(Wired UK, May 2015)
Kobalt changed the rules of the music industry using data — and saved it
On a winter’s afternoon, in a 23rd-floor office overlooking midtown Manhattan, Willard Ahdritz flops on a low leather sofa and opens his Dell laptop. Ahdritz is a tall, pale fellow with ice-blue eyes — a Scandinavian phenotype befitting his native Sweden. He keeps a metal Viking helmet and a sheathed sword on his window sill.
“Musicians say there is no money in streaming,” says Ahdritz, the founder and CEO of Kobalt Music Group, the most important music company you’ve never heard of. Squatting mantis-like, arms between his knees, he reaches over to the coffee table and taps on his laptop. “That’s what you know, isn’t it?” he says. “Well, that’s wrong.” He pauses, staring out from his frameless glasses. “You see, someone has lied to them.” With that, Ahdritz brings up the most remarkable web portal in music-business history. It allows songwriters to view every single instance when their work is streamed on Deezer or Spotify, broadcast on radio, sold as a CD, featured in a film, played in a pub, pirated by a fan in a YouTube video, sampled in a TV show or included in a Champions League ad. That’s just about everywhere on the planet — totalling 700,000 separate revenue streams for a single song. Ahdritz believes that such “transparency and accountability” will empower artists. This dashboard grants artists access to the notorious “black box” of record label revenues and shows them where their music is played, who is paying — and how much.
The portal also acts as a clearing house for synchronisation rights, a piece of music’s use in films, TV shows or ads. “The other day, there was a request for my song ‘Bangerang’ from a French movie producer,” says Moore, who approved the usage in the time it takes to download a song. “It shows the money offered and I just okayed it right there. It’s happening in real time. You used to get this ugly PDF and it took months to okay.”
Kobalt, founded in 2001 is the music industry’s back office. Its publishing arm collects royalties — sometimes in micro-payments of less than a fraction of a penny — for 8,000 artists around the world, generating revenues from 600,000 songs and collecting in 100 territories. Its clients include Kelly Clarkson, Grimes, Nick Cave, Gwen Stefani and songwriter/producer Dr Luke. It does the same for other music publishers — those holding copyrights to music and lyrics. Today, the company is the top independent music publisher in the UK and the second overall (to Sony/ATV) in the US.
Its spectacular track record and growth, plus Ahdritz’s infectious passion and belief, have attracted the attention of some of the world’s leading VCs. In February, Google Ventures’ London office made Kobalt its first investment, leading a $60 million (£39m) series C round. “We like investing in companies that transform traditional industries for the better,” says Google Ventures president and founder Bill Maris. “Nest, Uber and Foundation Medicine are good examples of other companies we have invested in that are similarly disruptive in that they are tackling problems or inefficiencies which are not otherwise addressed. Kobalt and Willard are changing the way artists are treated in the music business, particularly when it comes to providing trust and transparency and compensating creators for their work.”
Since launching the company, Ahdritz has been Viking-like in his assault on the big music labels, publishers and collection societies whose job — after each taking its cut, of course — is to gather and distribute royalties. He cheerfully tells songwriters how these entities have been ripping them off for decades. “The music industry is historically opaque. And it still is. There is a lot of fear among artists that they’re not getting paid. I tell them, ‘You are right. You’re getting screwed.'”
Here’s why: songwriters signed to big music publishers often wait up to two years to get their money after it’s been collected. They end up paying out half their gross royalties to the middle men – collection societies. And if they ask to see the books, they’re handed computer printouts that list a bulk number and little else. It’s not the kind of thing that can easily be understood — or even audited. “They are told, ‘Don’t worry about it,'” says Ahdritz. “‘You keep making music. We’ll handle this.'”
Ahdritz says all this is not because the labels and publishers are devious — it’s because they are inept. Since its heyday in the early 2000s, when the music industry enjoyed $45 billion in sales, profits have plunged to a third of that. Initially, Napster took its huge, pirate bite. Then iTunes cannibalised the CD by selling individual tracks. Now, who needs to buy anything when it’s free on Spotify?
A generation of artists like Moore embrace the streaming model and, oddly, even the sharing of pirated downloads. “My philosophy is get the music out to as many people as possible,” Moore says. “I spend a big part of my career onstage. That’s why I make records, to get people to shows, because I DJ. When people hear me, they want to be there.”
In November 2014, Taylor Swift lashed out at the streaming model. She yanked her entire catalogue, including her newly released album 1989, from Spotify because of the platform’s razor-thin payments. (It pays about £0.005 per stream.) “I’m not willing to contribute my life’s work to an experiment,” Swift said.
A few days later, Ahdritz put out a press release saying Kobalt’s Spotify revenue in Europe had overtaken income from iTunes downloads. Spotify’s royalty payments to artists had outpaced the digital download service by 13 per cent in the first quarter last year — suggesting there’s real money in streaming.
“Of course there’s money in streaming,” says Mark Beaven, founder and CEO of Advanced Alternative Media. His clients include Dr Luke and songwriter Noel Zancanella, who co-produced Swift’s 1989 song “Welcome to New York”. “The problem, is we don’t have an economy with transparency.”
The way Ahdritz sees it, the music industry needs an entirely new structure, not merely to survive, but also to thrive. “The industry is suffering a slow death and in order to live it must change,” he says. Kobalt’s technology and logic are airtight, and he has nothing less than world domination in his sights. “If you are going to track those billions of transactions on a global scale, with efficiency, you need new pipes,” he says. “And right now, the pipes are broken.”
