Resnikoff’s Parting Shot: The Muxtape Massacre

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There are two sides to every story, unless there are three, four, of five sides to worry about.

And in the case of Muxtape, mixed signals and conflicting actions from major labels and the RIAA eventually torpedoed a great idea.

That is what Muxtape founder Justin Ouellette so eloquently described last week, commenting on the ashes of a sunken startup.  When it comes to major label licensing, Ouellette was managing a decentralized, conflicting, and unpredictable negotiating process.  The entrepreneur was actively arranging solutions with the majors when the RIAA shut him down, and that was the end of that.  No money changed hands, Ouellette walked away, and everyone lost.

But even when money changes hands, the process is hardly rational.  Entrepreneurs and VCs understand the extreme licensing demands that often accompany a music-related startup, though approaches towards the problem vary.  Some financiers are willing to rally the cash and time investment required to legally play ball.  Others are more interested in developing traction through infringement before coming to terms, especially following the unbelievable success of models like YouTube.  But what happens when less capital is available for either option?

That is a question worth asking, especially ahead of a potentially disastrous liquidity freeze in the United States and abroad.  Federal bailouts notwitstanding, the fallout of a Wall Street meltdown remains difficult to predict, though few would argue that greener pastures lie ahead.  And venture capitalists, always assessing a portfolio of promising bets, might simply exercise more caution in a drier climate.

Actually, the climate is already dry, and threatening to become a drought.  Against that backdrop, can labels still squeeze VC-fueled payouts from long-shot startups?  Or, is an alternative strategy that focuses on lower upfront licensing demands and greater equity percentages better for long-term growth?

Sure, most startups fail, but massive licensing obligations are sometimes the culprit.  They cramp expansion, and encourage venture capitalists to pursue more aggressive timetables.  Labels get paid, but ultimately, a pile of cash is drawn from a pile of startup crap.  A more rational, reserved, and cool-headed Sand Hill might be less inclined to finance that model in the future.

And sometimes, investors simply aren’t around to assume the risk, even on a promising startup.  The Ouellette outcome is what happens when a highly-innovative – yet rational – entrepreneur approaches an irrational major label licensing approach.  Instead of toughing it out, the underfinanced Ouellette eventually realized that endless litigation, extreme licensing costs, and difficult financing rounds were potential elements of a battle not worth fighting.

In a more difficult financial future, VCs might start reaching similar conclusions.

Paul Resnikoff, Publisher.