Tomorrow's Forecast

Jun 22 2011

Today was a strange day in NYC —not quite sunny, but not giving in to rain either. The skies were in constant motion, drifting from lightly overcast to grey and ominous to hazy and hopeful in a constant cycle that never seemed to reach a culmination.

It’s not unlike the music business these days. No doubt there are some dark and weighty issues hanging over us, including the massive restructuring (or lack thereof) of the major music corporations, the budding crisis at the PROs and HFA, and our continuing inability to sell music, except when we essentially give it away at 80% off. Still, the mood among the weasels is noticeably brighter these days, and it’s not only due to the promise of a summer weekend with Lyor in the Hamptons. It’s as if those dark grey clouds have lifted a bit, and have been replaced by clouds of the whiter, puffier sort. Clouds that look a lot like an iCloud.

Negotiating season is over, and for once a new music technology is being brought to consumers with the blessing of the music industry—we’ve not been blindsided, ignored, or misled. Or at least we don’t know it yet. In fact, for the first time in decades, the music industry and the publishing business in particular acquitted themselves quite nicely at the bargaining table, not sticking in the fork to gouge a promising innovation but not settling for table scraps either. Maybe ten years of trouble has taught us something. No one wants to mess up what might be the last great hope for the music business.

Of course, at the moment, it is indeed a matter of hope. On the positive side, a partner like Apple certainly instills some confidence. Since the inception of iTunes, they’ve managed to consistently comprehend the way the modern consumer wants to listen to music, and to provide the best, most stylish, and most iconic technology to meet that need, in a way that music companies, including technology giants like Sony, have not.

At the same time, it remains to be seen how much of that genius stemmed directly from Steve Jobs, and how much will endure now that he is no longer an active presence in the company. I’m sure I’m not the only one to at least ponder why someone who refuses to pay even 99 cents for a legal download will pay $25 a year for a music locker, in which to store the contraband. But like the rest of the publishers, labels, artists and songwriters that have suffered through a decade of downloading and file-sharing, I sure hope they do.

In fact, one of the best aspects of the new licensing agreements between labels, publishers, and Apple is the chance to actually monetize, in retrospect, much of the music that has been pilfered in the past. With iCloud, Apple is charging $25 a year to scan and match a user’s existing music collection for songs not purchased from iTunes against the iTunes library—users will then be able to redownload up to 25,000 tracks to those same devices. With labels and pubs actually getting significant share of that $25 fee, this is a chance to recover at least part of what we missed the first time around. Life does not offer many such second chances.

Even better, the technology of the cloud allows true, verifiable accountings of what is being purchased, using iTunes Match to monitor what each individual consumer is putting into their locker. Unlike radio monitoring at the PROs, which is an error-ridden exercise inevitably weighted toward the mainstream pop playlists and the major publishers who represent the bulk of those writers, or the questionable system of divvying up the pots of gold netted in settlements with YouTube, Napster and the like, the accounting practices of iCloud should allow for a reasonably transparent system. While Apple has yet to lock in deals with the indie record companies and independent publishers, they have said that they will offer independent publishers the same percentage as is received by the major publishers who have signed on. Happily, the deal structure that’s in place would seem to be capable of getting everyone a piece of the pie.

Most importantly, unlike previous deals with companies like YouTube, we might be getting a share of a pie that’s actually large enough to mean something. Under the current agreement, the revenue from iCloud will be split with 30% going to Apple, 58% to record companies, and 12% to the publishers (and songwriters). For publishers and songwriters, that’s a big raise from the .091 cent per unit statutory mechanical rate—and most of us haven’t been seeing full stat rate on a consistent basis for a long, long time.

