How a Swedish saxophonist built Kobalt, the world’s next music unicorn

The Kobalt EC-1, Part I: Founding Story and Overview

You may not have heard of Kobalt before, but you probably engage with the music it oversees every day, if not almost every hour. Combining a technology platform to better track ownership rights and royalties of songs with a new approach to representing musicians in their careers, Kobalt has risen from the ashes of the 2000 dot-com bubble to become a major player in the streaming music era. It is the leading alternative to incumbent music publishers (who represent songwriters) and is building a new model record label for the growing “middle class’ of musicians around the world who are stars within niche audiences.

Having predicted music’s digital upheaval early, Kobalt has taken off as streaming music has gone mainstream across the US, Europe, and East Asia. In the final quarter of last year, it represented the artists behind 38 of the top 100 songs on U.S. radio.

Along the way, it has secured more than $200 million in venture funding from investors like GV, Balderton, and Michael Dell, and its valuation was last pegged at $800 million. It confirmed in April that it is raising another $100 million to boot. Kobalt Music Group now employs over 700 people in 14 offices, and GV partner Avid Larizadeh Duggan even left her firm to become Kobalt’s COO.

How did a Swedish saxophonist from the 1980s transform into a leading entrepreneur in music’s digital transformation? Why are top technology VCs pouring money into a company that represents a roster of musicians? And how has the rise of music streaming created an opening for Kobalt to architect a new approach to the way the industry works?

Gaining an understanding of Kobalt and its future prospects is a vehicle for understanding the massive change underway across the global music industry right now and the opportunities that is and isn’t creating for entrepreneurs.

This article is Part 1 of the Kobalt EC-1, focused on the company’s origin story and growth. Part 2 will look at the company’s journey to create a new model for representing songwriters and tracking their ownership interests through the complex world of music royalties. Part 3 will look at Kobalt’s thesis about the rise of a massive new middle class of popular musicians and the record label alternative it is scaling to serve them.

Table of Contents

Early lessons on the tough road of entrepreneurship

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Image via Kobalt Music

It’s tough to imagine a worse year to launch a music company than 2000. Willard Ahdritz, a Swede living in London, left his corporate consulting job and sold his home for £200,000 to fully commit to his idea of a startup collecting royalties for musicians. In hindsight, his timing was less than impeccable: he launched Kobalt just as Napster and music piracy exploded onto the mainstream and mere months before the dot-com crash would wipe out much of the technology industry.

The situation was dire, and even his main seed investor told him he was doomed once the market crashed. “Eating an egg and ham sandwich…have you heard this saying? The chicken is contributing but the pig is committed,” Ahdritz said when we first spoke this past April (he has an endless supply of sayings). “I believe in that — to lose is not an option.”

Entrepreneurial hardship though is something that Ahdritz had early experience with. Born in Örebro, a city of 100,000 people in the middle of Sweden, Ahdritz spent a lot of time as a kid playing in the woods, while holding dual interests in music and engineering. The intersection of those two converged in the synthesizer revolution of early electronic music, and he was fascinated by bands like Kraftwerk.

The entrepreneurial journey of his father heavily defined Ahdritz’ youth. His father was a master pastry chef, running a bakery in town that also acted as a community hub, attracting bands visiting town. He also traded stocks on the side.

During his youth, Ahdritz witnessed Facit, the world’s leading mechanical calculator manufacturer and the major employer in a southern Sweden region where his family vacationed, go out of business and leave 14,000 unemployed after it failed to adapt to new technology from Japanese competitors. He says his father would often urge him to “remember Facit” and the lesson of staying agile in business.

His father’s own near-bankruptcy experience during his adolescence also taught him about navigating tough times. He recalled to me his father’s insistence on staying loyal to his employees at the expense of the family’s finances by not laying them off.

His father seems to remain a heavy influence on Ahdritz’s entrepreneurial instincts even now — in a group discussion we had, two Kobalt executives noted that they regularly heard Ahdritz mention the advice or experiences of his father.

From band member to music label founder

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Image via Kobalt Music

After earning an undergraduate degree in electrical engineering and serving as a software engineer in the Swedish army, Ahdritz dove into the music industry. A talented saxophonist, his band Andrea Doria signed to a Swedish record label to distribute and market their music.

As was standard then and remains standard today, the label paid them a cash advance against future earnings in exchange for locking them into a multi-album deal in which the label takes ownership of their copyrights and most of their royalty money.

Even though Andrea Doria gained a strong fan following, it didn’t explode onto the music scene right away. When a larger label bought the one they were signed to, the new owners dropped the band and most of the other artists who had been signed. While the label did release them from their contract — often labels stop supporting an artist but don’t free them to work with a new partner — his band soon dissolved.

Holding the pulse of the country’s music scene, Ahdritz then co-founded his own label and publishing outfit in 1986 called Telegram Records and Publishing, representing some of the country’s top songwriters. Running a business only emphasized the pain points he had experienced as a musician though. Just getting paid the money owed to his company and his artists in a timely fashion was a nightmare.

The business of music is byzantine in its complexity. Due to copyright law, there’s a sharp distinction between the act of writing a song and the act of recording it, resulting in parallel infrastructure to support both activities by publishers and labels, respectively.

