INgrooves: Proof You Can Make Money On Music, Even If You’re Not Apple
It’s nearly noon at the Hotel San José, and music executives are still stumbling through the courtyard, casualties of the previous night’s festivities. The entire industry has descended upon Austin, Tex. for a 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 rather than pay for his own room. Morris shakes his head. “I’ve got a house down here if you ever need a place to stay.”
“You’ve got a boat 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 also handles distribution for Universal Music Group, the world’s largest record company.
McDaniels was in Austin for a party 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 should help send revenues past $125 million this year, when McDaniels expects to turn a profit. His gross margins: 25%.
His premise is pretty simple. An artist or label sends INgrooves a digital recording; the file is entered 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 different 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 like the Orchard and IODA (which merged under Sony in the wake of INgrooves’ Fontana acquisition), one click of the button grants indie artists access to a system used by the world’s largest record labels. And many 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 kind 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 job at insurer Marsh & McLennan. By age 27 he was in charge of development for the Western region, packaging and selling assets and credit risks to the likes of Enron and Global Crossing. “I would 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 high school and wanted to do something in music. So he typed up a business plan for a new kind 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 touch with a software engineer named David Kent.
“I needed to build an enterprise software platform; I just didn’t know how to do it,” says McDaniels. “So I met David. I told him what I wanted to do. He said a bunch 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 foundations 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 three 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 no time commitment. His client-retention rate approached 99% (and still hovers in that range, though INgrooves deals now come with a set term). “People thought I was nuts,” says McDaniels. “I didn’t know anything about 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 former head of MCA Records (precursor to Universal Music Group). Teller and his associates invested an undisclosed amount. “My reason 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 handle 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 an additional $20 million, leaving roughly 80% of INgrooves in the hands of Shamrock and Universal.
McDaniels’ world turned after Universal reached a tentative agreement to buy 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 tens of millions of dollars this year.
When is McDaniels’ big payday? Not for a while. All those rounds of fundraising have left him with a mere sliver of INgrooves. No matter. “Ten years from now, when 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 without 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 at the company’s Cupertino, Calif. headquarters. After the visit Conte and Dawn developed a direct relationship with Apple, allowing 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 that you’re going to happen to know 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 that have made it this far on their own. Pomplamoose lacks the infrastructure to make a proper international push; its overseas offerings are sporadic at best. And as the duo’s popularity grows (original, as well as covered, recordings), there’s more and more 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.