David Israelite

On the songwriter and publishing side, much of the credit for wrangling a more equitable split of the money goes to David Israelite, the president and CEO of the National Music Publishers Association. Easily the savviest of those trade group lobbyist/media spokesperson/diplomat/enforcers who’ve become the real champions of the music industry while the label presidents and publishing chiefs have been busy moving offices, schmoozing with hedge fund managers, and judging TV talent shows, Israelite was not directly a part of the iCloud negotiations. But according to Greg Sandoval’s insightful article in CNET News, Israelite was key in encouraging the publishing community to put some steel in their all too flexible spines. It’s a little like telling Charlie Brown, the perpetual loser, to man up and kick the ball. But lo and behold, it seems to have worked.

http://news.cnet.com/8301-31001_3-20071823-261/apple-google-music-clouds-can’t-snub-publishers/

Now, we can only hope that the publishing powers that be will also listen to Israelite’s advice about the essential need to streamline the process of licensing. Tech services have been demanding this for years, and every person that labors in the publishing community on a daily basis knows that the system as it currently exists is entirely dysfunctional. It doesn’t work for the new technology services, it doesn’t work for the old ones, it doesn’t work for the publishers themselves, and it certainly doesn’t work for the songwriters. If you want a peek at how bad it is, check out my blog “Life In The Slow Lane”:

http://ericbeall.berkleemusicblogs.com/2010/08/12/life-in-the-slow-lane/

But with the prospect of clouds on the horizon, publishers are going to have to sacrifice a certain level of independence in order to make sure that this new technology can be successful. The ability to access all music all the time without restrictions is a key factor in winning over the public to a format that could be the miracle cure for our business. We simply can’t afford to cling to our old system of clearing songs writer by co-writer, publisher by co-publisher, territory by territory around the world. No one has been a more outspoken advocate for the rights of publishers and writers than Israelite. But even he realizes that now is the moment to seize the initiative.

For the first time in a very long while, music publishers are in the drivers seat, but we have to keep the motor running. As we’ve already seen with YouTube, technology will move ahead with or without us. If people can’t get what they want legally, they will simply find another way. It’s up to us to create a centralized, global, uniform licensing system. If we can provide that, we are in a position to leave behind a mechanical royalty rate that even at its best was wildly weighted in favor of the record labels.

The current deal with Apple is a good one, and any competing service is going to have to match or better it in order to get in the game. Moreover, no one can win this game unless they have access to all our songs—old, new, hits, misses, and obscure album cuts.

All we have to do is go back to making music that matters to an audience, and figure out a quick way to make it available to them. The opportunity is there. As any kid who’s ever stared into the sky could tell us, clouds are what you make of them. If we make the necessary changes in the licensing process, they could bring an end to the longest drought of our lives. But there has to be something to put inside them. The cloud without our music is just that – an empty, substance-less piece of dead air. It’s up to us to make it rain.

Follow me on Twitter @EricBeall

If The Shmoo Fits…

Mar 23 2011

In case you’re lying awake at night dreaming of being the next Rebecca Black (and really, who isn’t?), you might want to read a little further before you equate fame, which is cheap and getting cheaper, and fortune, which is ever more hard to come by. Just last week, the Copyright Royalty Board released the statutory royalty rates for Internet radio royalties, which are royalties paid by webcasters for the streaming of sound recordings. It’s not exactly the pot of gold at the end of the rainbow. At the same time, it’s actually a step forward from where we were several years ago.

To be fair, YouTube is not one of the services covered by these royalty rates (although YouTube’s rates are not much better). The published rates apply to “noninteractive streaming”, which refers to streams that do not allow the listener to specifically select each individual track– it covers everything from radio-like “broadcasts” to what are termed “pureplay’ webcasters like Pandora. And more importantly, these rates are for royalties paid through Sound Exchange to performers on the “sound recording”– that’s in addition to the royalties paid to music publishers and songwriters, through ASCAP, BMI and SESAC. If you are a performer who writes and publishes his or her own music, you should receive royalties from Sound Exchange (representing your earnings as a musician and/or owner of the sound recording) and from ASCAP, BMI or SESAC (who collect your money as the composer and publisher of the song).

