Wanna Start a Subscription Service? Don’t

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VCs are already frigid when it comes to financing license-dependent startups.

So, if your business model depends on four label bosses giving a thumbs up, you’re almost guaranteed to lose money in Sand Hill’s eyes.
That we know.  Well, here’s more evidence to stay away from this sinkhole of an idea.  At Digital Music Forum West in Hollywood on Thursday, a panel of licensing veterans outlined the costs involved for anyone wanting to start a comprehensive download, subscription, and radio service.  “For the sound recording license, you’re probably going to pay over half of all your revenues to the record labels for the streaming services,” detailed Cecily Mak, VP & General Counsel at Rhapsody.  “And that percentage is greater for downloads… the download wholesale rate is 60-75 percent of the track sale price.”

Then, let’s talk about publishers – mechanicals, performance rights included, which translates into a “high single-digit, low double-digit number,” also according to Mak.  “And then you have to think about the costs involved with running the rest of the service.”  All in all, Mak estimated royalty payouts alone at 60-75 percent right off the bat.

But wait, there’s more.  Separately, one source close to the label licensing game pointed to upfront payments of $500,000 per major label – or a big sack of $2 million just to get a green light.  Those ransoms seem to vary greatly, but most likely, you’re underwater really fast, and zipped into a body bag soon thereafter (ie, Spiralfrog, Imeem).

And why pay for access to this game, anyway?  Even if the barrier to entry was low, serious questions surround the willingness of consumers to pay monthly fees for music.  And of course, paid downloads are now edging downward, at least in the US.  Some are willing the pull out their wallets, most are not, and players like Rhapsody have been struggling for years to ramp past niche.

That said, there are some alternatives, including “white label” services like Medianet Digital and 7digital.  Of course, the disadvantage there is that the white label takes a cut, and if their ship sinks, you could quickly get tugged under.

What else?  Even Mak conceded that a third path involves skipping the licenses initially (ie infringing), and begging for forgiveness later.  Actually, that was a model-in-vogue in the Valley up until a few years ago, though currently, the ‘Grooveshark Game Plan’ seems like one seriously bad idea.

Paul Resnikoff, Publisher.  Written while listening to Sleigh Bells, capped off by some Rammstein.