Tech start-up capitalisation in an oligopolistic copyright industry: the case of the contemporary music industry

ABSTRACT

Over the past 25 years, the music industry has been radically transformed through the entry of venture capital funded digital platforms. This process continues, but whereas previous generations of tech companies successfully disrupted the industry, a new wave of MusicTech companies now seek to gain entry through collaboration and cooperation, reflecting a stabilisation of economic power in large record companies and platforms. In this paper we examine the business dynamics behind the evolving role of technology in the music industry. More specifically, we reveal the ways in which distinctive features of the music industry set considerable challenges to contemporary MusicTech entrepreneurs in relation to capitalisation and investor reluctance. Through a critical examination of MusicTech as a platform political economy, we draw attention to key business dynamics underpinning wider processes of platform reintermediation and capitalisation that are crucial in the contemporary restructuring of a wide range of economic sectors.

KEYWORDS:

• Music industry
• MusicTech
• start-ups
• platformisation
• capitalisation
• venture capital

Introduction

Between the late 1990s and early 2000s, the music industry became the first major media industry to be fundamentally disrupted by digital platform innovations. MP3 file sharing, mediated through prototypical platforms – most notoriously, Napster – fundamentally challenged the music industry’s ability to reproduce itself by dramatically reducing revenues from the sale of recorded music, hitherto the sector’s main source of income (Garafalo, 1999; Graham et al., 2004; Leyshon, 2014; McCourt & Burkart, 2003). This “first wave” of platform reintermediation took the form of peer-to-peer (P2P) networks that (illegally) inserted themselves between record companies and audiences in the market for recorded music. These processes of platform reintermediation, which by propagating the open digital format of MP3, initially acted to destroy the traditional music industry business model founded on the exploitation of music rights in material music formats such as compact disk, have subsequently been reconstituted to rebuild it. In a “second wave” of platform reintermediation, major streaming platforms (MSPs) helped to undermine the open playback format, with users only able to access music through the platform, which allowed the music industry to reinforce copyright protection. In this way, streaming first stemmed, then reversed, the decline in revenues from recorded music. In 2016 revenues in the music industry increased for the first time in nearly 20 years, and by 2019 total global revenues had returned to levels of the mid-2000s in real terms. Revenue recovery across the industry has been largely dependent on the income generated by streaming services, which have become the dominant mode of music distribution; by the end of 2020 total steaming revenue reached $13.4 billion, 62.1% of total global recorded music revenues for that year (IFPI, 2021).

Geurts and Cepa (2023) describe the entry of MSPs into the music industry in terms of a business ecosystem envelopment strategy. In contrast to platform envelopment strategies (Eisenmann et al., 2011), digital platforms do not take over or replace the functionality of the enveloped business ecosystem, but rather install themselves on top of a traditional business ecosystem, leaving its existing organisation largely intact. The music industry remains highly oligopolistic, a characteristic which has been maintained despite it being a frontier sector for platformisation, having experienced two prior waves of platform reintermediation. In 2020, just three major corporations – Sony Music Group, Universal Music Group, and Warner Music Group – controlled an estimated 68.6% global market share of combined physical/digital revenues (Music and Copyright, 2021). Platforms have not displaced the music industry incumbents, but rather, platforms and music corporations have become bound together through a system of rent extraction (Meier & Manzerolle, 2019). The music industry represents an unusual case of platform reintermediation in which a small number of incumbent corporations, through oligopolistic control of intellectual property rights (it is estimated that the major corporations own the rights to some eight million songs), are positioned as the key rentiers of digital networks, rather than established or nascent platforms (Watson & Leyshon, 2022).

The emerging relations between MSPs and the music industry corporations have enabled a stabilisation around streaming as the main digital distribution format, and in particular around the revenues generated by MSPs. This stabilisation and a return to profitability has more recently encouraged a new round of digital innovation and platform reintermediation, blurring further the lines between the music and tech industries. A “third wave” of platform reintermediation (Watson & Leyshon, 2022) is being driven by an emergent MusicTech sector, characterised by entrepreneurial activity and technological innovation taking place largely outside the major music corporations, spread across music production, publishing, consumption, and distribution (see for example Dumbreck & McPherson, 2016). Rather than seeking to disrupt the music industry per se, many start-ups now seek to gain entry through collaboration and cooperation, reflecting the stabilisation of economic power in large record companies and platforms. Underpinned by the appetite of angel investors to fund new technologies and business models, a wide range of start-ups are developing applications that seek new ways to intermediate between artists, music corporations and audiences, and in so doing generate new revenue streams. Such firms have come to be labelled as “MusicTech”, mirroring the use of the suffix “Tech” to describe innovation in other areas of the economy, such as FinTech, MedTech and HealthTech. The emergence of the contemporary MusicTech sector can be seen as the next stage of the evolution of an industry in which a small number of existing incumbent corporations, together with now established MSPs, and a much larger number of independent record labels, intermediaries and MusicTech start-ups, are all engaged in processes of what has been termed “platform reintermediation” (Langley & Leyshon, 2021).