Like most agreements that are the result of hundreds of negotiating hours between attorneys, the basis for the rates is almost entirely incomprehensible. There is a distinction between broadcasters (commercial radio stations for example) who are streaming their programming on the Internet and “pureplay” webcasters like Pandora, who do not have a broadcast component to their business. There are exceptions for small services that can’t afford the agreed upon rates as well as noncommercial services. NPR gets its own special deal. Then we get to do the negotiations all over again in 2015. Still, it’s worth at least getting a rough idea of what your music earns for you, as a performer, when it shows up on an Internet stream. To get the full story, check out:

http://www.broadcastlawblog.com/2011/03/articles/internet-radio/final-webcasting-royalty-rates-published-a-comparison-of-how-much-various-services-pay/

Here’s the basic breakdown for 2011:

Broadcasters Per Performance Royalties:
$.0017 per performance

Statutory Webcasting
$.0019 per performance

Pureplay Webcasting
.00102 per performance

I know…. it’s alot of zeroes before you even get to the decimal point. You read correctly: it’s significantly less than one cent per performance. Ouch.

But keep in mind that this number is multiplied by the number of people listening to the stream. Therefore, a “pureplay” service offering 10 songs an hour to 1000 listeners would be paying a royalty of $10.20 per hour– or about a dollar per song. That’s not so bad, especially if you’re talking about a lot more than 1000 listeners.

Indeed, before we start complaining about the rates, it’s worth noting that performers are still fighting (after only about 80 years) to receive any royalties at all for use of their music on commercial radio. While songwriters and publishers receive performance income from the use of the songs in a radio broadcast, record labels and artists receive nothing, except that all important “exposure”. Which leads me to my real point…

Why is it that songwriters, publishers, labels and performers always seem to find themselves begging and pleading for a small crumb from the pie when it comes to every new media invention throughout history?

It happened with radio. In fact, it’s still happening with radio. Since the 1930′s, writers and publishers have been battling for what amounts to a tiny percentage of the overall profits from commercial broadcasting, when virtually every radio format in existence (except news, talk and traffic) is entirely built on music! And performers still haven’t managed to get anything at all.

It happened again in the 1980′s with MTV. Here was a television network built entirely on music, that paid nothing for the music videos upon which the channel relied. Today, the videos are in short supply, but MTV continues to pay almost nothing in synchronization fees for the music that it uses throughout shows like “The Hills”, “Gossip Girls” and “Jersey Shore”.

Then it happened yet again with YouTube in the last decade. In a virtual replay of the MTV story, the creators of YouTube constructed an Internet broadcasting network fundamentally based on the illegal, unlicensed use of any and all music, then sold the enterprise off to Google for a billion dollars, never having paid a nickel to OK Go, Soulja Boy, or any of the other YouTube phenoms who brought the company most of its biggest stories. Since then, Google has adapted a more acceptable position in regards to royalties, and YouTube is licensed by the PROs. However, as any songwriter or artist will tell you, the money being generated for the creative community is more symbolic than substantive.

OK Go

When a problem keeps occurring over and over, it’s usually worth considering whether YOU might be doing something wrong. Sooner or later, the music community– labels, publishers, songwriters, artists, producers and musicians– is going to have to take off the headphones and step away from the control board, or duck out of the board meeting, or skip the after-party and take a few minutes to ponder:

Why do we keep getting screwed by the people building businesses around the music we create?

Here are three quick explanations of why the music business seem to continually find ourselves desperately, hopelessly passing the bucket around the media industry, hoping someone drops in some spare change:

1. We are incapable of acting in concert.

We can make concerts all right. But labels, publishers, artists and musicians can never manage to act “in concert”– that is to say, as a unified front capable of fighting for the rights of everyone in the industry. Publishers distrust labels. Labels take advantage of the artists. Artists desperately undercut one another, hoping to grab an opportunity to set themselves apart from the pack. Now we even have the problem of publishers and songwriters going around ASCAP,BMI, and HFA to license directly, effectively damaging their own representatives in the collective bargaining process, all in order to save a few percentage points worth of fees. Not surprisingly, everyone in the media, from advertisers, to networks, to film studios and Muzak programmers, have realized that there is always someone willing to license their music for next to nothing, or at least less than their buddy is charging. We are, by and large, an industry of weasels, and it’s not helping our cause.

