To everything there is a season – Why we're shutting down

8tracks has had a long run and its day in the sun. We’re sad to announce, however, that the company and its streaming service will wind down with the end of the decade, on December 31st, 2019.

We have mixed feelings as we round out this decade and the life of 8tracks. We served many listeners and DJs well, at important times in their lives, for more than a decade, introducing adventurous listeners to new artists they may never have otherwise discovered, and for that we’re proud. On the other hand, we recognize we’ve disappointed many listeners and DJs, employees, investors and partners. We all wish we’d had the opportunity to continue to innovate in the music sector and serve our community and other stakeholders well, just as we had in our earlier years.

If you’d like to hear the “extended dance remix” of our journey, read on. If you’d rather skip to the TL;DR behind our decision, scroll down to bottom of this post.

 

 

A brief history of 137 months

Twenty years ago this month, inspired by the DJ-led dance music culture of 90s London and Napster’s “hotlist” feature, I completed a business plan for an online playlist sharing community, called Sampled & Sorted. Bootstrapping wasn’t an option in this era, and funding proved challenging after the NASDAQ crashed the following spring. So I decided instead to learn the ropes of a user-generated music streaming model (and startup life in general) at Live365, an internet radio service that predated Pandora. Some 8 years later, informed by my original business plan, lessons from Live365 and the mainstream adoption of social media, 8tracks launched on August 8, 2008 — some 137 months ago.

8tracks’ arrival came at a time of innovation and optimism. Obama would be elected a few months later, Facebook and Twitter were loved and exploding with promise, and the startup scene of NYC (where 8tracks was based) was hitting its stride, with Tumblr leading the way. 8tracks itself innovated in a few areas out of the gate: the playlist was the atomic unit of curation, sharing and consumption; each playlist was represented visually by its mix art, a couple of years before Instagram’s arrival; and DJs could apply freeform tags to describe a playlist by not only by genre or artist but also by activity, mood or other theme, introducing a novel, contextual approach to listening that Songza, Beats, Spotify and others would later emulate.

We hit the ground running, with Peter Kafka‘s thoughtful coverage at launch and Om Malik‘s favorable comparison to Muxtape shortly after it was forced to shut down. A couple of 8tracks mixes blew up on StumbleUpon the following spring, boosting our active users from 30k to 300k in a single month. While we had initially self-funded from my 401(k) and my co-founder Remi‘s savings, we saw enough growth to raise angel funding — allowing us to keep pace with growing royalty and bandwidth costs and pay a few part-time contractors. I moved back to San Francisco, and we found a unique, inexpensive loft space near Dolores Park where I lived and the team and I worked.

As a result of steady growth and an introduction by Alex Ljung to Index Ventures, we raised a $1.2m seed round in August 2011 — exactly 3 years after launch, and enough to begin paying full-time employees for the first time. I was also excited personally, as the round included not only Andreessen Horowitz (a16z) but also English DJ Pete Tong and Chairman/CEO of Atlantic Records Craig Kallman. Armed with our first significant funding, we grew > 5X in 18 months (4.1m streaming hours to 21.9m streaming hours) and reached monthly profitability (under the now-defunct Small Webcaster license) in 18 months. Good times.

But each Up came with its commensurate Down. Our positive operating and financial metrics suggested we should raise a larger A round to double down on growth. However, Index and a16z, the venture firms that had invested in the initial seed round, passed on leading our A round. In fairness, the benchmarks for VC investment at this stage were (and are) high; we were on track to be huge, but it wasn’t clear we were on track for a >$1bn exit, particularly given the competition. To paraphrase one VC: our growth was good and, as a result, it was likely we’d be acquired by a larger internet or music streaming company, capping their upside. While a reasonable thesis, this made it harder to raise funding elsewhere.

