RoyaltyShare (www.royaltyshare.com) is a San Diego-based company that is looking to solve the problem of managing royalties for online sales for record labels. The founding team is from eMusic, and the company is venture-backed by Trident Capital. They last closed a round of funding in July of last year. socalTECH's Ben Kuo spoke to Steve Grady, President and COO of the firm, about where it sees itself and his reflection on the record industry's transition to online sales, and the current issues the industry is seeing with iTunes dominance and incompatible music formats.
Tell us about your company, and where you fit into the music business?
Steve Grady: RoyaltyShare, which is based in San Diego, is handling the transition from physical media sales to digital media sales. Record labels are our primary customer base. As they shift more of their revenue to iTunes, Napster, and many other online outlets--including ringtones, traditional downloads, and subscriptions--it brings up a whole bunch of different issues. The amount of data that is being generated by these types of sales is exponentially greater than ever before, particularly as they are now selling tracks, instead of albums. When you were selling CDs and cassettes, you didn't sell tracks as individual products. The second thing is there are now different services and different product types--not just the CD configuration, including permanent downloads, tethered downloads through Napster, streaming services and ringtones, and ringbacks. These all generate a lot of data. What happens with these services, particularly with tethered streaming services like Napster, is you get unlimited access to music, and anytime anyone clicks on a track, the record label has to pay a royalty on that. That's lots of data to massage to make sense of in order to pay royalties. That's the crux of what we're helping people to deal with. That influx of data is more complex than they had to deal with before. If you are going to be a record label in the digital era, where new infrastructure is replacing old infrastructure, such as manufacturing plans, warehousing, inventory control systems--that infrastructure is being replaced with other things--bits and bytes, rather than atoms. We have the services to deal with your data, which enables to do all those things and do it efficiently.
How did you decide to start the business?
Steve Grady: A lot of the people here came from eMusic, one of the first digital download sites. The other co-founders were all from eMusic, including, Bob Kohn, who is CEO. I was with eMusic for seven years as VP of Marketing and General Manager, and Scott Holcombe, our CTO, was also at eMusic as CTO. We have experienced first hand running a digital music service, and dealing with labels and publishers. It's a pain point in the industry, and we got to understand that. The data being created is far more complex than has ever been created before. We talked with label partners, and they were having tremendous challenges with the data they were being given. We recognized the problem, and that in order for people to compete effectively they needed the infrastructure. We had a good skill set to deal with that issue. What drove the creation of the company was that eMusic was acquired by a private equity firm, which moved the operations to New York. Since we were based in San Diego, the team wasn't willing to make the journey to the cold weather in Manhattan. We formed a company with the knowledge of what was needed in this space.
How long has the product been available?
Steve Grady: We offer a number of different services. We launched our initial service around November, a service called Digital Advantage, which handles the front end of the royalty process. It is helping labels to take the data they are getting from all of the services, and process that data into something manageable. We don't apply any business rules, we just aggregate the data together, match them to the label, and give them a data file to use in their system. It's a bridge product. We recognized there was a need for that, as labels were really struggling with processing data. Most of the customers that use that deal directly with iTunes, Napster, and eMusic rather than going through the digital aggregators. If you're getting those reports every month, it's a lot to handle. Digital Advantage provides reporting tools which tell you how much you are getting from eMusic, Napster, iTunes, with breakdowns on titles, tracks, and services. There's also marketing tools to manage their digital sales process, and to understand what's working, what's not working, and where they should spend their time. That was the first thing we launched. We have forty customers now up and running on Digital Advantage, and just recently we started to roll out a full royalty service. This is a web-based platform that goes to basically the next step beyond Digital Advantage. We take data and aggregate it, and process it. We also apply business rules, such as contractual information--how much do they owe the artist, and for what kinds of sales. We take the sales data and pull that through our system, and apply business rules to create statements for artists and publishers. All of this is done in a web-based environment. What's nice about this is you have system availability 24 hours a day, 7 days a week, and can access it from anywhere in the world, with full visibility to all of your data. That includes all of your catalog information, licenses, business rules around those things, and statements--we're pulling a lot of data in one location and making it easier for the labels to spot problems and issues, and which can generate statements they can send out to their artists and publishers. This is very valuable as it allows them visibility into the process and to understand problems, and correct them. It's a very easy process for the labels, and takes away painful things they have to do every quarter, or semi-annually. It allows them to outsource the technology piece, kind of like you would payroll when you start a company. You don't build your own payroll system, you rely on an ADP or Paychex to run those for you. It's the same thing here. When you run a record label, the last thing you want to do is to develop a royalty system. You want to get your royalty done if you have to, and you want a lot of visibility into that process. You're not going to build it yourself, you will want to rely on someone that does that all day. That's what we're doing. You can offload that onto us, and focus on the critical things like finding new artists and developing those artists and marketing and promoting them.
What kinds of labels are using your services--big or small?
Steve Grady: We have deals with the largest independent labels, including Razer & Tie, Epitaph, Sanctuary, Koch Records and Koch Distribution. It runs the gamut. It really allows them to get powerful automation they've never had.
Being where you are, with the visibility into the digital music industry, where do you things are now in terms of adoption of digital music?
Steve Grady: We're very bullish on digital music, and that's where we're staking our future. There's a real need for RoyaltyShare in the transition to digital. We have spent a great portion of our careers on digital distribution, and it has become a phenomenon that people are aware of, particularly with the very successful business in iTunes, and the other services who are trying to compete against iTunes. It's good news and bad news. The good news is that there is growth there, and there is a very strong revenue stream being created for these labels--and an important revenue stream. The bad news is that it's still a challenging space. iTunes clearly dominates the market, and from there's it's quite a steep dropoff. After iTunes are eMusic, Napster, Sony Connect and others, but there's a very steep dropoff. That's not where you want to see it long term. You'd like to have four or five very strong, healthy services growing and competing against each other. It's not good having one service that dominates the business. You're seeing the desire from record labels to see other channels out there. It needs to change for the market to really take off. To see hockey stick growth, you need other successful partners to take off. That's what we're hoping will happen eventually. The reasons why that hasn't occurred yet--and I'm not telling anybody anything they don't know--is format is a huge challenge. If you consider iTunes, where both the player and the service dominate the marketplace with seventy to eighty percent market share, and services like Napster, Microsoft's service, and MusicMatch don't play on the number one device in the marketplace--that's one big problem. It really constricts the opportunity for those other services. There are lots of proprietary formats, incompatibilities, and that restricts growth opportunities. It's something the industry is grappling with, and needs to resolve, for the market to take off. Hopefully, that will happen in twelve to eighteen months.
Thanks for the insights!