2. We forever believe in the myth of “exposure”.

I remember when I first started playing the guitar, back in grade school. Soon I had formed a band, and even at that young age, I quickly realized: everyone always has a party, a dance, a wedding or a bar mitzvah that they want you to play for free– “because it will be great exposure”. Of course, it’s not entirely untrue. Clearly, OK Go got plenty of benefit from their “free” YouTube video, as has Rebecca Black. But as a business model, the idea of giving away the product to another company who then keeps all the money that your product generates has not panned out very well for us.

In perhaps the greatest irony of all, the music industry actually winds up paying out huge amounts of money to radio (and back in the day, to MTV) in order to get those media outlets to use their music for free. It’s not just that we’re giving it away for nothing. We’re actually begging, pleading, and paying out the nose just to be able to give it away. Meanwhile, someone else is building their Clear Channel, or MTV or YouTube, largely from people tuning in to hear our product. And the more people that tune in, the more someone else earns, while we get nothing. But don’t worry. It’s great exposure.

3. We continue to focus solely on creating music, rather than selling it or marketing it.
Why was it Apple, rather than Sony for instance, who created the iPod, and iTunes? Why didn’t the major record labels, having already learned about the power of music videos from all the “exposure” they got from MTV, come up with YouTube? Why couldn’t a music publisher have invented Pandora? Instead of battling endlessly with the corporations who control these ventures, none of which have any inherent investment in music, the industry could actually control and profit from the medium it uses to promote and disseminate its product to the public. Instead of passing the bucket around after the set, the musicians could actually own the club.

It never happens. The history of the music business is the story of one fatal flaw, and that is the inability to think beyond the music itself, to how the public wants to receive that music. We’re creators and owners of content. But we’re never interested in thinking about how that content could be used.

Doug Morris

A few years ago, Doug Morris, then the head of Universal Music, gave a widely publicized interview with Wired magazine– where he bemoaned the effects of the digital revolution, and complained that everyone was treating the record industry like “The Shmoo”:

“There was a cartoon character years ago called the Shmoo. It was in Li’l Abner. The Shmoo was a nice animal, a nice fella, but if you were hungry, you cut off a piece of him and put onions on it, and if you wanted to play football you just made him like a football. You could do anything to him. That’s what was happening to the music business. Everyone was treating the music business like it was a Shmoo.”

Acknowledging that his lack of knowledge in regards to technology made it difficult even to hire the necessary experts, Morris insisted that his job should solely be finding and developing new artists.

“There’s no one in the record company that’s a technologist. That’s a misconception writers make all the time, that the record industry missed this. They didn’t. They just didn’t know what to do. It’s like if you were suddenly asked to operate on your dog to remove his kidney. What would you do?”

Given an attitude like that, it does seem a little surprising that Morris would be the choice of Sony (didn’t they use to be a technology company? ) to revitalize their music division in the year 2011. But of course, that’s exactly the problem. We’re so used to being the Shmoo, we couldn’t possibly think of doing anything else. It might be wise for musicians and performers to keep their calculators handy. Because we’re going to have to continue to live off royalty rates like $.00102 per play for some time to come.

It occurred to me as I walked the same quarter mile circuit along Sixth Street for the three hundredth time in three days that the primary benefit of SXSW for A&R people is not the opportunity to hear hundreds of up and coming bands in a single four day span. The primary benefit of SXSW for the music weasel is exercise. Instead of sitting around an office all day, the middle-aged weasel is forced to actually walk from place to place, thus ensuring more aerobic activity than most of us have seen in months. Many also seemed to be working on their arm muscles as well, with lots of pouring and heavy glass-lifting to build those biceps.

During Austin’s giant music-fest, it also occurred to me that the only thing sustaining the music industry at the moment has nothing to do with music. The only people at SXSW that brought their checkbooks and actually had money in their accounts were the media and branding companies. Record label A&R were there of course– after all, there were parties with free food– but there were far fewer than in years past, with whole major label teams missing in action. Music publishers were there too, hoping to meet people in the advertising business. Of course, the music supervision crew was in full effect, but unlike the good old days of two years ago, they were no longer the coolest kids in the room. Given the falling revenue at most broadcast companies and the ridiculous glut of music that is chasing the same gratis spot on The Hills, synchronization licensing fees have dropped to the point where even indie bands desperate for a break have realized that there is no pot of gold at the end of the Hollywood rainbow.