The VC’s perspective proved prescient: Google reached out to us later that year (2013) to explore acquisition. We decided not to pursue the opportunity, as Google envisioned an acqui-hire, re-purposing our engineers to make Google Play “more social” and likely shutting down the existing service. We had our sights set on growing 8tracks into a large independent company, and our growth had continued unabated: we now reached nearly 8m MAU who streamed 30m+ hours each month. We had generated over $500,000 in ad revenues in a recent month, and a fund with very deep-pocketed, strategic backing had verbally agreed to lead our A round.

But we faced a set of new challenges in 2014. Perhaps most significant, Spotify’s free offering on mobile, launched in December 2013, began to cannibalize our audience. The investor we’d expected to lead our A round backed out. And our growth in listening and revenues during 2013 meant we no longer qualified as a Small Webcaster; instead of paying royalties calculated as a percentage of revenues — such that royalties grow as revenues grow, as one would expect — we now had to pay high per-play rates as a Large Webcaster, taking us out of profitability. Given our primarily ad-based business model in which revenues can fluctuate significantly from one month to the next, it was hard to predict profitability.

We’d set up a mutually beneficial integration with SoundCloud in 2011 so that our DJs — whose playlists heavily favored music from indie labels and DIY artists over that from major labels by a 2:1 margin — could add music from SoundCloud to a playlist, driving plays and exposure for those artists. In 2015, however, SoundCloud required that we reverse our integration. As early-adopting music consumers had shifted to on-demand streaming from downloads, many 8tracks DJs no longer had the “raw materials” to craft playlists.

The combination of Spotify’s growth in listenership at our expense, mainstream adoption of on-demand streaming in lieu of track downloads (creating an impediment to curation for many of our DJs), a loss of 1/3 of our streaming hours over the 18 months to July 2015, our inability to raise a Series A round, and increasingly challenging unit economics suggested it was, in fact, time to sell. Accordingly, we met with several investment banks and opted to “run a process” with Perella Weinberg to find a good home with a shared vision and greater resources. But despite broad outreach and myriad meetings, we found no credible buyers. I suspect most investors expected we’d shut down, but we loved our product and community and wanted to find some way forward.

Historically, we paid royalties for all streaming to SoundExchange (the entity established to collect and administer royalties under the US compulsory license for webcasting) as we didn’t always know a listener’s location, and to ensure all artists were getting paid through a fair system. However, in early 2016, we were required to cut off streaming to listeners outside the US and Canada. The royalty rates offered under direct licenses in other countries were too expensive vis-a-vis the CPMs achievable through programmatic advertising (e.g. Google AdSense), and we were too small to field regional sales teams. As 40% of our listenership had come from outside the US and Canada, the depth and diversity of our programming — a value proposition that had long set 8tracks apart — took a hit.

But our community also remained undeterred. Shortly after the cutoff, we ran a “testing the waters” campaign to gauge interest in a Regulation A (equity-based) crowdfunding round, newly available under the JOBS Act. As our community creates our programming and has a psychological investment in the 8tracks platform, it stood to reason that passion might be meaningfully consummated in a financial investment. We were amazed to receive over $33m of investment interest. Of course, we recognized there’d be a delta between what people said they’d invest and what they actually would, and we set a cap of $11m on the round.

While we waited for approval of our SEC filing, we ran low on cash. We considered our options and proposed a plan — “maintenance mode” — whereby contributors on our team could voluntarily reduce their pay to conserve cash; in return, if we raised at least $5m, we’d pay the shortfall plus a cash bonus. As always, prior and since, the team’s commitment to our shared vision was humbling. Nearly all took the pay cuts, and we scraped by until the first receipts from crowdfunding came in. Unfortunately, for regulatory reasons, credit cards could not be used to invest; and while SeedInvest, the platform we used to execute the round, was able to accept debit cards initially, our debit card processor decided, several weeks in, that it no longer wished to support crowdfunding initiatives. This processor held up the money invested for a month, and then in an attempt to reverse the debits inadvertently charged debit card investors a second time. While that situation was ultimately resolved, it took a toll, and we raised less than $2m in the round — a good showing for an early crowdfunding round but not enough for our ambitions.

