Music Startups CAN Work: MOG CEO David Hyman Responds To imeem’s Dalton Caldwell

This guest post was written by David Hyman, a self-proclaimed music junkie and CEO and founder of MOG, a startup that offers both a premium music service and a portal of music content. Before starting MOG, David served as CEO of Gracenote, the world’s largest music database and music-identification service, which sold to Sony for $260 million in 2008. Previously, he was SVP of Marketing at MTV Interactive, and he co-founded Addicted to Noise, the webzine that pioneered multimedia music reporting and around-the-clock music news. In 2008, he founded Musica Tecnomica, a regular gathering of music-focused innovators in San Francisco.

Dalton Caldwell, founder/ex-CEO of imeem, recently gave a presentation at the Y Combinator Startup School on the impossibility of creating success in digital music. I’d like to provide an alternate point of view and make it clear that, like in any business, “making it” requires know-how, hard work, diligence and passion. Having significantly contributed to the successes of four companies that have guided themselves through the muck including Addicted to Noise, Sonicnet, Gracenote, and now MOG, my perspective is quite opposite from that of Dalton’s and I see great opportunity for those playing in the space.

Dalton’s takeaway from his experience appears to be that the entire music market can’t work, perhaps because imeem did not work. Yes, digital music seems to be a game that every 20-something wants to try and play, and it’s almost as if creating a digital music product is a rite of passage for millions of young buck programmers. It’s unfortunate that because it’s a sexy space, and because there are tons of entrants into the field, all of the noise creates an impression that winning can’t be done. It certainly can.

Like being a paid musician, an actor, a rocket scientist, or a media mogul, success and whatever you do requires years of commitment and unbridled passion. For those that put in Malcolm Gladwell’s 10,000 hours, the rewards can be significant. Rewards realized by countless success stories: from Winamp and Spinner, to, Pandora, Gracenote, iTunes, MySpace, Facebook, Tumblr and all the popular blogging platforms, YouTube, VEVO, ringtone companies, lyrics sites, music-oriented games (Guitar Hero, Tap Tap Revenge, etc.) and many, many more.

To Dalton’s point, providing music content is a smaller-margin business. But, the addressable market is massive. Music consumption is at an all-time high and is most likely the second biggest leisure activity in the world behind watching television. It’s an industry in massive flux. Those with models that work can reap massive rewards through its tumultuous evolution. There are countless phenomenal businesses built on providing services and products on a massive scale with a small margin.

It’s hard work getting deals done with the labels. They have limited business development resources and can’t make thousands of bets. Contrary to what Dalton conveyed, the labels don’t require you to do deals that make no economic sense. For example, MOG is very happy with the realistic minimum guarantees that were set, all of which we’ve hit. You have to come to the labels with a great idea, a great product and a model that works.

MOG started out providing tools to music bloggers. We successfully morphed that into the fastest growing music network, providing ad sale resources to over 1,300 blogs and music sites, reaching over 35 million monthly uniques (see comScore). We are a fast-growing, solid business. We recently launched a cloud-based online and mobile music subscription service, heralded by press and users.  It’s a low margin business, yes, partially offset with improved margins from our ad business, but a great business on its own.  Our model does not have unknown variable costs. We have built a team that can execute with great cost efficiencies, and are prepared to take our business globally.

Historically, subscription businesses were hindered by lack of ubiquitous access. But mark my words, with open-platform smart phones, 3G (and soon LTE), digital services quickly coming to television (wait until you see all the TVs coming with MOG inside), and most importantly, IP-based services in the car — often tied to established billing relationships consumers already have with carriers and others — it’s the future of music (along with free radio).

As for Congress getting involved with statutory rates, it’s my opinion that these rates and not letting the free market dictate how this area evolves will be the death of the music industry. Can you imagine, Congress coming up with how much a label (and ultimately an artist) can make by placing caps on the industry? I assure you that would be the industry’s quickest decline, as it would become impossible for labels to make bets on new talent.

It’s a massive global market and there will be a handful or more of players. Dalton says to stay out because it’s saturated. People told us to stay out for the same reason. But, we believed in our core we could build a better mousetrap and we did. And who knows, perhaps so could you! It’s a damn big market coming. It won’t happen overnight. But it’s inevitably coming.

So, to those of you who love music, and can’t think of spending your life doing anything else, diligence, unbridled passion, commitment, and common sense can not only provide a lifetime tied to music, but a healthy reward. Like my father always said to me, “You don’t get something for nuthin’, kid.”