The only people left with any juice at SXSW are the magazines, the websites, clothing brands, car companies, or beer companies. Like it or not, music’s greatest value at the moment is as a marketing or branding tool for companies eager to target a very specific, target audience. Musicians of course are eager to embrace what they see as crucial avenues of exposure– meanwhile, the brands view music as simply one more way to attract the all-important but ever-elusive, A.D.D.-addled college and post-college demographic. The music industry may think they’re using the media. But it’s clear from the amount of music being used by the media, advertising and branding businesses, compared to the amount of music actually being sold, that it’s the media, advertising and branding people using us.

Not that there’s anything wrong with that. It’s just that once more, the music industry finds itself a pawn in a game that it doesn’t control, a plight that seems to be the underlying theme of music business history. First it was radio– since the Fifties, the record industry has found itself on bended knee, pleading (or paying) for any favors that the gatekeepers of radio might dole out. Then it was television, with MTV able to extract free 24-hour programming courtesy of the record labels. Make a half a million dollar video, give it to MTV for free, then hope they choose to play that video from among the other fifty half a million dollar videos they received that week. Wow, what a business model.

Of course, the previous decade brought us a new power player in Apple, and once again, the record industry was left at the mercy of a different business, which sees music largely as a means of selling electronic equipment. And now, with the loss of album sales draining any profitability from the business of selling music to the consumer, there’s a new power alignment emerging– and once again, the music industry finds itself a supporting actor in someone else’s play.

Why couldn’t music companies have created Sirius Radio or iTunes? Why could a music company not have diversified into the advertising business? How did Sony, which is an electronics company as well as a record company, manage to get beaten so badly with the iPod? Why do music companies not own music magazines or music websites? Even when someone tries to create some synergies with moves like the Time-Warner-AOL merger, they manage to let the politics of the various businesses impede all attempts to make the companies work together. Only a handful of organizations, Disney being the most obvious example, actually seem to have understood that controlling the means by which the music reaches the audience (the Disney Channel, Disney Radio, Disney Girl magazine, even Disneyland) or the merchandise related to the music is far more valuable than simply finding and developing artists and leaving the rest to someone else.

Just as musicians often seem to have a blindspot when it comes to realizing that there’s more to music than simply the technical level of musicianship, music business types seem to be unable to see that the power lies with those who understand how to use music to attract an audience (radio, television, internet companies and other brands) rather than those who simply discover and manufacture the music. As a result, the music weasels are left outside the Levi FADER Fort trying to talk their way past the doorman so that they can see their own band perform.

Of course, there’s not much we can do now to undo the mistakes of the past. So given this new world order, what can a savvy publisher or songwriter do to make sure that his or her music is a media magnet, that it’s brand-friendly and advertising-attractive? The one thing that even the most short-sighted weasel can see is where the money is– and ain’t in radio and records. Here are four things to keep in mind when you’re making music as a marketing tool:

1. Versatility is not an asset.

The only time versatility is valuable to a musician today is in a wedding band. The rest of the world is all about narrow-casting, about appealing to a specific, definable core audience and being immediately recognizable to that group of people. Take a look at the magazine stand– there are very few general interest magazines left. Most media companies, whatever their format, work hard to appeal to a very specific, specialized audience. That’s what gives their advertising space value. In the same way, when they consider an artist or a band, they don’t want someone that appeals a little to a lot of different types of people. They want someone that appeals a lot to a very specific group of people.

2. Know your audience.

This does not mean being acquainted with everyone that shows up at a gig or having a million MySpace or Facebook friends. It means understanding exactly who your audience is– demographically, emotionally, and financially. What is the age range of your audience? What do they do (school, work, retirement)? What are their hobbies? What movies do they see? What books do they read? What other music do they listen to?

If you can’t define your audience in that way, then a brand, advertising exec, or press person probably can’t either. That means they have no reason to think that you would help them sell jeans or makeup or alcohol or magazines (which of course also need to sell jeans and makeup and alcohol). Bands that work in the Marketing Age have easily identified audiences, which is sometimes more valuable even than the size of the audience, as measured by record sales or downloads.