Ahdritz’s mission, since way before he started his company, way before iTunes and streaming, and way before YouTube, has been to fix these broken pipes. It started back in the 80s, when he helped midwife a very Swedish phenomenon: a dance-pop music craze that ended up conquering Europe.
In 1987, he launched Telegram Records, a Stockholm-based music label. His background as an accomplished jazz saxophonist and his previous work as a coder for the Swedish army made him a good fit for signing creative types and navigating the music industry’s back rooms. By the early 90s, his discoveries — including Rob’n’Raz feat. Leila K (“Got To Get”) — were helping to propel the Swedish pop/dance movement. But the good times didn’t trickle down to the artists. Or, rather, the proceeds were merely a trickle. “You waited two or three years for your money,” Ahdritz says. “And you could not understand the financial statements they sent. You were screwed.” Eventually Clive Davis, founder of Arista, signed every one of Ahdritz’s bands and took their music global.
Fed up, Ahdritz quit the business in 1993 and sold his label to Warner Music Sweden. He swapped Scandinavia and the music industry for graduate school, at New York University’s Stern School of Business. After earning an MBA, he worked for seven years at LEK Consulting, a mergers and acquisitions giant. But it was while working on its British Airways account, drawing up the business plan for its low-cost carrier Go, that his own mental turntable began to spin again.
“I saw how BA used tiered pricing, selling different seats for different prices, using an enormous database, and I said ‘A-ha’,: says Ahdritz. “We should do this with music.'”
This was at the height of Napster’s peer-to-peer filesharing popularity, and although Napster did not charge for its service, Ahdritz could see a day when it, or something similar to it, would. But rather than launch his own version, Ahdritz went after the back office space. He wanted to fix the industry problems he had seen at Telegram to prevent artists having to wait years to get their money, and to let them know who was paying what.
Let’s start with a global hit — Taylor Swift’s “Shake It Off”: Swift and her co-writer on the track, Max Martin, make most of their money not when she performs the song, but through publishing royalties. A major source of publishing revenues is mechanicals: CD sales, iTunes downloads or streaming (Spotify payments vary depending on whether a song is streamed on its paid version or its ad-funded free service).
Now take into account the outfits that collect these fees, and take their cuts, both domestically and internationally. Collection societies — such as PRS for Music in the UK and BMI and Ascap in the US — collect licensing fees for songwriters, composers and music publishers whenever their material is publicly performed or broadcast. That means on TV, radio, in pubs (there are 60,000 alone in the UK, each paying a monthly licensing fee), on podcasts, ringtones, and most recently on music and video players including Vevo, YouTube and Spotify. After deducting their operating costs, they distribute the remaining money as royalties to the big publishing houses and the record companies, such as Universal, that have publishing arms.
Back to “Shake It Off”. That song was heavily rotated on radio and in pubs. It’s been covered in YouTube fan videos and parodies and played over the PA at Wembley Stadium. It’s carried by more than 200 digital service providers around the globe and has been streamed on Vevo 568 million times. Vevo’s streams then appear as a single revenue line in the collection society’s accounting report. There are more 700,000 distinct revenue sources today. Vevo’s total comprises just one single line.
When Kobalt collects royalties for an artist, it tracks thousands of data points. For a single global hit that pulled in £4.8 million in sales last year (Kobalt’s confidentiality agreements prevent us naming the song), it uses up to 60 pieces of metadata — crucial identifiers to make sure the right people get paid. These include industry codes for the song’s five writers, five publishers, nine lead musicians and session musicians, 11 officially recorded versions of the song and eight official remixes. Royalties flowed in from 100 territories worldwide.
Spotify streamed it 170 million times to 3.2 million listeners before it was pulled. Kobalt collected micro-payments on each of these uses directly from these platforms, putting it up on its portal line by line in real-time. With the traditional model, the collection societies and territorial publishers gather these royalties and then pay it to the labels or artists’ publishers. When they in turn pass on the artist’s share, the digital heap may only appear as a single revenue line. It’s not that the labels or publishers are acting dishonestly; it’s that they don’t possess the tools to track it and break the usage down. Money can fall through the gaps. “What would you do if you had a company putting money in the bank for you and then the bank won’t tell you have much you have, or the names of the people who deposited it?” Mark Beaven says. “They only give you a bunch of accounting codes and say, ‘Don’t worry about it.'”
Transparency is something that the music industry has tried to dodge throughout the digital upheaval. It wasn’t until September 3, 2010 — when Eminem forced a US federal court to deal with it — that the big labels and their artists gained some clarity. That day an appeals court decision launched dozens of artist-versus-label lawsuits seeking fairness. Eminem’s production team, Mark and Jeff Bass, had sued Universal Music Group for failing to pay appropriate royalties on digital downloads of his songs. The appeals court ruled that digital downloads, on sites like iTunes, counted as licences of songs, which carry higher royalty payments than sales. Eminem’s contract supplied him with 50 per cent for licence royalties versus 12 per cent for sales. Universal Music Group settled with the producers for an undisclosed sum. (One of the producers has estimated the rights to be worth up to £13.3 million, but has said they could increase over the next ten years to as much as £33.3 million.)
“Historically, when you have a royalty problem with labels, you negotiate and settle,” says Ahdritz. “Very few people can write that cheque to cover legal expenses. But our platform is directly integrated to the data. There are no secrets.”