Yet, despite the music industry’s position as a pioneer sector for processes of platform reintermediation, it has received relatively little attention within the platform economy literature. Research which has focused on the music industry has been primarily concerned with MSPs, the significant tensions around the equity implications of how streaming platform revenues are distributed and the commodification of artists’ labour (Hesmondhalgh, 2021; Leyshon & Watson, 2021; Marshall, 2015; Meyn et al., 2023; Qu et al., 2023; Simon, 2019; Towse, 2020). Research on start-ups, platform reintermediation and capitalisation has been primarily focused on financial services industries and technologies (FinTech), evidenced in a burgeoning body of literature on this sector (see Lai & Samers, 2021, for a useful overview). Yet, tech innovation and platform intermediation are impacting upon a range of sectors beyond finance, as reflected in wider policy narratives being developed around sectors such “MedTech” and “HealthTech”, “CreaTech” and “MusicTech”. In the case of the latter, as with other “—Tech” sectors (for example, see Kalifa, 2021) policy makers have been quick to promote particular cities or national music industries as “leading” centres of MusicTech innovation, for example in the UK (DIT, 2018) and Sweden (Stockholm Business Region, 2016).

While MusicTech start-ups share many of the same characteristics, opportunities and challenges of those in other areas of tech innovation, the specificities of a particular sector shape the dynamics of tech innovation and start-up capitalisation. In this paper we undertake a critical appraisal of capitalisation in the MusicTech sector, to reveal important specificities to the music industry that shape the opportunities and challenges faced by platform tech entrepreneurs and start-ups. In this paper we examine the business dynamics behind the evolving role of technology in the music industry. More specifically, the paper outlines a series of unique interrelated challenges faced by MusicTech entrepreneurs and start-ups, centred on issues of capitalisation and investor reluctance. The challenges to which we refer are, inter alia: scaling technologies; defining user bases and markets; recruiting and renumerating skilled tech developers; mentoring and accessing networks within the industry, and; identifying innovation gaps related to potential investment by large music industry corporations. Through a critical examination of MusicTech as a platform political economy, we draw attention to the wider processes of platform reintermediation, consolidation, and capitalisation that are playing a crucial role in contemporary oligopolistic copyright industries in particular, and across a wide range of economic sectors more broadly.

The remainder of the paper is organised as follows. The second section outlines the process by which a MusicTech sector has emerged to identify and develop new markets and new income streams within an industry that has consolidated and stabilised around large music corporations and music streaming platforms. The third section draws on interview material to explore the problems encountered by MusicTech start-ups seeking investment. It documents the ways in which these firms seek to “scale” their business to generate income to justify and reward such investment. The fourth section examines the problems MusicTech firms face in attracting both workers and investors with appropriate skills and competencies to help grow their businesses and explores the ways in which large music corporations are seeking to consolidate their power through strategic investment in Music Tech start-ups. The fifth and final section offers some concluding observations.

Music industry third-wave platform reintermediation

Academic accounts of tech start-ups often assert that they serve to challenge the dominance of incumbent firms through a process of disruptive innovation, as the legacy business models of incumbents plus inertia provide opportunities for new entrants to gain footholds and then rapid momentum in the marketplace (Crittenden et al., 2019). The music industry underwent this process of disruptive innovation earlier than many other sectors. As the open music format of MP3 took hold, P2P networks grew quickly to allow consumers access to recorded music without payment in return for exposure to adverts and, in some cases, malware. As we have argued elsewhere (Watson & Leyshon, 2022), P2P networks can see as prototypical platforms in as much as they developed new multi-sided markets and leveraged networks effects (Liebowitz, 2002). The displacement of P2P networks by MSPs, which closed off the open MP3 format within a platform, laid the ground for first stabilising and then rebuilding copyright-based revenues within the music industry. Moreover, this stabilisation has led to most MusicTech start-ups not overtly challenging but rather seeking to align themselves with incumbent corporations and platforms to participate in acts of collaborative innovation. Examples include creating complimentary platforms, data applications or content production, and efforts to identify and open up new revenue streams for music (see Table 1, for examples). More broadly, this situation is reflective of the accommodation that was achieved between tech disruptors and industry incumbents during the second wave of platform intermediation, after almost two decades of digital disruption. This accommodation is such, for example, that the incumbent corporations have used their position within the industry to negotiate preferential licencing agreements with, while also acquiring equity stakes in, a range of streaming platforms and companies (Negus, 2019). The outcome of this situation is that competition in the contemporary platform musical economy predominantly centres on start-ups gaining attention from the incumbent corporations of the industry, as both controllers of music rights and as potential investors or buyers of innovations. The actions of incumbents in cultivating a wider ecosystem to draw in the necessary disruptive innovations and innovators to expand their platforms and preferentially lock-in firms into their own platforms and ecosystems (for example, through the release of public Application Programming Interfaces (APIs)) is a strategy seen in other areas of the economy where hitherto dominant firms have been threatened by disruptive tech starts ups (see for example Hendrikse et al., 2018, 2020, on FinTech).

Table 1. Platform reintermediation in the music industry (after Langley & Leyshon, 2017, p. 16).