For those who are songwriters, rather than artists, the point remains the same. If you wish to write for a specific artist, you need to have some idea as to the nature of the artist’s audience, and what that audience wants to hear about. A song will define the person that sings it to his or her audience, so you have to be sure that the song is presenting the artist to that audience in a way they will understand and appreciate. I’m not suggesting you write jingles. I’m urging you to do your homework, and know how the artist for whom you’re writing is trying to define himself or herself.

3. Understand music as fashion.

The branding, advertising and media worlds are not in music for the long haul. They’re not in anything for the long haul. The media business relies on constant change and ever-shifting sands, that’s what keeps it relevant and entertaining. Fashions will change every spring– they have to, because there are magazines and new clothing collections to sell. Likewise, your music, when it’s part of the media world, has to be up to the minute, reflective of the moment, and sonically on the cutting edge. And then it has to change as times do.

There’s no point in criticizing fashion for being “trendy”. That’s the nature of it. It would be like complaining that water is wet. Likewise, there’s nothing wrong with music that’s trendy. But to be effective in this new media world, you have to stay one step ahead of the trends, knowing which sounds are in vogue and which are getting worn out, what subjects are ripe for picking and which ones are past their sell date, and when it’s time to move on and re-invent your whole musical approach. The advertising, media and fashion worlds make the weasels back at the record company look like long-term thinkers by comparison. In this world everything is always changing, and fast. Which leads us to:

4. Seize the Moment.

A music manager was recently telling me about an incredible placement he had just obtained for his artist, which had the young artist featured prominently in a major national advertising campaign for a big consumer product. If this artist had already landed one such huge opportunity, he suggested, imagine how many other brand or advertising related calls were going to come his way, once people saw this campaign?

My first thought was: None. The problem in working with a brand is that it is “branding”– the brand is now identified with the artist, and the artist with the brand. The bigger the campaign, the more “branding” takes place. Once you have defined yourself to your audience, and closely identified yourself with a particular product, it becomes harder, not easier, for other brands to embrace you. Once you’re on the cover of Rolling Stone, you’re not going to get hyped in Brooklyn Vegan. Because advertising agencies or products are focused on using your music to define their brand, it will, by definition (pardon the pun), take you out of the running for many other related products, who don’t wish to share their definition with any other company. In this media/advertising world, you’ll only get a couple of big chances.

That means you have to make the opportunity work for you. If you know that you’re going to be working with a particular brand, or getting a key placement at an important media outlet, then you have to build an entire strategy around that, making sure that you are prepared to use that exposure to build your audience (and database), drive sales (which means making sure music is ready and available) and establish yourself as a key part of the brand’s identity (which means supporting the company in every and any way possible).

This is not like the old music business, where you could tour around without too much planning, and slowly build a fan at a time for as long as it took. These opportunities are windows that open and close rapidly. You have to have your social networking, music distribution, touring and marketing campaigns ready to capitalize on whatever opportunity you get, and be prepared to measure and document the results. You also have to fully embrace the brand, to make sure you hold onto the chance for as long as you can. If it means going to Phoenix to play for a room full of car salesman or softdrink manfacturers one day, then you better do it with a smile. Trust me, it will be far more useful than any conflicting gigs your record company might have put on the schedule.

This week, I’m in Miami trick! I’ll be at the Winter Music Conference and Ultra Fest on Thursday and Friday– give me a shout if you’re down there. Or I’ll see you at the Beatport Party, or the Belvedere Vodka/Sirius Radio Listening Lounge, or…. you get the idea. If you can’t beat ‘em, let ‘em throw you a party.

We’re seeing the future— all over again. Just when the music industry had finally started to almost get the hang of selling mp3s on iTunes (even if we still haven’t figured out how to sell music from around the world, which blows my mind) the weather shifts and suddenly our new technology is dead.

“Gone is the MP3!” all the headlines are reading, and indeed, for the first time, the sales growth of digital track downloads dropped drastically this year, from a growth rate of 26 percent in 2008 to only 8 percent in 2009. Apparently all of us who were waiting for legal downloading to make up the revenue lost to the death of the CD had better find a new dream to embrace, because this once-new technology appears to be over before it began. What once was the future now appears to be officially “past”.

