. 2 was Deezer, a French on-demand streamer with big plans for global expansion. It got $130 million. Spotify's $100 million made it No. 3. SoundCloud, a distribution and promotions platform for musicians (which noted venture capitalist Ashton Kutcher has invested in) came in at No. 4 with $50 million.
The question remains, however: Given the high levels of uncertainty and risk in the music business, why is the money pouring in like this? Part of the answer could be that when investors go to parties, they get way more attention talking about the music business than they do talking about, say, the medical-device business.