Domain of circulation	Platform type	Indicative platforms	Insertion of platform into multi-sided markets
Online exchange markets	Platforms which provide a marketplace for music.	Spotify Apple music Amazon music Bandcamp	These platforms have become incumbents with regards to music distribution but are subordinate to the major music corporations for the licences required to stream music.
Social media and user-generated content	Platforms which host user-generated content in the form of text, images, videos and live streaming.	Facebook, Twitter YouTube Instagram TikTok/Douyin Twitch	Social media platforms are important for the promotion and marketing of artists and users, and for the licenced used of music.
Music rights	Platforms innovating in the area of music licencing for music use in where this is problematic or not currently possible, such as content creators on social media platforms (e.g. YouTube) and live events.	Lickd Click “n” clear Jaak Blockur	Through creating solutions for the legal use of music, these platforms have the potential to capture rights income currently not being collected, offering potential revenue gain for major rights holders.
Record label-facing	Platforms innovating in the area of marketing and promotion, including social media audience development and context-aware marketing.	Landmrk Fanbytes Number Eight	These platforms provide complimentary rather that disruptive technologies and play a potential role in the corporations retaining their position as the incumbents of the music industry.
	Platforms providing a variety of management services and data services for record labels including, for example, music management platforms and data science services.	Disco Instrumental
Artist-facing	Crowdfunding platforms for donating or pledging money to artists, often in return for exclusive merchandise, experiences, and even cryptocurrencies	Kickstarter Patreon Corite Riteband Blockpool	Provide financial tools to artists to fund creativity …
	Music publishing and distribution services to assist independent artists in collecting publishing royalties and distributing their music on streaming platforms.	CDBaby Distrokid Tunecore Amuse	Independent music publishing and distribution platforms are largely not in competition with the major corporation publishing divisions and distribution networks.
	Companies producing platforms and software to assist with music and video creation.	Topline Rotor AI Music Bandlab	Support and enable artists with regards to music and video production.
	Data analytics	Audigent Next Big Sound Kworb ForTunes Viberate Soundcharts Songstats	The development of big data and other analytical tools to help record companies, management companies and artists provide insights into audiences to market more effectively.
Live music	Platforms facilitating live music performance streaming and ticketing.	Sofar Sounds Mbryonic Melody VR Dice SecondScreen	The COVID-19 pandemic has acted to accelerate innovations already underway in live music performance streaming.

Table 1 displays a typology that attempts to position both established and nascent MusicTech platforms and start-ups in relation to both particular domains of circulation and their relationships to the incumbent music industry corporations. To be clear, we are not arguing that all MusicTech firms are platforms. As MSPs were stabilising the industry, but before a return to profitability, there was a search for all manner of technological applications to the music industry that might produce new markets and revenue streams. But, this attempt to embrace new music technologies cast a wide net, and adopted an inclusive definition of technology, to include new musical instruments, holographical representation for virtual live performances and new forms of immersive listening.¹ However, as MSPs have become the dominant mode of music distribution, so they have set the structure and context within which a new generation of platform-based MusicTech innovations have emerged.

The “overarching framework” of platform reintermediation in the music industry has two key elements. First, there are online exchange markets, which are centred upon MSPs, several of which have preferential licencing arrangements with incumbent corporations, while others are part-owned by the majors. MSPs represent a fundamental shift from ownership to access models as the dominant channel of delivering recorded music to consumers (Barr, 2013). Second, there are social media platforms, which function as one of the most prominent domains of the new form of digital economic circulation (Langley & Leyshon, 2017). Both domains facilitate the distribution and creative use of music and generate significant audiences for music. There also exist a range of industry-specific domains of circulation that include music rights, record label facing companies, artist-facing companies, and live music. In common with platform capitalism more broadly, firms in MusicTech can broadly be divided into those firms focused on providing business-to-business (B-2-B) technological solutions, and those producing new technological innovations aimed at consumers (B-2-C).

This paper draws upon 26 qualitative semi-structured interviews undertaken in two western European countries – the United Kingdom and Sweden – with individuals working within MusicTech start-ups, as well as major record labels, independent record labels and publishers, incubators and other organisations engaging with start-ups (see Table 2). The start-ups were focused on different aspects of the music industry, including music rights, music creation technologies and live music experiences, as well as artist and repertoire (A&R), music management, music video, music recognition and music investment. The start-ups and other participating organisations were located primarily in London, with a smaller sample taken from Stockholm. London and Stockholm are recognised as primary European agglomerations for music industry activity and MusicTech innovation, with a history of collaboration between music and ICT (Power & Jansson, 2004; Watson, 2008) and a plentiful local supply of financial resources for business capitalisation that encourages potential entrepreneurs in their early start-up phases (Kibler, 2013; van Gelderen et al., 2005). Interviews were undertaken between February 2018 and September 2019, prior to the outbreak of the COVID-19 pandemic, using a mixture of face-to-face and telephone formats depending upon the availability of the interviewees. Interviews lasted typically lasted between 30 and 90 min. Transcripts were analysed using systematic coding and recoding based around key themes and common categories emerging from the data, considered in relation to the overall theoretical framework.

Table 2. Profiles of interviewees.

Interview number	Interviewee details
1	Head of digital, major record label MusicTech incubator (London)
2	Chief marketing officer, social media start-up (London)
3	Business development manager, music management start-up (London)
4	Co-founder and CEO, music rights start-up (London)
5	Former founder and CEO, live experiences start-up (London)
6	Founder and CEO, music rights start-up (London)
7	Founder and CEO, music video start-up (London)
8	Director of policy, major record label (London)
9	Senior account manager, online artist and repertoire start-up (London)
10	Founder and CEO, independent music publisher (Liverpool)
11	Partnerships manager, social media start-up (London)
12	Co-founder and CTO, music creation start-up (London)
13	Co-founder, marketing campaigns start-up (London)
14	Former CEO, music recognition start-up (London)
15	CEO, music creation start-up (London)
16	Founder and CEO, music rights start-up (London)
17	Founder and CEO, music creation start-up (London)
18	Founder and CEO, live experiences start-up (New York)
19	Editor, music industry news and analysis publication (London)
20	Director, independent music production innovation hub (London)
21	Marketing manager, music streaming start-up (London)
22	Founder and director of product, independent record label (Stockholm)
23	CEO, governmental business region (Stockholm)
24	Founder and CEO, music investment start-up (Stockholm)
25	Commercial director, major record label (Stockholm)
26	Managing director, start-up advisory firm (Stockholm)

