Robb McDaniels of INgrooves dishes on the state of digital music

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What do Thievery Corporation, Universal Music Group and Dolly Parton have in common? They all use INgrooves to distribute their music to more than 600 digital stores worldwide, including iTunes, Amazon.com, eMusic, 7Digital, Verizon Wireless and countless others.

San Francisco-based INgrooves has been in business for 10 years, but few people have heard of it or its chief executive, Robb McDaniels. That’s beginning to change, in part because the company earlier this year purchased Fontana, a Los Angeles distributor of physical albums for more than 200 independent labels.

INgrooves is turning the most heads, however, for its role in the new digital economy. Last year, INgrooves distributed songs that rang up roughly $1 billion in digital revenue. And while it’s true that distribution isn’t the kingmaker it once was, as only a handful of labels have the resources to ship albums to thousands of physical stores, it’s an interesting perch from which to witness the digital tidal wave that has permanently transformed the music industry’s retail landscape.

As a sign of how much things have changed, McDaniels, 37, is scheduled to deliver the keynote address on Wednesday at the annual Music Biz conference of the National Assn. of Recording Merchandisers, the 54-year-old group once dominated by the likes of Tower Records, HMV and Virgin Megastore.

We spoke with McDaniels, a former financial analyst for Marsh & McLennan Securities, about the next wave of technology to hit the mainstream music industry in the solar plexus -- on-demand streaming services such as Spotify, Rhapsody, MOG, Rdio, Slacker, Muve and others.

Now instead of getting pennies per download, artists are having to wrap their heads around building their careers on fractions of pennies per play. Here’s an edited version of the interview.

There’s a lot of debate about whether streaming music is actually a good or bad deal for artists. Which is it?

RM: It’s a complex question with many different answers depending on a number of variables, including the type of artist, genre of music, specific fan demographic and generally appetite for new technologies and formats. When chaos reigns supreme, everyone looks for a single answer that is globally applicable and it just isn’t possible with the streaming debate!

Fair enough. Give us an example of an instance where it might not make sense for the artist to debut albums day-and-date with streaming, and one where it does make sense.

RM: With an artist that’s starting out, making music available on Spotify or other streaming services is a no-brainer. But if an artist has a lot of fans, the calculus becomes more nuanced. Then you have to balance the long-term annuity of the streaming services with the immediate payout of traditional retailers, both online and physical.

Also, with chart positions still being so important in the industry, at times it may help push an artist into that No. 1 spot by strategically leveraging retailers that are measured by Soundscan in the first weeks of a release and shift to streaming services after that. Although this is being resolved [now that the Billboard Hot 100 list incorporates on-demand plays to measure hotness].

The labels are strong supporters of streaming music now. This runs counter to the popular notion that labels care only about protecting CD sales. What gives?

RM: I think that streaming represents a format change -- the first since Napster made the download ubiquitous -- and the labels have taken a lot of heat for not initially embracing the digital download and legally licensing [the first version of] Napster. They don’t want to make the same mistake twice. Streaming services like Spotify, Rdio and MOG are also fantastic alternatives to P2P file sharing. So the labels would like to support this legal substitute.

Do you think people are buying fewer songs because they can get unlimited, free access to them from these subscription services?

RM: If the streaming services are able to convert illegal P2P users who aren’t currently paying anything at all, then those consumers will actually be paying more. For those that were downloading in the past but are now streaming, the hope is that their engagement with music actually goes up and they end up spending more money listening, sharing and purchasing other things of value offered by the artist, like tickets and merch.

Paul Resnikoff, publisher of Digital Music News, recently urged artists not to put the Spotify Play Button on their Facebook page. Do you think his reasoning is sound?

RM: I think we, as an industry, should focus more of our time and effort on creating new ways to enhance the value of the artist-consumer experience instead of just saying “don’t do this or that.” If an artist wants to put the Spotify Play Button on their Facebook without offering any other value proposition, then that is their prerogative. I think that any means of engaging the consumer, including streaming music play buttons, can be a positive thing for artists if used correctly and augmented with other “stuff.” Let’s get creative people!

Ian Rogers, who will be interviewing you for your keynote at Music Biz, a year ago gave a presentation at the New Music Seminar arguing that the 99-cent download is dead, that artists should focus on other revenue streams. Do you agree?

RM: But the CD hasn’t died yet! And Vinyl has come back to life! Maybe none of it is dead or alive -- maybe it is all just “evolving.”

What WILL consumers pay for when it comes to music?

RM: They’ll pay what it’s worth. Music plus experience equals value.

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-- Alex Pham