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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It s nearly noon on the Hotel San José and music executives are still stumbling through the courtyard casualties of the previous night s festivities. The total industry has descended upon Austin Tex. for every 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 previous night on the couch of a fellow INgrooves executive in place of pay for his own room

 

Morris shakes his head. I ve got a house down here in case you ever need an area to stay. You ve got a ship in L. A. a house here says McDaniels in mock exasperation. What am I doing wrong? Morris laughs. Not spending your money apparently. That s something of a McDaniels trademark

 

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 in addition handles distribution for Universal Music Group the world s largest record company

 

McDaniels was in Austin for a celebration 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 might be useful send revenues past $125 million this year when McDaniels expects to show a profit

 

His gross margins: 25%. His premise is pretty simple. An artist or label sends INgrooves a digital re­cord­ing; the file is entered right 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 the various 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 just like the Orchard and IODA (which merged under Sony within the wake of INgrooves Fontana acquisition) one click of the button grants indie artists access to a system utilized by the world s largest record labels

 

And a lot of music retailers won t deal ­directly with musicians anyway. ITunes isn t interested in forming relations with artists–there are just too many explains Jack Conte of Pompla­moose who says he was lucky to develop a special relationship with Apple (see box p. 56). Obviously there are all kinds of management infrastructure problems with that style 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 task 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’d 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 highschool and desired to do something in music. So he typed up a marketing strategy for a brand new style 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 contact with a software engineer named David Kent. I needed to build an enterprise software platform; I just didn t understand how to do it says McDaniels

 

So I met David. I told him what I wanted to do. He said a gaggle 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 principles 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 use as a release during three-day coding binges McDaniels redirected his entire marketing budget for 3 months to satisfy 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 with out time commitment. His client-retention rate approached 99% (and still hovers in that range though INgrooves deals now include a set term). People thought I was nuts says McDaniels

 

I didn t know anything concerning the music industry. I just said Here s how I think 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 time McDaniels had connected with Al Teller the previous head of MCA Records (precursor to Universal Music Group)

 

Teller and his associates invested an undisclosed amount. My explanation for getting involved is that their core technology was superior to that of their competitors says Teller. Besides financial support Teller brought disc cred–and introduced ­INgrooves to Universal. The music giant needed a partner to deal with 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 one other $20 million leaving roughly 80% of INgrooves within 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 acquisition 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 hundreds of thousands of greenbacks this year. When is McDaniels big payday? Not for a while

 

All those rounds of fundraising have left him with an insignificant sliver of INgrooves. No matter. Ten years from now once we re sitting on the top of the world and I m owning 5% he says I don t think I ll mind. Who Needs a Middleman? While most indie acts use a distributor like INgrooves a plucky few have launched successful careers and not using a middleman–including Jack Conte 27 and Nataly Dawn 25 of Pom­pla­moose in Sonoma Calif

 

The duo gained Internet fame by covering songs originally recorded by ­Be­yoncé and Lady Gaga playing all the instruments and singing all vocals themselves. In 2010 employees at Apple s iTunes discovered the clever YouTube videos and invited Pomplamoose to perform on the company s Cupertino Calif. headquarters. After the visit Conte and Dawn developed an immediate relationship with Apple permitting them to bypass third-party distributors

 

They upload their music straight to iTunes and take home 70% of the revenue generated by the sale of their MP3s–over 100 000 downloads just last year. The music world is a big world and chances which you re going to happen to understand somebody are slim says Conte. Pomplamoose really just got lucky in that we got a connection at iTunes

 

That said there are drawbacks even for acts which have made it this far on their own. Pomplamoose lacks the ­infrastructure to make a suitable international push; its overseas offerings are sporadic at best. And because the duo s popularity grows (original in addition covered recordings) there s increasingly work for them

 

Perhaps their latest news shouldn t come as a surprise: Conte says they ve recently entered talks with INgrooves and its competitors. –Z. O. G. Special Offer: Free Trial Issue of Forbes

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