By October that year, as our crowdfunding, listener count, streaming hours and revenues all fell short of expectations, it was clear that we needed to make a significant change to increase revenues and/or decrease expenses — or we’d be on a trajectory to run out of money. We laid off more than half of the team, shifted our focus to a subscription model through introduction of a weekly listening cap, and outlined our plans and rationale on the company blog. While the introduction of audio ads a year later helped us remove the listening cap, and we returned to monthly profitability in April 2018, our audience and revenues have never recovered. As we could only afford to support a small team (and only 4 contractors working one day per week for the last year), we’ve had to prioritize maintaining the service over innovation, and our listenership and revenues have steadily declined.

About a year ago, we decided we’d explore what we called our “Switzerland strategy,” whereby listeners could authenticate on 8tracks with their preferred on-demand music streaming service and then stream 8tracks playlists using that account. We further envisioned 8tracks could become a platform that could connect different services, so one DJ could use her Spotify account to publish a playlist into 8tracks, which could then be streamed by a listener using his Apple Music account. While I still think this idea has legs, we simply didn’t have the resources to properly execute this vision.

In the spring, SoundExchange reached out to push for payment of back royalties. Based on advice of counsel and advisors, we decided to pursue an “ABC” (assignment for the benefit of creditors). With the leadership of a dedicated firm called Armanino, we ran a very thorough M&A process (yet again) to find a buyer. In an ABC, the highest bid is designated the “winner,” assets (but not liabilities) are assigned to a new holding company (old company is shut down), and the winner buys the assets from this holding company, with proceeds administered by (in our case) Armanino to pay creditors ratably based on the liabilities outstanding. This process uncovers our “true” fair market value — based on what, in fact, a company is willing to pay for 8tracks today — maximizing the return to creditors and, if liabilities are repaid, our return to investors. We found a prospective low-ball buyer in the fall but, last Thursday, that buyer decided not to complete its purchase of the company.

 

Why we’re shutting down

To state it simply, we’re shutting down because we can’t generate enough revenue, at our current scale, to cover royalties that continue to increase. One could blame “the music industry” for the travails of 8tracks — the path to the grave has been well trodden by many digital music startups these last 20 years. But the challenges run deeper, and I think it’s instructive to consider the perspective of the artist and label. As technology has advanced, the atomic unit of consumption has shifted, from prepayment for consumption of all the songs in an album (the CD), to prepayment for use of a single song (the download), to pay-as-you-go for an individual song (the stream). With each step, the artist (and anyone who represents that artist, like a label) gets paid less and later; with each step, the listener gains more flexibility in paying for and consuming what they want, when they want it.

While the resulting pressure on margins suggests a shift away from the traditional label structure, toward an artist services model, the fact remains that it’s not easy for most artists to generate meaningful revenues through music streaming — particularly as streaming consumption has spread “down the Tail” to DIY artists, independent labels, back catalog at major labels, and even AI-generated music. More than 40,000 tracks are added to Spotify every day, and myriad forms of digital entertainment and information — the rabbit hole of YouTube, games, apps, blogs, newsletters and more — compete for the attention of the youthful demographics that traditionally consume the most music. It’s unsurprising that royalties remain expensive and will continue to increase.

Given the magnitude of music royalties, the only way to field a enduring streaming music service (if music from the major labels is to be offered) is through money and scale. We’re nearly out of cash and can’t afford to pay current and past royalties, which we expected we’d be able to pay off in whole or in part through the ABC process mentioned above. But the reason we fell behind in royalties is because we steadily lost the scale of listenership necessary to sell advertising with a direct sales team at CPMs that would cover compulsory royalty rates with a solid margin. And the steady decline in our free, ad-supported audience resulted in a smaller base of active listeners that might eventually be converted to 8tracks Plus, our ad-free subscription offering.

We lost listenership, in large part, because Spotify was able to satisfactorily address listener needs for music discovery and activity- and mood-based listening over time, as it improved its offering, reducing the relative appeal of 8tracks’ early lead in delivering on its unique value propositions through a crowd-curated model. (As a sidebar, I’d argue that listener and curator needs for community and social interaction are still underserved.)