“No one wants to invest in music”: start-up capitalisation and investment in MusicTech

One of the most important challenges facing entrepreneurs in technology start-ups is access to capital (Conti et al., 2013). As Langley and Leyshon (2021) have argued, a significant and integral feature of platform capitalism is that digital platforms are highly capitalised by investors. In outlining the central importance of platform capitalisation to the emergence of FinTech, for example, they describe how low interest-rates and risk-embracing investors have been drawn to platforms by the demonstration of powerful “platform effects” on existing markets by BigTech giants, and in the case of FinTech, particularly promising revenue prospects. Our findings from this research, however, suggest that start-ups in MusicTech, with far less certain revenue prospects (for reasons we will subsequently discuss) experience a set of dynamics and barriers around investment which are very specific to the music industry. We find that in the early stages, investment in MusicTech start-ups is largely characterised by funding provided through founder friends and family (FFF) investors, small business loans and other innovation-related loans (for example, accelerator programmes), which then in turn often act as important signals to attract individual angel investors (Conti et al., 2013). Yet, interviewees also noted significant issues related to investor reluctance related to their ability to progress from seed and early-stage investment to venture capital investment at Series A² and beyond. For example, the founder and CEO of a music rights start-up noted how:

… investors love intellectual property [but] no one wants to invest in music … because it’s just not enforceable. Because people have struggled with the enforcement side of the rights. And I think when you [achieve] that … investors are going to be a bit more supportive and understand more of the value, because they know that they’re not going to be cheated away by the general public stealing music. (Interview 16)

Here we see direct reference to the legacy effects of preceding waves of platform reintermediation and on-going issues around copyright enforcement which, despite the stabilisation around MSPs, practitioners consider to be of concern to investors. Similarly, the founder and Director of Product at an independent record label noted the issues of approaching investors as a music start-up, going as far as to say that reference to music was a “bad word” in pitches to potential investors. Many interviewees who observed that most investors did not understand the music industry, and therefore neither the nature of the innovation they were presenting or the investment opportunity. For example, another interviewee, the founder and CEO of a music rights start-up, noted how:

In terms of finding investment, it was quite a difficult road. And it’s hard for people to take you seriously because, one, I’m in a market that they just don’t understand, and two, no one’s ever done this before, so you don’t necessarily see the potential. (Interview 16)

For a number of the start-ups interviewed, recognition of investor reluctance and the difficulties of building a sustainable model around music resulted in companies either avoided promoting themselves explicitly as music start-ups and platforms, or sought to broaden the applications of their platforms and services to increase their appeal to potential investors. Others noted the relatively small economic size of the music industry encouraged the development of platforms and services which had utility across other sectors.

The Chief Marketing Officer of a social media start-up with a strong music focus noted the glaring absence of successful exemplars of new music industry business models in the streaming era that could be used to attract investors. In this regard, the matter of investor reluctance is not only about legacy issues around copyright, but a lack of success stories alongside some high-profile failures of MusicTech start-ups, such as Crowdmix, a social music discovery³ company, which in 2016 entered administration despite obtaining £14million of investment and having employed a staff of 160 across offices in London and Los Angeles. While some of the reasons for the failure were specific, such as poor financial management and a poor HR policy, other reasons were related to Crowdmix being a MusicTech start-up and are instructive for the discussion which follows in this paper. One notable issue in the demise of Crowdmix, for example, was that neither of its two founders had a music industry background, and this was exacerbated by the fact that its main investors came from an entirely unrelated industry – property development (MusicAlly, 2016). As such, the company did not sufficiently understand the music business or have the required connections into the music industry to negotiate appropriate deals around music rights, and subsequently, they developed a flawed business model.⁴ Too late, hires were made of people with better connections in the music industry, in order both to develop an appropriate business model and give the start-up legitimacy within the sector.

It is clear from the sheer number of MusicTech start-ups within contemporary music industry clusters that a preponderance of small business loans and other innovation-related loans, friends and family investors, and individual angel investments have funded the development of a diverse start-up ecosystem. Relatively modest levels of investment are often sufficient to place many MusicTech start-ups in a position where they can make initial hires and work on proof of concepts and prototypes of platforms. Yet, as the paper will later address, the inability of many start-ups to raise venture capital investment even at Series A level results in significant issues when it comes to scaling up platforms, users and markets, and recruiting and renumerating development teams.

As Langley and Leyshon (2021) note, due to the way that platforms aspire to remake markets, multi-sided platforms must have strong “demand economies of scale” or “network effects”. For users, the benefits of a platform increase as a function of the total number of users (Cusumano et al., 2019). As such, one of the early key strategic objectives for MusicTech firms is to rapidly recruit and retain user populations – and their data – to “leverage network effects” by “scaling up” (Langley & Leyshon, 2021). This strategy is exemplified by the major streaming platforms. Yet, in the case of MSPs, aggressive scaling is about more than simply remaking markets. In his critical examination of Spotify, Vonderau (2019) points to the co-dependence between constant growth imperatives and debt finance, arguing that the platform’s growth strategy “does not primarily aim to turn songs (or audiences) into commodities but to treat them as a form of collateral that can be mobilized to secure loans” (2019, p. 15). For platform start-ups, scaling offers the promise of future income streams that provide venture legitimacy in the present. In his analysis of digital start-ups in music, Hodgson (2020, p. 429) points to the importance of “imagined metrics”, including assumptions about the behaviour of future customers, which “parade as stable and fixed indicators yet are in fact provisional and highly contingent”, but are of fundamental importance in attracting investors. Many of those we interviewed were acutely aware of the need to scale to demonstrate the financial viability of their platforms, and to provide a return to their investors. Start-ups are also required to vigorously communicate the intermediary advantages of their platforms and technologies to both potential users and content providers.