What makes it official of course is Apple– as we all know, it’s Steve Jobs’ world and we’re just living in it. When the big Mac shells out money to purchase the start-up venture Lala, with its whopping 100,000 person customer list, something must be bubbling. As we enter a new decade, it now appears that bubbling sound is the music stream, which is bringing you the next big thing:

Cheap music!

Uh… wait. Don’t we already have cheap music? NO! This will be cheaper still!!! While iTunes, that old-school relic of yesteryear, still wants to sell you a download for a dollar, services like Lala will allow you to stream the same song once for free and then give you unlimited access for 10 cents a track. The hitch of course is that the music doesn’t really “belong” to you. It’s more like a library book that you never have to return– which is close enough to ownership for me. Rather than shelves of CDs (like your grandparents have) or iTunes folders full of MP3s, the listener can access a full collection of music from the Web-based “cloud”, for either a per-song fee, or perhaps a monthly subscription (as in the Spotify model).

In a perfect illustration of the new technology approach to finance, Lala, a company started with $35 million of venture capital (provided in part by Warner Music) generates revenues under $10 million dollars, but is purchased by Apple for somewhere between $17 million (not too great a deal for Warner) and $85 million (which seems completely inexplicable). The general consensus is that Apple did not buy the company with the intention of replicating Lala’s current business model, but rather using the start-up’s technology and executive talent to launch their own Apple streaming service, which if they do it really well, could render iTunes obsolete.

Interestingly, the one hitch in Apple’s plan, and the one silver lining for the music industry, is that the current music licenses allowing Lala to offer legal music streams are not transferable as part of the sale. This means that Apple will have to re-negotiate the licenses with the major labels and publishers before they can launch their new service– a prospect that has label executives digging in for their last real chance to save their industry (and their jobs). While it would appear that the general licensing framework on the publishing side has already been laid by the recent agreement with the DMA (see the blog “Triumph or Turkey”), both the labels and publishers are determined to protect their interests within whatever business model Apple eventually constructs. If songs downloaded from iTunes will now be kept in a permanent online “locker” from which they can be streamed at any time on any device, labels will want a higher price per download, a fee for each stream, and a cut of any fees that Apple gets to increase the size of the locker. Publishers will expect a “mechanical” royalty for the stream, as provided in the new DMA agreeement, and ASCAP and BMI will certainly consider the “stream” a performance.

http://ericbeall.berkleemusicblogs.com/?s=triumph+or+turkey#

That’s all good– provided the model catches on. Not too surprisingly, the jury is still out on that one. So far most streaming models have proven very popular when the music is free, but far less so once that whopping 10 cents per track price tag is attached. Subscription models have not caught on either. Spotify offers a premium subscription at 10 GBP per month. So far, only about 10 percent of their customers buy in.

The inescapable fact is that until these services become profitable, the money for music-makers and music licensors will be pretty paltry. On the positive side, Apple has proven quite adept at figuring out how to make money off of music. The danger is that the new streaming service kills off iTunes, which is just starting to make some real money for the music business, and replaces it with something that earns ten percent of what iTunes did.

In general, it’s hard for me to be overly optimistic about the technological trend. First, we replaced the CD, which sold for as much as $15-20, with a product that sold for a dollar. Now we’re poised to replace the service that sells music for a dollar with a service that sells it for 10 cents. That’s not a great direction for music publishers, music labels, artists and songwriters to be headed. Given the precarious position of major labels like EMI, collection organizations around the world, and the thousands of small and large music publishers who saw as much as a 30 percent drop in income last year, we MUST collectively drive a hard bargain with Apple. That won’t be easy. Then, once an agreement is in place, we must continue to take legal action against unlicensed services that undercut Apple and other legitimate business partners.

If streaming is the future, and it likely is, then we need companies like Apple to make that business profitable. We also need to see a fair share of those profits. Otherwise, our vision of the future will indeed look a lot like a cloud– gray, ominous and full of hot air.