Why is Kobalt getting into bed with Google?

“Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content… And Airbnb, the world’s largest accommodation provider, owns no real estate.”

It’s the truism that’s rapidly doing the rounds on LinkedIn and Twitter: today’s most exciting companies live or die by their technology and service.

Harbouring very few assets is exactly what propels them to stay one step ahead of the competition.

The pithy observation, originally penned by TechCrunch, rather suits Kobalt, a company that has raced to a US $250m valuation in little over a decade while barely owning any copyrights.

Kobalt has built its business on allowing its clients to keep hold of their own IP, while promising them ‘transparent, efficient and empowering’ music industry services.

As such, clients of Kobalt’s Publishing, Neighboring Rights and Label Services divisions receive improbably generous income splits that have irked the firm’s rivals in all three fields.

This model enables creators and small businesses to lean on Kobalt to support their own entrepreneurship: 60% of Kobalt’s revenue comes from 500 incorporated music publishers, many owned by a single songwriter.

“We’re fully integrated with YouTube. It’s very clear [google’s] investment will not hurt this kind of relationship.”

Despite not being able to compete with its major label/publishing rivals on catalogue, Kobalt has clearly hurt them when it comes to modern chart music. According to Billboard, Kobalt’s publishing company claimed 17.3% of the Top 100 hits on US radio in Q4 2014, second behind only Sony/ATV.

MBW understands that Kobalt’s projected revenues to the end of June 2015 are $260m, up 40% year-on-year.

When you consider that FY 2014 sales at the world’s third biggest publisher, Warner/Chappell, were less than double this amount at $517m – and that another 40% growth next year would take Kobalt above a $370m annual turnover – it’s clear why it’s started getting the big boys hot under the collar.

It’s also pretty obvious why Google Ventures wants to get involved.

The company recently led a $60m investment into Kobalt alongside existing financier Michael S Dell, founder of Dell computers.

Bill Maris, Managing Partner at Google Ventures, called Kobalt “one of the most innovative brands in media”, predicting that it would be “instrumental in shaping the music industry’s future”.

Question is, why would Kobalt want to invite Google – often painted as the scourge of the music business for its willingness to direct users to torrent sites – to help shape its destiny?

As revealed by MBW last month, Kobalt is using part of the Google Ventures money to open new offices in South-East Asia and Latin America. But its ambitions go far beyond bricks and mortar.

“Google Ventures is a very separate entity to Google itself,” clarifies Willard Ahdritz, Kobalt Music Group CEO (pictured). “But, how can I put this? We have been fully integrated with YouTube for one-and-a-half years – and it’s very clear that this investment will not hurt this kind of relationship.”

Of course: Ahdritz’s vision for the music industry is the antithesis of what he calls ‘the short-termist Battle for Middle Earth’ currently surrounding freemium music services – the attempts by major record companies to force the likes of Spotify to reduce their free offering to drive more consumers to pay.

Instead, he adopts a far-sighted view: if Kobalt and other companies can monetise billions of consumers worldwide through ad-funded consumption, the industry will enjoy a big payday.

Only once that’s achieved, says Ahdritz, should the music market allow itself to become distracted by the finer details of who pays what to whom.

“We now have [kobalt clients] Paul McCartney and Max Martin around the table with Michael Dell and Google. That, to me, sounds like the future of the music business.”

The YouTube ‘integration’ he mentions has a name, ProKlaim – software built in tandem with the Google-owned platform and launched last year.

ProKlaim allows Kobalt to identify unclaimed music in user-generated content, which Ahdritz says it is now helping the company monetise 1.5bn YouTube video plays every month.

“There needs to be trust between technology companies and the music industry,” says Ahdritz. “I have been very clear from the beginning that whether it’s Spotify or YouTube or SnapChat or SoundCloud, the most important ingredient is trust.

“They need to sell our products and drive our products. There will always be a discussion around what the [royalty] rate is for that, and amongst the music industry on how that’s balanced between master rights and publishing. But trust must come first.

“I’m extremely excited that Google Ventures is investing in a transparent and trustworthy company like Kobalt. Because now we have [Kobalt publishing clients] Sir Paul McCartney and Max Martin sat with [Kobalt investors] Michael Dell and Google at the same table. That, for me, sounds like the future of the music industry.”

Ahdritz queries why any music businesses would gladly take big monetary advances (or equity) from digital companies like Google or Spotify, and then publicly attack their record on royalty payouts.

Kobalt, he claims, has to-date never taken a cash advance from a digital service – instead demanding better royalty rates for clients, plus data and integration tools like ProKlaim.

“My experience is that these companies are paying and they are paying our clients well,” he adds. “Can it be more? Yes, I think it can. Our clients are always worth more.

“And there is still room for improvement [for streaming services] to become more sophisticated in increasing their ad revenue, experimenting with pricing tiers and the personalisation and customisation of content.

“But let’s make sure [streaming services] are profitable first, on a global scale. Then, when we have all that activity and all that usage data, let’s decide how we divide this increased pie.”

The division of that pie is already a hotly-debated topic, though, with songwriters and publishers in the US and Europe seeing a fraction of the royalties paid to labels and performers from download and streaming music platforms.

“Let’s make sure streaming services are profitable first. Then we can decide how to divide the increased pie.”

“I admit, it is strange that in sync we have a 50/50 split [between publishers and labels], but on Pandora it’s 14:1 and on Spotify it’s 6:1 [in favour of master rights],” says Ahdritz.

“It’s hard for me to sit and defend to my publishing clients why a master rights owner should get 14 times more money. The market must decide, eventually, what is fair.”

He offers a starting point for those discussions: “In my mind, labels and publishers invest equal amounts in the production of a [record].

“The rest of the investment from labels goes towards an artist’s brand. So why do we allocate 100% of this label investment to the record product, when it ultimately provides a small percentage of total income to the artist?

“The big money comes from the artist brand, not the [recorded music] product; you’ll hear no argument from me if the label and artist takes all the money from the branding deal, their touring deal, their fragrance deal… But it is fair to say that I am not so sure about [artists and labels] taking six times more from recorded music than a songwriter.”

However this money is ultimately divided in future, Ahdritz is positive about the attitude of key DSPs towards the music industry today.

The continued empowerment of artists, he believes, has given digital music services many more voices to listen to – but also many more reason to play fair.

“Historically, DSPs have been happy to license, pay and walk away – washing their hands of what happens afterwards,” he says.

“Now I see a big turnaround, a changing attitude that says, ‘We need to make sure that the money is flowing down to creators, or they will leave our service.’”

“It’s fair to say I am not so sure about [artists and labels] taking six times more from recorded music than a songwriter.”

Ahdritz is very clear that despite Google Ventures’ investment, the autonomy of Kobalt hasn’t been compromised. (“Nothing has changed in terms of  the corporate control of the company,” he says.)

As for Kobalt rivals who continue to snipe about the prospective longevity of the firm’s business model, Ahdritz hopes that the unencumbered backing of Google Ventures and Dell will “make those people think before they speak”.

And he is very insistent that Kobalt didn’t need the $60m cash injection.

“We never bet the farm on anything new,” he explains. “Kobalt has not been out in the market to sell itself, but we are very pleased to see who we are now working with.

“Given the fact that we do not own copyrights, my No.1 priority is always to maximise my clients’ value.

“I’ve not seen any other significant music company that thinks the same way.”Music Business Worldwide

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