Since the music industry began in the early 20th century, musicians and songwriters have complained about paltry royalty payments for their creations.
It’s not only the amount of money they complain about. It’s waiting for their money, sometimes for years. And it’s the music industry’s opaque and arcane reporting practices that leave artists with no clear idea whether they’re getting everything they are owed.
Now, Google Ventures, the search giant’s venture capital firm, and Michael Dell, the founder of the namesake computer company, are investing $60 million in Kobalt — a New York company whose sophisticated computer system scours payment systems around the world to make sure royalty money ends up where it belongs.
“I am super excited about this investment,” Google Ventures Managing Partner Bill Maris told The Times. “This is a real company with a real engine behind it.”
According to Maris, Kobalt’s revenues are growing at an annual rate of 40%.
The privately held Kobalt claims that it is collecting royalties two to three years faster with a 30% higher cash return on average than traditional collection methods for its roster of artists, which includes Beck, Foo Fighters, Kelly Clarkson, Paul McCartney, Thom Yorke, Trent Reznor and Pitbull.
Unlike traditional music publishing companies, which share copyright ownership with artists, Kobalt operates on a service model: Artists pay Kobalt a flat rate to collect royalties and report, via computer and smartphone, where their music is selling and how much they’re owed. That means more money in the artists’ and songwriters’ pockets.
“The music industry has not been so concerned about back-end systems and paying people,” said Kobalt founder and CEO Willard Ahdritz.
Originally from Sweden, Ahdritz founded Kobalt in 2000. An electrical engineer with an MBA and a saxophone player, he had founded a record label and music publisher called Telegram, where he concluded the music industry needed a new model and a new infrastructure “to handle the billions of transactions happening in the online world.”
He founded Kobalt as a fee-for-service operation, leaving artists and songwriters with full ownership of their works — rare in the music industry, according to Mark Mulligan, music industry analyst at Midia Research.
Because of that unique structure, “they have much less competitive pressure than you might think.”
Kobalt also offers “label services,” where independent artists pay Kobalt to help them make and distribute recordings as an alternative to signing more-constraining and long-term contracts with the major music labels. Label services have become so popular that even the big music companies are experimenting with it, Mulligan said.
As compact discs and MP3 sales fade and streaming music becomes the standard method of music distribution, royalty rights will become easier for computers to directly track.
Although performers and songwriters such as Taylor Swift and Jimmy Buffet complain loudly about the tiny payments they receive from Spotify and other streaming services, the main problem isn’t streaming but the payment system itself, Ahdritz said.
“The pipes are broken.… There’s actually a lot of money there,” he said. While payments in the traditional system often go through one or more intermediaries, Kobalt connects those who owe royalties directly to the artists.
Google Ventures’ Maris said artists sometimes wait for years for royalty payments while music publishers make use of the money.
“In what other industry is anyone OK with waiting a year to get paid?” he said.
The new cash comes on top of an earlier $66-million investment. The infusion will be used to scale up computer systems and finance a big global push, with an early emphasis on Mexico, Argentina, Brazil and Southeast Asia.
“I honestly think we’re going to see strong growth in the music industry when we open up those pipes,” Ahdritz said.
Not so fast, said analyst Mulligan. Kobalt is doing a “fantastic job” drumming up royalty payments for its artists without demanding partial ownership of their works.
But using computers to track royalties worldwide won’t be easy: Business interests, country-by-country government regulations and a web of organizations that act as intermediaries all get in the way of data access and transparency.
Kobalt “is working within the constraints of an incredible, arcane system,” Mulligan said. He doubts the system will be fundamentally altered anytime soon.