Yet, the need to scale presents significant challenges in terms of financial and human resources, both with regards to technological development (an issue we will return to shortly) and marketing and reaching new users and new territories. Thus, while scaling is an important indicator to potential investors of a platform’s future viability, often it is difficult to scale without sufficient investment in the first place. We had a range of responses relating to this challenge when we posed a question to start-ups as to why their next round of investment – typically, Series A venture capital investment – was important to them. Many referenced the need to grow their marking teams. For example, the co-founder and CEO of a music rights start-up noted how “the marketing budget will be a much higher percentage … how do you reach two million kids in their bedrooms all around the world?” (Interview 4). Along similar lines, the marketing manager of a music streaming start-up noted that “we know we’ve got a product that works, we just need to raise the funds to be able to go into those markets to sell it” (Interview 21). For some companies, future investments were considered crucial to having a physical presence in particular markets, with one interviewee noting the importance of having a “local presence” in markets and “experienced people on the ground … to understand local factors” (Interview 24). Several start-ups in both London and Stockholm referred to the large and potentially lucrative US market, but also noted the costs associated with developing a physical presence there.

Another issue inhibiting the ability of many MusicTech start-ups to scale their user bases is their ability to secure the necessary music rights required to provide music to users of their platforms and services. For many start-ups, licences are required to the most popular music content to attract users. However, these licences that are predominantly controlled by the major music industry corporations (Watson & Leyshon, 2022), and several interviewees highlighted the reluctance amongst corporations to provide licences to start-ups unless they could prove their ability to produce revenues. One interviewee described this as a “chicken and egg” situation in which there is need to demonstrate revenues to secure licences, but a need to obtain the licences to generate revenue:

Because we don’t have top 40 hits or the popular content, we’re playing this chicken and egg game. So, the music industry is just like, “Oh well, we need to know revenue figures”, and I’m just like, “You need to give me your music and then I can make money from your music. But until you give me that, I’m telling people [users of the start-up’s music licencing platform] that they need to license music that they’ve never heard of”. (Interview 16)

There is a similar “chicken and egg” dilemma in relation to music rights with regards to capitalisation and investors. Our interviews revealed that even in cases in which majors offered licencing arrangements, the up-front cost of these deals was prohibitive for many start-ups,⁵ with several interviewees discussing the prohibitive pricing of music licences for start-up firms. One interviewee noted that “you’re not going to build a B-2-C proposition without very, very deep pockets” (Interview 5). Start-ups with limited funding are unable to obtain the necessary licences required to access music assets that would allow them to scale. The more significant volume of venture capital investment available at Series A stage has the potential to allow them to obtain the required music rights, but without demonstrating scale, it is unlikely that firms can attract such investment. Indeed, such funding is often conditional on licencing agreements already being in place.

Recruitment of skilled labour and the need for “smart” investment

As illustrated above, start-ups in MusicTech face a dilemma: while scaling offers the promise of future income streams that provide venture capital legitimacy in the present (Vonderau, 2019), the opportunities for scaling may not be able to be realised without significant initial investment. There are other ways in which issues of capitalisation impact upon MusicTech start-ups’ ability to realise innovations and demonstrate the efficacy of their technologies. Most notable from our interviews were problems relating to recruiting and remunerating key personnel, and especially Chief Technical Officers (CTOs) and developer teams. Talent shortages are a widely recognised feature of labour markets in technology-based clusters (Davis et al., 2009). There is a scarcity of skilled labour globally across the technology and software sectors in general (see for example Bachtiar et al., 2022; Hyrynsalmi et al., 2021), and this can be particularly acute in technology-facing creative industries due to relatively low pay. In the UK for example, there are noted skills shortages across the film, television, animation, visual effects (VFX) and videogame industries, which have recently been exacerbated by the UK leaving the European Union (Ozimek, 2021). In the case of MusicTech start-ups in London and Stockholm, the issue of the limited availability of people with the requisite technical knowledge is further exacerbated by the need to match levels of staff remuneration and rewards offered in other sectors with greater start-up capitalisation. In the creative industries, the prospect of high profits for workers in the future – by converting stock options into money – can allow companies to attract highly skilled employees prepared to take risks despite relatively low basic wages and employment insecurity (Teipen, 2008). As Hodgson (2020) notes, it is a common approach among pre-revenue music start-ups to attempt to attract engineers through a “double-pronged approach” of selling them a vision of company development and offering them remuneration in the form of equity. However, the wages and potential value of equity that MusicTech start-ups are able to offer are often not particularly attractive vis-à-vis those being offered by start-ups in other areas of the economy. The founder and Director of Product at an independent record label, for example, noted that:

That’s the hard part for the whole tech scene, there is not enough talent that can work with it. And of course, a music tech company is for sure not making as much money as a FinTech company. So as a developer, you might not take the chance to join a start-up in MusicTech because obviously you want your shares, and you might be rich … They can pick and choose whatever they want to do. Like someone can pay them a huge salary and options, you know. (Interview 22)

Yet, a number of interviewees did suggest that the distinctive challenges being addressed by start-ups in the music space, along with the disruptive ethic of some start-ups, can be attractive to developers.