Moreover, Spotify offers a complete music streaming experience, spanning on-demand and lean-back (radio) listening. Our bet was that most consumers, most of the time, would opt for highly tailored lean-back programming — because easy and relevant — and could pop out to an on-demand service once in a while when they wished to hear a particular track or artist. And we were right, in part. Executives at on-demand services note that, after a new user’s honeymoon period of building her on-demand library, she generally migrates to listening to her library (aka liked songs) on shuffle or to a lean-back program of music (playlist or station). Nonetheless, easy, on-demand access to any song has proven to be a must-have requirement; it’s what people are accustomed to in the “ownership” model, and periodic on-demand listening makes algorithmic lean-back selections ever better. The upshot is that the average music consumer wants all of his listening needs addressed “under one roof.”

Given 8tracks’ audience size and declining trajectory vis-a-vis Spotify, Apple, Amazon and Google/YouTube, we were unable to raise sufficient funding (or find a good home for the company) to properly invest in product development, both for features that would have capitalized on 8tracks’ unique value proposition in the streaming music ecosystem as well as for features viewed today by most consumers as “must-haves” (such as the aforementioned on-demand licenses that, during our peak years, would have required 10s of millions in investment to fund). Without sufficient funding, we couldn’t hire (or retain) the people needed to drive this product innovation; without product innovation, we’ve fallen further behind competing services, reducing our audience and revenues further in a downward spiral.

We — the remaining team at 8tracks — all think it’s still to hard to find playlists with a “soul behind the music.” User programmed playlists on Spotify and YouTube are great, but they remain relatively hard to navigate to find the best ones for a particular person’s taste, time or place. And there’s not (as yet) an ecosystem to allow curators to flourish. There’s still work to be done.

 

Get your playlists

While we can’t port the 8tracks community to an existing music streaming platform en masse, we can make it easy for you to grab the metadata from playlists you’ve created or liked, so you can re-create these playlists on your second-favorite music streaming service ; )

If you’ve ever published a playlist on 8tracks, you’ll receive an email today or later this week, including the mix name, art, description and tracklist for each. If you registered with 8tracks using your Facebook or Google credentials, please send us an email at support@8tracks.com, including your 8tracks user name, and we’ll email you this information for each of your playlists.

In addition, on 8tracks.com, you can export any 8tracks playlist to Spotify by clicking the “Save playlist to Spotify” button included on top of the mix art. This process isn’t perfect, as some tracks aren’t available on Spotify, and others are available but aren’t matched to Spotify’s catalog. But 80-90% of tracks in a given playlist should match, for most genres. Note that we can’t make any assurance as to how long the website may remain up and running, so please act now if you’d like to migrate your favorite playlists over to Spotify.

 

8tracks, by the numbers

In closing, I thought it might be interesting to reflect on 8tracks, Harper’s Index-style, by the numbers:

• Months since incorporation: 159
• Months since launch: 137
• No. of registered users: 19.6m
• No. of DJs: 750k
• No. of playlists: 3.5m
• No. of tags: 500k
• Monthly active users (Nov 2019): 927k
• Hours streamed per month (Nov 2019): 539k
• Subscription revenue (Oct 2019): $47k
• Advertising revenue (Oct 2019): $6k
• EBITDA (Oct 2019): $18k
• No. of investors in our Seed 1 round: 37
• Funding raised in our Seed 1 round: $1.2m
• No. of investors in our Seed 2 round: 40
• Funding raised in our Seed 2 round: $1.4m
• No. of investors in our Regulation A crowdfunding round: 4,464
• Funding raised in Regulation A crowdfunding round: $1.8m
• No. of investors willing to lead our Series A round: 0
• No. of buyers in 2015 M&A process led by Perella Weinberg: 0
• No. of buyers in 2019 M&A process led by Armanino: 0

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