Add in the differences in law and collections in each country and you get a glacially slow payment cycle, plenty of inaccuracies, and lots of paperwork. Plus, each party takes their cut of the royalties along the way and provides few details on song consumption (which would be helpful for ensuring the accuracy of royalties and for gaining insights into one’s fan base).

While it had reasonable success, Ahdritz didn’t see a path toward turning Telegram into a large company, and he was frustrated by the major labels’ domination over the industry. Their massive bank accounts, global distribution networks, and control over promotional opportunities (including radio play) provided strong advantages that he just couldn’t match.

He called it quits in 1991 and went to business school to transition into a new industry. (His co-founder sold Telegram to Warner Music Sweden two years later.)

Leaving music behind… but not for long

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Images via Getty Images / NataliaDeriabina

After earning a Masters in Finance at the Stockholm School of Economics and NYU Stern, Ahdritz joined the corporate management consultancy L.E.K. in London. From his eight years there, Ahdritz highlights two big projects that laid the groundwork for his return to music: one project was helping British Airways develop a complex database for tracking passengers, flights, and baggage, and one project was helping British Telecom plan for what they expected to be the rise of multi-feature mobile phones.

“I saw the opportunities what mobile phones would give after the BT case and what happened in the music industry with Kazaa and Napster,” Ahdritz told me, “I wanted to be an entrepreneur again.”

The specific idea for a digital collections platform hit him in early 2000 after he joined a startup incubator program. The internet would democratize the distribution of music and provide more transparency on the purchasing and use of music online (which could be tracked in a central database). Democratized distribution would also undermine the stranglehold the major label groups have to control whose music gets released.

By allowing artists to cultivate their own fan followings, Ahdritz envisioned a more inclusive world of music beyond the all-or-nothing model of major labels chasing superstars. He also foresaw a centralized global structure for tracking music consumption and copyrights in a database that would allow him to pay royalties directly to each party without connecting through a country-based system of middlemen.

As Tim Bunting, the general partner at Balderton Capital who has led the firm’s investments in Kobalt, recounted to me, Ahdritz’s pitch to artists was “I’m gonna pay you 18 months earlier and 25% more.”

Out of those thoughts came Kobalt.

So what exactly is Kobalt?

Kobalt represents tens of thousands of musicians as an alternative to the three major label groups that dominate the music industry and the territorial system of country-level organizations paying out royalties.

Think of the music industry in two parts: the end-point of distributing music to consumers and the infrastructure behind the scenes developing that music, getting it distributed, and collecting royalties.

While Spotify and other streaming platforms have revolutionized how music reaches consumers, Kobalt is attacking the infrastructure side of this equation. Three conglomerates — Universal, Sony, and Warner — comprise the “majors” whose record labels and publishing divisions represent nearly all the top talent in developing and marketing their music. They, in turn, rely on a network of collection societies in every country to track, collect, and pay any royalties owed.

Predicting the music industry’s shift to digital distribution, Ahdritz bet on two core theses:

  1. That Kobalt could use software to simplify, increase, and speed up royalty collections, and
  2. That streaming music would give rise to a large middle class of recording artists earning between $25,000 and $1 million annually.

Kobalt is building an operating system for the music industry in the streaming era: a tech platform (called K-Tech) tracking worldwide rights ownership and royalty payments with analytics providing digestible insights. On top of this OS, it offers its own “killer apps” in each core service vertical  — publishing, label services, royalty collections — while letting other companies build their services on top of it too.

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Via Infogram

Hundreds of small publishers and record labels use Kobalt’s platform to track rights ownership and royalties and tap Kobalt services to augment their own (like marketing in foreign countries or foreign royalty collections).

Kobalt’s own alternatives to a traditional publisher and record label, Kobalt Music Publishing and AWAL respectively, are differentiated by their service-based business model: they only take a commission of revenue earned, at a much lower rate than has been standard in the industry. Deal terms vary by artist but Kobalt says its cut of fees are roughly the inverse of what labels and publishers typically take, which is 80-85%. Traditional publishers and labels take ownership of the copyrights themselves.

In Q2 this year, 45 of the top 100 songs on radio in the US were, at least in part, by songwriters that Kobalt Music Publishing represents. It varies as the second and third largest publisher by market share on the Billboard Hot 100 rankings and in the top five for global revenue market share, representing the publishing of icons like Childish Gambino, Lorde, Bob Marley, Marshmello, Max Martin, Paul McCartney, Elvis Presley, and The Weeknd.

The music industry is notorious for sharp elbows and Kobalt hasn’t been exempt from that. Numerous people I interviewed over the past four months recounted trash talk from Kobalt’s competitors. “It was pretty ugly,” as one talent manager said.

Ahdritz isn’t shy about his disdain for the business model and perceived ethics of the majors, to which executives at the majors have made behind-the-scenes threats against the careers of those who support Kobalt and spread rumors like Kobalt is “a Ponzi scheme” that doesn’t work financially. (Naturally, no one I spoke with wanted to discuss this on the record.)

