At EMusic in 1999, we often felt like our future was in the hands of the major record labels, who steadfastly refused to license their catalogs without draconian DRM and unaffordable licensing fees.

Ten years later, it’s difficult to see Pandora in a similar situation, threatening to shut-down due to exorbitant royalty fees that are costing them $17m of their $25m in annual revenues:

“We’re approaching a pull-the-plug kind of decision,” said Tim Westergren, who founded Pandora. “This is like a last stand for webcasting.” (from the Washington Post)

It’s painful, because Pandora has built the best Walkman we’ve ever seen and delighted consumers worldwide.

One lesson I learned at EMusic is to be wary clear of investments (time and money) in companies and industries where it will be difficult or impossible for them to control their own destiny, unless their is a clear and overwhelming compelling plan of attack. This includes industries that are heavily regulated and the industries where their are large players with strategic control points.

In music, the major labels have the strategic control of content, and many music ventures (like Pandora) are put in the position of asking for permission to exist. A friend of mine who does digital deals for a major label – striking licensing deals and investments with startups – recently called me for advice on his next career move. When I suggested that he leverage his expertise and contacts into a business development job for a digital music start-up, he recoiled:

“The last job I want is one where I’m sitting across the table from the guy that fills my seat, begging for a deal we can’t afford.”

Wireless is a good example, because of their fierce control and anti-competitive behavior of carriers like Verizon, AT&T, etc. See my previous post on open networks. You can get a good sense of how innovation can be stifled in these markets from from Jason Devitt. It’s these experiences that prompted Jason to develop a go-to-market model for SkyDeck that doesn’t put his destiny in the hands of the carriers.

In general, a good rule of thumb is to evaluate the importance of your general counsel and public policy lead in your business plan. If you are even thinking about bringing on board someone to lobby in Washington, it’s a good sign that you’re in trouble. At EMusic, we had the best of the best, but the fact that the legal and lobbying team was as important as the business or technology team was a sign of trouble.

Marc Andreessen of Netscape, LoudCloud and Ning writes a bit about this in his guide to start-ups, offering eight rules on doing deals with big companies:

First, don’t do startups that require deals with big companies to make them successful. The risk of never getting those deals is way too high, no matter how hard you are willing to work at it. And even if you get the deals, they probably won’t work out the way you hoped.

To be clear, I’m not saying a start-up can’t succeed in these industries or if they require big deals – only that it’s harder in general and harder to be entrepreneur in this environment. Time is shorter than money, and best spent in directions where a start-up has more control of it’s destiny. Granted, total control is an illusion, but if you’re beat in the 100m dash, you want to beat by a competitor like Usain Bolt on a level playing field, not by the judges, regulating bodies, etc.

Bottom line: Go for green fields, and spend time and money on start-ups that have reasonable control their destiny.

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