Many of the start-up founder-entrepreneurs that we interviewed described their own lack of technical know-how in relation to realising their innovations. Accordingly, some interviewees highlighted the importance of recruiting a sufficiently qualified and experienced CTO who could be relied on to direct technical development. The founder and CEO of a music rights start-up reflected that “I made one good hire; the CTO. That’s the first. And then after that you take his lead” (Interview 4). Another interviewee, currently interviewing for a CTO, reflected on their need for technical direction, stating that “it’s been difficult to really understand what it is that we need, because I don’t know. And that’s where I fall down” (Interview 16). Yet, many participants reflected on the difficulties inherent in recruiting developers more generally. The founder and CEO of a music creation start-up, for example, explained that:

[Programmers] are bloody hard to find … For every month worth of someone solidly looking we might get one person … our last CTO spent about the last ninety days of being in this company trying to find people. And we eventually employed three people, two of which just couldn’t cut it. (Interview 17)

One of the strategies adopted by several start-ups to address problems of developer recruitment and remuneration was to recruit from outside their base city, and in many cases outside of their home country, often on a flexible, hybrid-working basis. One interviewee, for example, noted how

I’ve got a chap who’s a professor of deep learning in Athens, who’s doing two days a week for us … our head of MIR [music information retrieval] is based in Seville, simply because she prefers it to London and I’m not going to argue with her because she works brilliantly no matter where she is, she just gets on with it. (Interview 17)

Two interviewees based in Stockholm explained the financial challenges of locating a developer team in the city. One noted that:

We have a tech team outsourced in Bosnia, a pretty significant tech team. Cost, and setting up the team is so difficult. Spotify takes all the developers, and they take a lot, so it’s extremely hard to recruit developers. It’s probably any start-up in Stockholm’s biggest problem. Yeah, extremely competitive to hire talent in tech. (Interview 22)

The other whose start-up had a development team based in Ukraine, noted how:

… they are as good as Swedes, they speak great English, and the cost for having a team there is much less. They’re very competitive! It would be lovely to have all these guys in the same room because that’s always better, but the competitive situation in Stockholm to get developers means the price level of those developers increases. So, I think for us this is a perfect fit, and I think as we also grow global, there is no reason for us having development in Stockholm. (Interview 24)

The problem of the scarcity of investors is also amplified by the need to find investors that also have suitable experience to mentor entrepreneurs and, ideally, the capacity to unlock networks and connections within the music industry. In the case of second wave streaming platforms, their disruptive impact upon the industry effectively forced the incumbent music industry corporations to build relationships with these platforms to first protect, and then maximise the value of, their intellectual property. However, in the case of third wave MusicTech platforms and start-ups, the need to collaborate and cooperate with the major corporations, in particular to licence music (see Watson & Leyshon, 2022), along with the sheer number of innovations in the market, places the emphasis on start-ups to build networks with major corporations. The case of Crowdmix, the failed MusicTech start-up mentioned earlier in the paper, is held up as an example of the importance of gaining investors experienced in the music industry. Such a perspective was expressed by a number of our interviewees, for example a senior account manager at an online artist and repertoire start-up noted how music is a different type of industry to other disruptive technology spaces within which investors typically invest:

Our investor networks don’t sit in music typically, most of their businesses are in FinTech or disruptive technology spaces but not music … I think in terms of music technology consultation, especially when it comes down to the challenge of what is the correct user experience for a music B to B company, it’s an area which gets misunderstood quite a lot because it’s something where you really need to be in the music industry to understand … It’s a very different type of industry. (Interview 9)

In his study of early-stage investors and entrepreneurs in the US, Lee (2022) notes how social ties are critical in enabling entrepreneurs to connect to venture capitalists. The lack of such ties, he argues, can exclude viable business ideas from funding whilst distorting capital allocations in favour of those entrepreneurs with greater social capital. However, one interviewee, the founder and CEO of a music rights start-up, noted how unlocking access to the right networks often requires connecting with the right investors who are able to provide mentorship and guidance on how to navigate within their industry:

I don’t have a specific music mentor, and that is something that I feel like I’m missing and could really benefit from. He [current investor] is more business side … he’s very business strategy … he kind of acts as like my COO. I’ve learnt a lot from him … But yeah, in terms of actually music and then getting connected with some of the higher people that you can’t necessarily get to, that’s where I’m struggling. I need someone who’s well connected, who’s kind of like quite high up in that industry, who’s got a lot of experience really. To kind of teach me you know, well don’t go talking to these guys without talking to these people, or don’t go saying this thing to them, and you know, how to play the game. (Interview 16)

A noted characteristic of the emergence of Tech innovation ecosystems is that the founding of new firms by former employees from related firms or technologically related industries, who subsequently transfer knowledge and capabilities from pre-existing companies and industries into the emerging one (Chen & Hassink, 2022). Yet, amongst our interviewees, few had come directly from the music industry themselves. Rather, a number had managed to find investors experienced within the music industry and were quick to explain the benefits of this. The founder and CEO of a music creation start-up, for example, explained how:

Fundamentally, the only reason why [investor name] invested is he’s got a place to take it: [the business]. He’s very well connected in the music space … he knows everyone right to the top of the music industry. So the reason why we’ve been able to walk into many of the largest companies we need to, is simply because of that connection. (Interview 17)

A number of our interviewees noted how a tension existed between the need to obtain any available investment and being more selective with investment to think about the longer-term benefits of having the correct investor. The above interviewee, for example, referred to this as attracting “smart money”:

So I think that’s something really important to sort out when you start raising money, they call it smart money or strategic money, but making sure that you know that you’ve got a route … Everybody just wants to get the money, but make sure it’s the right money or else you might as well not even bother taking it because all you’re doing is kicking the can down the road. And then you are stuffed because the smart money that you wished you’d have taken you then can’t. (Interview 17)

Similarly, the founder and CEO of a music investment start-up described the need to look for “further value” from investors:

If they only provide the money, that will be good in the short term, but then after the first money starts to end, you have no value from that investor … it gets no further value. But if you have right people, the money is good in the start but then eventually they could be the one that actually open up the big commercial deal for you, so I think it’s super important to try to find the right ones. (Interview 24)

However, the above interviewee also recognised the tension exists, noting that “But also, it’s very easy to say because in the beginning you need the money, so if somebody comes up with a cheque, it’s tough to say no” (Interview 24).

One potential source of investment for MusicTech start-ups are the major corporations of the music industry. Returning to profitability through the incomes being received from the major streaming platforms, all three major corporations have been making strategic investments in MusicTech (MusicAlly, 2016). One of our interviewees, an editor at a music industry news and analysis publication specialising in reporting on MusicTech, noted the important role of the corporations in investor reluctance at Series A stage:

They [the major music corporations] have got to actually be the people who provide funding because otherwise those companies might struggle to get funding. The one thing we’re hearing is that it’s still a bit awkward I think if you’re going to a venture capital company and asking for a series A round … but in terms of seed funding and angel investors, I get reports back that there’s lots more of them. It seems to be quite a good time for that … [but] then they have to figure out how to make the jump to Series A. And I think that’s where major labels are figuring out how they fit into that. That the major labels are the next round of funding perhaps, or are they the people who are participating in series A to convince investors … (Interview 19)

There are many examples of recent investment by the majors in MusicTech, and furthermore, all of the three major corporations operate forms of start-up incubator programmes. Universal Music Group (UMG), for example, operates a number of incubator schemes, including the Abbey Road Studios Red incubator in London, where UMG takes a small share of equity in the start-up in return for the start-ups’ participation in the incubator; the Capitol Innovation Centre in Los Angeles, which is a collaborative workspace for artists and tech innovators/entrepreneurs; and the Universal Accelerator Network, which is a series of partnerships with tech accelerators across the globe (MusicAlly, 2016). One interviewee, who was part of one such programme, described how this provided benefits not only in terms of mentorships and access to networks, but also in terms of investor confidence:

It’s a massive complement. They’ve only taken two companies so far this year, and for us going into a series A, it’s the sort of good PR and sort of vindication you need to keep investors confident and happy. We are also in contract with Universal and, if we can keep that, we are hoping it will put wind in the sails … it gives us access to lots of their senior management who aren’t directly involved in our contract process. So like marketing, like their PR teams, like their tech teams, you know. (Interview 4)

However, unsurprisingly, this investment is highly strategic and focused on strengthening their own oligopolistic position vis-à-vis competitors. As such, start-ups are unlikely to receive interest or investment from major corporations unless their innovations are targeted at the need of the corporations. Thus claims from some of our interviewees struggling to gain such interest that major corporations are “innovation resistant” and not sympathetic to the plight of start-ups looking for investment, must be set in this context. As one of our interviewees, the CEO of a blockchain start-up noted:

I think you shouldn’t have unlimited sympathy for those tech founders, right, because … I think that there’s a lot of naivety … to think, you know, that the people who actually work in this industry are just all idiots and therefore, “I can do something, and I can come in from the outside” … but if they don’t really understand the problem or don’t really understand how they’re going to communicate the solution or whatever, that can be a barrier in and of itself. (Interview 6)

Another interviewee, the CEO of an independent music publisher, noted how, “I think there are a lot of people that don’t know how the music industry works, but have an assumption about it, that make bad decisions on what they should build for the music industry, and it’s not needed” (Interviewee 10). Such a situation is an example of what De Groote and Backman (2020, p. 2) term the “asymmetric goals” of incumbents and start-ups, with many start-ups focusing on what is technically possible, rather than those innovations that are needed by the industry. Reflecting on their own experience working for a major corporation, one of our interviewees, described how this issue might directly late to issues of investor reluctance at Series A stage and beyond:

I got like hundreds of pitches from different music tech companies … But they very seldom saw the real problem because they really wanted to build something cool within music. I think because of the attractiveness of music, I think there are unproportionally many start-ups within that industry, they just have a cool idea, and they just start to develop because it’s fun and then all of a sudden, they realise they actually don’t solve anything. So I think that is probably one of the reasons for it’s a bit hard to find investors because you simply don’t solve anything, it’s just fun. (Interview 24)

