First Stage Investor

8tracks, Unable to Generate Enough Revenue, Shuts Down

8tracks, Unable to Generate Enough Revenue, Shuts Down
By Andy Gordon
Date January 2, 2020

8tracks, a music-streaming service that created playlists through crowd curation, has called it quits.

We recommended 8tracks in mid-2016. It was one of the first companies we added to the First Stage Investor portfolio. Unfortunately, it wasn’t able to scale and shut down on December 31.

When 8tracks launched its fundraise on SeedInvest in 2016, it hoped to raise around $11 million. But because of confusion over credit card and debit card usage, it was able to collect only around $2 million.

It just wasn’t enough for the company to continue to innovate, expand services and scale. And that was the beginning of the end.

Scaling was the key. 8tracks needed funding to scale listenership so it could sell advertising that would cover compulsory, and very expensive, royalty rates.

But it wasn’t just a lack of money that prevented 8tracks from scaling. It was also the competition. Namely Spotify, with its ever-improving streaming services. Spotify became more than just a nuisance in December 2013, when it first offered its free streaming services on mobile devices, cannibalizing 8tracks’ audience.

It became harder for 8tracks to attract listeners as Spotify expanded its offerings to include music discovery and mood-based listening. That directly encroached on 8tracks’ unique value proposition of delivering “lean-back listening” – aka radio listening – through a crowd-curated model.

An inability to raise enough money… high royalty payments that punished growth rather than rewarded it… and Spotify’s incursion into mood-based listening and music discovery prevented 8tracks from delivering on its early promise.

A Self-Fulfilling Prophecy

8tracks’ early success allowed it to raise $1.2 million in 2011 and attract investments from the likes of Andreessen Horowitz (a16z), British DJ Pete Tong and Atlantic Records CEO Craig Kallman.

With that funding, its streaming hours grew more than fivefold in 18 months (from 4.1 million streaming hours to 21.9 million streaming hours). 8tracks even achieved monthly profitability. It was this track record of impressive growth and the idea of using the crowd (of music lovers) to curate music that grabbed my attention. When I recommended 8tracks to First Stage Investor members, I called its use of crowd curation a brilliant twist on what other larger music streaming companies do.

And perhaps with enough money, 8tracks could have competed with Spotify. What ultimately doomed 8tracks was its venture capital (VC) investors questioning whether it could become a $1 billion company. A more likely scenario (according to them) was that 8tracks would be acquired by either a larger internet company or a large music streaming company, which would limit their upside. Google did offer to buy out 8tracks early on, mostly to acquire its software talent. But 8tracks founder and CEO David Porter rejected the offer outright.

Without the ability to raise significant new sums and to scale, the concerns of the VC investors became a self-fulfilling prophecy. Porter said the company was shutting down because it couldn’t “generate enough revenue, at [its] current scale, to cover royalties that continue to increase.”

Greater revenue would have required a larger listener base. But 8tracks has been unable to outperform the larger and deeper-pocketed Spotify that, unlike 8tracks, offers a complete music streaming experience, spanning on-demand and lean-back listening.

8tracks has nearly run out of cash. It can’t afford to pay current and past royalties. And it hasn’t been able to find any buyers.

In his December 26 letter, Porter said, “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.”

And so 8tracks’ 159-month run comes to an end. And since no buyers were found that would have provided a small sum to pay off a portion of liabilities, investors won’t be getting any money back.

It’s not how Porter planned it. Nor is it how we envisioned it. Sometimes, the best ideas refuse to be turned into viable businesses. 8tracks was not negligent… it didn’t make any obvious wrong turns… but it perhaps underestimated the difficulty of its attempted disruption. It attracted smart VC money (e.g., a16z). It also attracted smart crowdfunded money (us). But it came up short, as many startups do.

As an early investor, you need to recognize that these things happen. I believe Porter and his team gave it everything they had. We’ve been extremely fortunate that this kind of thing hasn’t happened more frequently to holdings in our portfolio.

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