Thursday, February 25, 2010

Epicenter The Business of Tech Bankrupt, Crowd-Funded SellaBand Acquired by German Investors

SellaBand, the bankrupt crowd-funded online record label, announced late Wednesday afternoon that it has found buyers and a new CEO in Munich, Germany. The announcement says the site, which tried to reinvent the traditional model by raising tens of thousands of dollars from fans to fund the creation of albums, will go back online tomorrow.

This acquisition comes after SellaBand weathered some heavy storms: the revelation last Thursday that its prize catch — the rap group Public Enemy — was losing investors, asking its creditors for a provisional suspension of payments on Friday, and then filing for bankruptcy in the Court of Amsterdam on Monday.

Since August 2006, 43 bands got full funding for an album, which typically meant gathering $50,000 from investors, who received a copy of the album for a minimum investment or share in sales revenue for higher investments.

But even though the company kept one third of revenue from the sale of released albums, plus interest from the escrow accounts before albums were made, it lost money.

“The problem is that the business model is not bringing profits,” said SellaBand founder Pim Betist. He left the Amsterdam-based company he conceived in 2001 as a Friendster-style approach to funding music, about a year and a half ago. “That’s why they’re suffering, and that’s why they went bankrupt, and now they need to let go of the concept.”

Or, as Dutch Twitter user Luwte put it, “Sellaband failliet,” which translates strictly as “SellaBand bankrupt” or loosely as “SellaBand: FAIL.”

Wednesday afternoon, CEO Johan Vosmeier announced in a statement on the site that he has stepped down and that Munich-based entrepreneur Michael Bogatzki is taking over. Bogatzki’s LinkedIn page says he’s “looking for fresh and new-media ideas/start-ups.” Another online profile says he has done marketing work for Sony BMG and markets an adult lubricant.
The real lesson here: While the crowd has great powers, not everyone in that crowd should be trusted with a guitar.

The new CEO says he “will continue to advance this fantastic platform while acting in the spirit of the SellaBand community and its founders.” (We asked him whether he bought all the company’s assets, and hope to report more on who owns the company now soon.)

Vosmeier, a former Sony/BMG executive himself, said the above statement represents the full extent of what he has to say on the topic, for now anyway.

“I have spoken at length with the people who have bought and am totally convinced that they are just as committed as we always were to build a solid future for SellaBand. What is extremely important to me is that the new company, called SellaBand GmbH and to be operated out of Munich in Germany, will respect our commitments towards Believers and also to those artists who are currently recording their SellaBand album, and/or are about to release their music,” wrote Vosmeijer. “There is no doubt in my mind that ‘crowdfunding’, as they call it, is a blessing for artists in the 21st century and that this concept has the potential to cure what’s been ailing the traditional music industry for so long.”

Founder Betist agrees with Vosmeijer and Bogatzi that all is not lost for the idea of crowd-financed music. He blamed the company’s bankruptcy on a combination of old-school record industry ways and new-school misplaced optimism. For instance, listing any band that applies might work for iTunes, but for any other music concern, curation is key. Betist said he expects the new owners to keep Sellaband running in its current state for the next few months, then make some tweaks.

The site’s investors understandably wondered whether their money is safe, which it was, according to Betist. That’s because before a band hits its financing goal, whatever money it manages to raise is kept in an escrow account to be returned if the album never gets made. Before that, Billboard reported another bad sign: that the site’s most popular group — Public Enemy — failed to reach the $250,000 it sought through the site to record an album and was losing investors, although it did raise over $70,000 at one point.

This note currently appears on the Sellaband website. Insiders expect an acquisition to be announced this week.

The note announcing the bankruptcy appeared on the Sellaband website, which was otherwise offline.

Sellaband’s crowdsourced music-financing experiment seemed promising, and in its three-plus years, it attracted thousands of artists (cached version) and financed dozens of CD and download releases, so it wasn’t a total failure. Still, there’s no glossing over the simple fact that a lack of profitability drove the site into the ground, where it had to be picked up by these new investors under yet-to-be-announced terms.

What went wrong?

Reliance on CDs. Although it was a social media site, one of Sellaband’s chief goals was to release compact discs, so they had to raise $50,000 or so from the crowd before releasing a record.

Expensive production. Investors had to come up with funding ranging from $30,000 to $250,000 because Sellaband aimed to make albums the major label way, hiring expensive producers rather than producing on the cheap, as most acts do these days.

Reliance on Albums. Instead of selecting a few key tracks for maximum impact, Sellaband used the traditional method of grouping songs into albums. The problem: Even if they have the talent, not every band has the stamina or depth to come up with 12 great, original tracks with wide or niche appeal.

Lack of specialization. Unless a site aspires to be the next iTunes, it helps to specialize in certain scenes, as music bloggers have discovered. Sellaband didn’t have every band on iTunes, but it did have bands of every style. Smaller record labels don’t generally work that way, and according to Betist, crowd-financed ones shouldn’t either.

Not enough promotion. It’s one thing to finance the production of an album, and quite another to sell enough CDs and downloads to turn a profit. Music promotion is a tricky business these days, but SellaBand spent too much money on hiring well-known producers, and not enough on promoting the results. Most of the bands apparently weren’t up to the task, either. In order for a band stand a chance, it needs luck and smart promotion, as well as plain quality. However, no online street team can overcome a lack of quality and appeal.

“Who let you in?” Too often, the idea of quality gets glossed over in discussions of the business side of music. Nobody wants to listen to music if it’s no good (key exceptions notwithstanding), regardless of how it’s distributed or financed. Admitting every band may have swelled the numbers of Sellaband artists into the thousands, but almost all of them failed to attract the requisite investment because potential believers didn’t find enough to believe in, after their first three clicks.

Betist embraced a more exclusive approach in his new venture, Africa Unsigned, which aims to solve the problems that affected Sellaband by releasing music from a specific niche genre. A panel of experts, including Damon Alburn from Blur, Senegalese singer and guitarist Baba Mal, and Fela Kuti drummer Tony Allen will help choose what’s released in a specific genre.

“I believe in that filter — and I didn’t [before], that’s one thing I didn’t know when I started Sellaband,” said Betist. “I learned along the way that the filter is necessary, because people want to be entertained.”

The real lesson here: While the crowd has great powers, and is as capable of collaborating to fund music as it is of solving other complex problems, not everyone in that crowd should be trusted with a guitar.

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