Conclusions

In this paper, we have focused on the business dynamics behind the evolving role of technology in the music industry. While one of the most important challenges facing entrepreneurs in technology start-ups across a wide range of industries in general, and the creative industries in particular, is access to capital (Conti et al., 2013), this paper reveals the unique and significant issues faced by start-ups in the MusicTech sector in particular with regards to capitalisation. Our findings suggest that in the early stages, as with early-stage start-ups across the economy more broadly, investment in British and Swedish MusicTech start-ups is largely characterised by small business loans and other innovation-related loans, friends and family investors, and individual angel investments. The availability of such capital has resulted in a diverse and well-populated MusicTech ecosystem. Yet, we also found there to be significant issues of investor reluctance related to their ability to progress from seed and early-stage investment to Series A funding and beyond. Reasons for this include the uncertainty of returns from investments in music-related innovations vis-à-vis other sectors (for example, FinTech); a number of high-profile failures of music start-ups; and, crucially, the legacy effects of preceding waves of platform reintermediation – specifically issues of music piracy and on-going issues around copyright enforcement – which despite the stabilisation of the music industry around MSPs and it’s return to profit, continues to be an issue on investors’ minds. As Lee (2022) argues, the venture capital model favours innovations that promise large returns in a medium time frame with minimal risk. Many MusicTech start-ups meet neither of these two conditions.

The analysis presented has focused on a series of interrelated challenges faced in this respect. First, there is the issue of scaling. Scaling offers the promise of future income streams that provide venture legitimacy in the present (Vonderau, 2019). However, the need for such scaling presents significant challenges in terms of financial and human resources, and as such, while scaling is an important indicator to potential investors of a platform’s future viability, it is difficult to scale without sufficient investment in the first place. Second, there is the issue of recruiting skilled tech developers. While the issue of demand far outstripping supply was recognised as an issue effecting Tech start-ups across multiple sectors, this issue is exaggerated by the inability of MusicTech start-ups to financially reward technical staff, especially in terms of equity, vis-à-vis other sectors with greater start-up capitalisation and potential for growth. Third, there is the issue of mentoring and accessing networks within the industry. High-profile MusicTech failures have revealed the importance of having investors that understand the music industry, are able to provide appropriate mentoring, and to provide a “way in” to closed industry networks. Yet, our interviewees emphasised the tension that exists between, on the one hand, the need to obtain any available investment, and on the other attempting to be more selective with investment and think about the longer-term benefits of having “smart” investment. Finally, we have considered the role that the incumbent corporations have as potential investors in MusicTech. While there are many examples of instances where they have provided investment, it is highly strategic and focused on strengthening their own oligopolistic position vis-à-vis competitors. As such, start-ups are unlikely to receive interest or investment from major corporations unless their innovations are targeted at the need of the corporations. Yet, without previous experience in the music industry, or access into corporate networks, it becomes a significant challenge for start-ups to identify appropriate innovation gaps.

The music industry is a pioneer sector for processes of platform reintermediation that has already transitioned out of its major phase of disruptive innovation and seen an early accommodation emerge between tech disruptors and industry incumbents vis-à-vis other sectors of the economy. Previous platform disruptors have moved into a position of incumbency in terms of distribution, but in such a way as not to have displaced the major music corporations as incumbent rights holders and key rentiers. Rather, platforms and music corporations have become bound together through a system of rent extraction (Meier & Manzerolle, 2019). The stabilisation of the industry around the revenues generated by MSPs, together with the appetite of angel investors to fund new technologies and business models, has more recently encouraged a new round of digital innovation and platform reintermediation. However, rather than seeking to disrupt the music industry per se, many start-ups now seek to gain entry through collaboration and cooperation, reflecting the stabilisation of economic power in large record companies and platforms. Yet, despite these pioneering dynamics, it is an industry that has received relatively little attention from within the platform economy literature beyond the economics of streaming. As we have revealed in this paper, while MusicTech start-ups share many of the same characteristics, opportunities and challenges of those in other areas of tech innovation, such as those outlined in a burgeoning literature on FinTech, there are important specificities to the music industry, as a mature oligopolistic copyright industry still marked by the legacy of music piracy, that shape the opportunities and challenges faced by platform tech entrepreneurs. Yet, beyond the specifics of our case study sector, we also draw attention to processes of platform reintermediation more broadly, which are playing a crucial role in shaping the contemporary development of a wide range of sectors of the economy. As we have demonstrated in this paper, a platform political economy perspective offers an essential lens for on-going research that seeks to understand the business dynamics and challenges around technological innovation and platform reintermediation, consolidation, and capitalisation.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 For example, see a seminar organised by music industry think tank, MusicTank, on the possibilities of new technologies generating innovative and potentially proliferative new markets for music (MusicTank, 2014, Is Technology the New Beatles, 16 September. Available at: https://www.youtube.com/watch?v=_VfhlpkNl58&t=11s (Last Accessed 30 May 2023)).

2 Series A funding is the common term for referring to a company’s first significant round of venture capital financing. This is funding usually sought after an initial investment round where common stock and common stock options have been issued to company founders, employees, friends and family and angel investors.

3 Social music discovery platforms are a form of social media platform premised specifically on the discovery and sharing of music amongst users with shared musical tastes.

4 The company planned to operate on the basis of a 50/50 split of revenues with artists around their music and content. Revenue was to be generated by selling ad space and making income around secondary streams. However, the company had not negotiated with other services, for example Spotify, regarding the secondary streams happening from these services, and therefore had no agreements in place to be able to use the content which they then planned re-monetise.

5 The cost of licencing music varies based upon several factors, including the number of songs being licenced, the songs being licenced, the type of licence being sought, the intended use of these songs and the medium in which they are used. In some cases, the licence may include in the contract a percentage of the revenue earned through that license.