Sep 24, 2020
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INgrooves: Proof You Can Make Money On Music, Even If You’re Not Apple

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Label Maker: INgrooves Robb McDaniels. This story appears in the May 7 2012 issue of Forbes Magazine on newsstands now. It s nearly noon at the Hotel San José and music executives are still stumbling throughout the courtyard casualties of the former night s festivities. The total industry has descended upon Austin Tex

 

for a week of schmoozing and boozing at South By Southwest. Robb McDaniels 37-year-old founder and CEO of digital music ­distributor ­INgrooves is in slightly ­better shape. Sporting a lightly rumpled button-down and a close-cropped beard he sips his coffee at an outdoor table—and spots Griff Morris an executive at Swedish label X5 Music

 

Griff! What s up? Morris sidles over. McDaniels tells him he spent the former night at the couch of a fellow INgrooves executive in place of pay for his own room. Morris shakes his head. I ve got a home down here if you ever need a place to stay

 

You ve got a boat in L. A. a home here says McDaniels in mock exasperation. What am I doing wrong? Morris laughs. Not spending your money apparently. PROMOTED Civic Nation BRANDVOICE | Paid Program
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A decade ago he launched INgrooves out of his spare bedroom. Since then he s raised over $50 million in capital and built a staff of 140 becoming one of the world s largest distributors of digital music. ­INgrooves is home to acts from Mac Miller to Dolly Parton and small labels like X5 but also handles distribution for Universal Music Group the area s largest record company

 

McDaniels was in Austin for a party hosted by his company and Fontana the distributor of physical and digital music which INgrooves recently acquired from Universal for a reported $5 million to $10 million. INgrooves lost money last year on $41 million in sales up from $24. 4 million in 2010. But Fontana can help you send revenues past $125 million this year when McDaniels expects to turn a profit

 

His gross margins: 25%. His premise is pretty simple. An artist or label sends INgrooves a digital re­cord­ing; the file is entered into a system automatically converted into the proper format and pushed out to iTunes Amazon. com Spotify and 600 other online and mobile retailers. When someone buys the MP3 or streams the song the artist s royalties get passed along to ­INgrooves which pools them from different sources and cuts the artist a check

 

­McDaniels charges retailers nothing; INgrooves takes 10% to 30% of the wholesale price (a typical album ­retails for $10 and wholesales for $7). But in an era where bands like indie duo Pomplamoose can sell 100 000 songs a year by releasing their albums straight to iTunes without paying a cent to a middleman why do thousands of artists flock to McDaniels? To simplify the process

 

Each retailer has its own formatting requirements paperwork and sales reports; foreign countries all have different laws. With INgrooves as with comparably sized rivals like the Orchard and IODA (which merged under Sony in the wake of INgrooves Fontana acquisition) one click of the button grants indie artists access to a system used by the area s largest record labels

 

And many music retailers won t deal ­directly with musicians anyway. iTunes isn t attracted to forming relations with artists—there are simply too many explains Jack Conte of Pompla­moose who says he was lucky to develop a distinct relationship with Apple. Obviously there are all kinds of management infrastructure issues of that form of situation

 

… That s why they work with labels and distribution agencies like INgrooves. Born in London to American parents and raised in and around New York City McDaniels studied political science at Trinity College. He moved to San Francisco to take a role at insurer Marsh & McLennan. By age 27 he was accountable for ­development for the Western region packaging and selling assets and credit risks to the likes of Enron and Global Crossing

 

I would go into the bathroom before meetings and just be like What am I doing? This just doesn t feel right he recalls. An old hobby provided his escape route. McDaniels had tried his hand as a deejay during high school and wanted to do something in music. So he typed up a business plan for a new form of music distributor to make sense of the digital era—linking content owners with retailers that sold into the newly Napster-less market

 

In 2002 he left his job; later that year an ex-director of human resources at Napster sold him a life insurance policy—and suggested he get in touch with a software engineer named David Kent. I had to build an enterprise software platform; I just didn t know how to do it says McDaniels

 

So I met David. I told him what I wished to do. He said a group of stuff I didn t understand and I said Great. Go build it. Starting in 2003 with just an Excel spreadsheet and a thumb drive Kent began laying the rules of INgrooves. McDaniels leased a tiny room from a San Francisco architecture firm for $500 a month

 

After he couldn t make rent he forked over a small chunk of equity to his landlord. When Kent a classically trained musician asked for an electronic piano to apply as a release during three-day coding binges McDaniels redirected his entire marketing budget for three months to fulfill his CTO

 

Meanwhile McDaniels was signing artists and small labels to his nascent platform. While most distributors locked up acts with three- and five-year deals McDaniels offered agreements without time commitment. His client-retention rate approached 99% (and still hovers in that range though INgrooves deals now come with a collection term). People thought I was nuts says McDaniels

 

I didn t know anything about the music industry. I just said Here s how I believe the business should operate. Boosted by $2 million from a small venture capital firm in 2005 INgrooves churned out sales of $1. 6 million in 2006 and $4. 7 million in 2007. By that point McDaniels had connected with Al Teller the former head of MCA Records (precursor to Universal Music Group)

 

Teller and his associates invested an undisclosed amount. My reason behind getting concerned is that their core technology was superior to that in their competitors says Teller. Besides financial support Teller brought disc cred—and introduced ­INgrooves to Universal. The music giant needed a partner to address its outdated digital distribution and in 2008 made what McDaniels describes as a significant strategic investment in his company

 

In 2010 Shamrock Capital poured in a further $20 million leaving roughly 80% of INgrooves in the hands of Shamrock and Universal. McDaniels world turned after Universal reached a tentative agreement to purchase EMI s recorded music division in late 2011 for $1. 9 billion. The purchase still pending drew close attention from regulators; preemptively Universal started divesting some properties

 

When INgrooves asked about Fontana Universal was willing to listen. Fontana which handles 200-plus labels including ­Rostrum Records (Mac Miller s label) and Stunvolume (the label started by alt-rock group Garbage) should lift ­INgrooves revenues by several thousands and thousands of bucks this year. When is McDaniels big payday? Not for a while. All those rounds of fundraising have left him with a trifling sliver of ­INgrooves

 

No matter. Ten years from now when we re sitting at the top of the area and I m owning 5% he says I don t think I ll mind. For more at the business of hip-hop look into my book Empire State of Mind: How Jay-Z Went From Street Corner to Corner Office and follow me on Twitter and/or Facebook

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