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.

    I have great faith in Spotify. After just eight months of existence in Sweden, they already have 35 percent of the digital market. 1,2 million (out of 9 million) Swedes use the service! And that’s despite being invite only.

    It’s also important to remember that Spotify pays better than commercial radio to an artist for similar exposure. Again the problem here is that artists don’t understand that streaming should be compared to radio, not physical sales. 100.000 streams equals one song played once for 100.000 listeners on regular radio. And how much does an artist get for one such play? Not much.

    I strongly support the move away from pay per stream. Why? Because that business model has proven to be extremely limiting in terms of long term success.

    Streaming services can’t grow because of it and thus they can never fully be an alternative to piracy. Surely you can see the difference between a Spotify with 10-15 million users and 100 million users. But with the current “fear” the latter won’t happen.

    This is a good post. I don’t know what to say, but I want to leave a comment to let you know that I’m reading your writings.

    Thank you for the post, Eric.

    Cheers,

    Like music, all media products (books, magazines, films, art, photography, TV, etc.) that can be digitized and delivered over the internet have suffered huge revenue loss from the “information wants to be free” mentality. Originally computers were developed as office machines, and tools for science and math applications. Today we all know that the main use of computers by “consumers” is for use as media machines and for social networking, not business/office aps. Ask a college kid what the dominant use of their computer is. Writing papers and doing research? I don’t think so. Would most people be interested in a computer or mobile device if there were no access to the internet? Probably not.

    Aside from social networking (communicating), it is “free content” that drives internet traffic. There is only ONE revenue stream created by the internet that is certain, and that is the fee paid to internet service providers for acess. If free media content was NOT available online, Who would financially suffer the most? The ISP industry. Why can’t there be a model based more on cable/satelite TV? You pay for a TV hookup, but all content is licensed and paid for. Somehow this model makes enough money to be good for everyone in the TV food chain. Everyone who creates content is conpensated. It’s the law.

    What expenses justify the fees that ISP providers charge? Does anyone know what their profit margin is? Is it modest or immorally huge? I’m sure that mandatory blanket licensing is the only method that will work in the future of digital media, but I don’t want to see consumers get stuck with the burden of cost, while those industries whose profits are made on internet traffic don’t have to pay a fair share for their continued survival.

    wonderfully insightful. thank you for letting us know what’s going on in the industry. hope to hear more about this topic!
    your friend,
    tony

    Great article. I think long term, maybe very long term streaming will win the day. When we are all connected all the time to very high bandwidth (including all our media players such as ipod home system car ) so its all instant, then streaming will rock. How it is paid for is another question. Maybe we will trade positive thinking. Hmmmm thats a thought, excuse me while I bring down capitalism
    Ade

    Nice article. I did offer free music licensing on the website to attract consumers and hoping to depend performance royalties for commercial song application. Music nowadays is becoming very competitive, in fact very hard (but not impossible) to an indie music publisher.

    I do have songs on other sites that are streamed, and has some songs on you tube, used by other sites without authorization. It is hard, if no other income streams comes in to the publishers wallet.I am still observing and learning on this aspect a lot.

    With as many publishing outlets as the internet provides I think that even IF we have to take a cut from stream ‘plays’ (contrary to Joe’s very valid point about thinking of Spotify as radio rather than physical sales); I think sync deals in advertising will increase…maybe picking up some of the slack P2P invoked. So says the optimist…

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