Kobalt has firmly established itself but still has not proven it will be a dominant long-term player. According to Matt Pincus, Founder of SONGS Music Publishing (which Kobalt acquired last year), though, “They’re a Swiss clock. They’re an execution-first company. They have to be because they don’t have a big legacy catalog like the majors do.”

The wind (finally) in Kobalt’s sails: music is booming again

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Image via Kobalt Music

Why is a 19-year-old company raising venture capital like a startup? Kobalt’s first decade wasn’t filled with much growth. Ahdritz saw the opportunity early but also timed his startup early. He specialized in the collection of royalties from digital use of music, but illegal downloads comprised much of consumers’ online activity at the time.

Apple only launched the iTunes Music Store in 2003 and digital disruption sunk the music industry for the next decade. Spotify wasn’t founded until 2006, and it took a few more years for streaming to reach outside of Scandinavia. In the meantime, Ahdritz expanded into publishing (with what are known in the industry as “admin deals,” where a publisher doesn’t take songwriters’ copyrights) and later in 2011 acquired AWAL, which focused on distributing artists’ songs to digital services.

Streaming has only just become the dominant music consumption format (in developed countries) and we’re now starting to see the monetization to support a growing middle class in music.

Bunting of Balderton Capital told me that when he met Ahdritz ahead of the Series A in 2008, “What I was struck by was, despite his humble beginnings, Willard’s size of ambition, which was, from Day One, to completely change the music industry. His determination to do it was very unusual given that he had this period where his progress had inevitably been somewhat limited.”

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Via Infogram, company data, Engadget, Billboard, Music Business Worldwide, FT

Last year, streaming delivered 47% of the recording industry’s global revenue, with paid streaming revenue up 33% from a total of 255 million accounts. That revenue is expected to multiply several times in the next decade due to growing penetration in developed markets and, in particular, in emerging markets.

In a report I’ll talk more about later in this EC-1 series, Goldman Sachs estimated that the global recordings market will jump from $30 billion in 2017 to $80 billion in 2030 while publishing will double to $12 billion.

Streaming, mobile phone penetration, and potentially new audio devices like smart speakers are also driving a substantial increase in the amount of music people consume. According to Nielsen, in 2017, Americans listened to an average of 32.1 hours of music per week. That was up from 26.6 hours in 2016 and 23.5 hours in 2015.

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Image via Kobalt Music

What Kobalt is today

Kobalt Music Publishing and AWAL don’t own copyright assets like traditional publishers and labels do. Whereas those businesses are valued based on a multiple of their copyrights’ annual earnings, Kobalt is reliant on recurring revenue from the revenue-share they have with artists. Given the 95% annual retention rate of Kobalt Music Publishing clients, this is a fairly predictable recurring revenue stream for Kobalt at scale, not unlike a SaaS business.

Kobalt Music Group is divided into five businesses, three of which focus on songwriters (Kobalt Music Publishing, AMRA, and Kobalt Capital) and two of which focus on recording artists (AWAL and Kobalt Neighboring Rights).

Here’s a high-level breakdown of what they do and how they compare to the status quo in the music industry. (I’m skipping nuances of copyright law here that I’ll incorporate later in the series where important.)

When it comes to helping musicians develop and promote their work, Kobalt offers lighter-weight “admin publishing” and “label services” solutions as alternatives to traditional publishing deals and record deals, respectively.

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When it comes to collecting royalties, Kobalt focuses on digital royalties (which constitute most of an artist’s royalties these days) outside the United States.

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Kobalt Music Group is still deeply unprofitable, pouring money into growth — mainly in the form of more staff — including a $150 million spending commitment to scale AWAL. In its last fiscal year (ending June 2019), Kobalt lost $42.7 million on $402 million in revenue (the vast majority of that top-line revenue is paid out to clients). It predicts revenue of over $540 million this year.

Gaining market share does seem critical for it to secure its desired status as the go-to alternative to the traditional label and publishing system and the best royalty collections organization, and the company says it could make itself profitable right away if it prioritized that instead.

Kobalt’s CTO Rian Liebenberg told me that upgrading their tech infrastructure to handle the rapidly increasing volume and complexity of data is a top priority, with the volume of data increasing by 300% each year.

Kobalt’s end game isn’t to finish off the major label groups, whose deep catalogs of old copyrights protect them from disruption anyway. It is, as Bunting said to me, “that they would turn around and say to Kobalt, ‘for the right economic arrangement, we will go on your platform. We will manage songwriters and catalog and we will use you.’ So they would be like our products.”

How I’ll assess Kobalt over the next two posts

Ahdritz is great at selling a David vs. Goliath story of transparent digital newcomer triumphing over the big, analog incumbents. But will Kobalt triumph, and what would that triumph look like exactly?

It’s still small by comparison to the major label groups and their profits are soaring, not shrinking. It also has a wave of startup competitors targeting the same opportunities it sees.

The next two posts in the Kobalt EC-1 will dig deeper into Kobalt’s business and competition, first through the context of its collection of royalties and administration of publishing and then through the context of AWAL and its bet on music’s middle class.


Kobalt EC-1 Table of Contents

Also check out other EC-1s on Extra Crunch.