This week– a dispatch from Amsterdam, where I’m attending the Amsterdam Dance Event (ADE). As a side note– if you’re involved in dance music, I highly recommend this international conference, which is not so much an event as a long series of events– panel discussions, networking, and dozens of parties featuring all of the leading DJs from around the world. It’s very well-run and business-oriented– much more productive than the Miami Winter Music Conference and more manageable than Midem.
As luck would have it, I was on a panel discussion this week, but not one that I expected. Instead of the usual “Issues in Music Publishing”, which is what I am often faced with, this panel was called “The Truth About Flat-Rate Licensing”. Huh? I had no idea what this subject entailed when I took it on. As is probably true of most of the readers of this blog, I’m a “creative” guy. When it comes to understanding how we are receiving royalties from the thousands of different new media outlets, we’d really rather be in the studio, or talking about music and songs. Which is probably a big reason the music industry is in the situation it is today.
Flat-rate licensing, if you didn’t know (I didn’t), is the current buzzword in the industry to describe the myriad of efforts to offer the consumer access to music in a way that is easier, more comprehensive, and less expensive — so much so that it often feels “free” to the customer. Rather than the traditional iTunes model, where songs are purchased one by one, the flat rate aims to give the customer access to a whole catalogue of music, either to own, or to “rent”.
Commerce on the internet being what it is, there are of course hundreds of variations on this theme. Subscription models like Rhapsody and Napster charge a monthly fee in exchange for “all you can eat” access to music.
“Freemium” models like Pandora and the much-talked about Spotify offer free music streaming, and a premium subscription program that grants better sound quality and an ad-free environment for a small monthly charge.
Of course, “free” or almost “free” music is an attractive sales pitch (despite the fact that most music fans have been helping themselves to illegal “free” music for the past several years). The challenge is how to pay the creators of the music, the owners, and still have something left to keep the website in business. This has not worked out so well.
Most of the sites offering music at a flat-rate are generating income from a combination of subscription fees and advertising income on the site. Some, like the Sky and Virgin Music sites will be “bundled” with the internet service provider, so that when a customer opts in for the music service, it will appear simply as one more item on the cable bill. Nokia tried a similar “bundling” idea with their “Comes with Music” program, which added the music cost into the price of a phone and the mobile service.
Now some people are even advocating a surcharge, to be added onto the price of computers, mobile phones and other potential music players. The income from this surcharge would then be pooled and distributed back to the creative community, in exchange for genuinely free music for the consumer. The Green Party in Germany, always somewhat dubious about the value of copyright law anyway, is proposing a government-sponsored cultural “tax” that would compensate creators of content, but allow citizens to access and use as much music as they want at no cost. This is the “music as water” idea that I discussed in a previous blog.
It’s all very exciting, and holds great promise, as new untried ideas usually do. But for the creative community, which includes songwriters, publishers, producers, artists, labels, and musicians, the problem is that none of it seems to actually work. Many thought the subscription model would be the answer– today; AOL, Yahoo, and MTV have already given up on their attempts. Ad-supported models like Spiral Frog and Ruckus have also disappeared, YouTube is losing money, and Imeem is barely holding on. Pandora has yet to make significant profits, but appears to be solid, and Spotify seems to be wildly popular in Europe. However, even Spotify is making less than ten percent of its income from subscriptions– with most consumers opting for the free service instead.
It’s hard to run a business based on giving things away. The problem with all of the flat rate sites is that the combination of subscriptions (which no one seems to want) and advertising (these sites, and the internet in general, are a difficult sell to advertisers) don’t add up to anywhere near what is needed to pay songwriters, publishers, and labels the appropriate royalty for each song streamed.
Not surprisingly, the flat rate businesses have gone to the music industry to ask for special, low rates from the labels, and societies like ASCAP, BMI and SESAC, in order to get these businesses off the ground. By making it less expensive to provide access to music, the argument goes, we’ll all sell much more of it in the end. And if we don’t grant the access, the public will just steal it, like they are now.
It’s a tough call for the music industry, especially after having been so badly burned already by companies like YouTube, who just took the product, then came back to negotiate later. It’s also difficult because at the moment, very few of these ventures are generating any meaningful income for labels and publishers– while the time demands of licensing and negotiating with all of them is quickly becoming overwhelming.
Needless to say, the issue wasn’t settled in one forty minute panel in Amsterdam last week. But here are four quick points we need to keep in mind on this issue:
1. The best approach is slow and cautious. Right now, we are in the jungle. In the jungle, you don’t rush blindly ahead. You dip a toe in the sand, and see if you sink. We have no hope of predicting which of these services might catch on. We need to move slowly, with very short-term agreements and see what works and what fails. And we need to be sure not to undermine our other business partners while we do that. Which leads to…
2. We should support our allies and punish our enemies. Rob McDaniels for InGrooves estimates that it takes 150-200 streams of one song to equal the royalty income on a single download. Right now, our industry still relies on the sale of physical product (believe it or not, it’s still the primary source of revenue) and on digital downloads. Perhaps streaming is the future. Perhaps not. But we would be very unwise to cut ridiculously low-cost rates to a business model that obviously threatens both physical retailers and iTunes. Let’s take care of the people paying our bills. At the same time, we should continue to press ahead with legal efforts against things like Pirate Bay– efforts that are finally starting to show some results.
3. We need to recognize that “bundling” and ad-revenue sharing is a marriage, and it works both ways. If we bundle the cost of music access into the cost of a mobile phone or the sale of a computer, we’re now not only in the music business, we’re in the electronics business. Any economic factors that hurt the sales of phones and computers will now hurt us as well.
4. Most of all, we need transparency in the negotiations and setting of rates, so that everyone in the music community understands what they’re being paid and how it’s being calculated.
In preparing for this panel, I tried desperately to find out what the actual per stream royalty rate is, or what the percentage of ad revenue is for services from YouTube to Spotify.
Nobody knows. It’s certainly not easily accessible on the internet or in industry trades, nor can anyone at the PRO’s manage to explain it. If you’ve checked your royalty statement recently, you won’t find any explanations there, next to the 2 and 3 cent payments from YouTube settlements and the like. As the major labels begin to acquire financial stakes in companies like Spotify and Vevo, it becomes even more important for songwriters and publishers to understand exactly what the terms of the licensing deals are, and how the PROs and others reached that agreement.
If you’re thinking that it sounds like the same old story, with the songwriters and artists once again getting the short end of the deal, I share your pain. Much as we dislike it, we better take some time out of the studio and start learning about this stuff. If I could do it, you can too. “The Truth About Flat-Rate Licensing” is still being determined, and we need to play a part in that.