Music Publishing & Songwriting

While I was walking home tonight, I passed by a museum and something in the window caught my attention. It was a display of a small antique pipe organ from the late 1700’s– it looked like a very early attempt to create a miniature Wurlitzer that could be played at home. A rather odd, “Chitty Chitty Bang Bang” type of contraption, it reminded me of the homemade time travel machine rigged up by Doc Brown in “Back to the Future”. In its day, it probably looked as cool as the iPad. Now, it’s not something that anyone uses to get the job done.

The sight of this awkward, ungainly invention brought me back to an analogy made by one of my colleagues earlier in the day, as we discussed the current challenges of copyright licensing. “I feel like we’re trying to drive some old unrestored 1950’s clunker” he said, “the kind that only the old guy that owns it can actually drive, because you have to know just how to wiggle the gear shift and how many times to pump the brakes to make it all work”. I heard almost the same sentiment at a lunch with one of the industry’s most respected copyright lawyers. Everyone in the music business knows it’s true, though few will say it publicly, since it directly undermines our demands to get paid for what we own. But the old copyright system just ain’t working anymore. The truth is:

The process of licensing copyrights has to change drastically and fundamentally, if the whole concept of copyright is going to survive at all.

Right now, we’re driving down the Information Superhighway in that old 1950’s jalopy– we’ve got it floored and we’re doing about 35 miles an hour. Copyright holders are not only being run over, we’re also being passed by, as young entrepreneurs from the Google, YouTube, Spotify generation create global empires built on providing immediate, free access to entertainment and information. Meanwhile, the copyright community is still back somewhere on the side of the road, trying to figure out who owns the rights in which territory and for how long, and who has the right to issue the license, and how many licenses will be necessary, and what should the license cost. At best, we’re an impediment. At worst, we’re irrelevant.

Consider:

At a family wedding, the bride and groom do a crazy dance to a medley of big pop hits– it’s all relatively harmless (at least from a copyright standpoint) and clearly covered by the principle of “fair use”. After all, this is kind of what music was made for. But not too surprisingly, the dance is captured on videotape by the people filming the wedding. It’s then posted on YouTube, probably as a simple, cheap way of sharing the moment with family and friends. Again, it’s all still covered by fair use, since it’s largely a private activity and there’s no attempt to sell anything.

But suddenly, the family wedding video becomes a viral phenomenon, and millions of viewers go to YouTube to watch the silly dance, generating plenty of tangible economic benefit to YouTube in the process. At this point, clearly the copyrighted material contained in the video (that is the medley of recorded music to which the dance is performed) should be licensed, and the labels, artists, publishers and songwriters should be compensated. But how? Just a guesstimate would indicate that there could be 15 different artists, all of the major labels (some of which might no longer own the master recordings in question), probably at least fifty songwriters, and twenty different music publishers, each of whom would have to grant permission, and then play a role in determining the appropriate sync fee for each song. It would take months for a two minute home video, and probably cost in the six figure range. Ridiculous.

Here’s another:

A video collector owns outright some archival footage of a big star performing on a TV variety show from years ago, which a new mobile entertainment provider now wants to license and sell as a download to mobile phones in Asia. But within this short segment, the big star performs a song, which would have been licensed under a sync agreement that covered only that particular performance, in that territory, during a specific window of time. In order to use the footage in a different medium, territory and era, a new sync license will need to be negotiated with all of the publishers (many of whom have sold their catalogs or allowed the copyrights to revert to the songwriters). And then there’s the matter of union fees. Several of the performers on the show may have been members of the American Federation of Television and Radio Artists (AFTRA), Screen Actors Guild (SAG) or the American Federation of Musicians (AF of M), which means there might be residual payments due for any reuse of the show. Good luck figuring that one out.

A last example:

A music fan in Japan wants to purchase the new CD by an American act signed to Columbia/Sony Records in the US. The CD has never been released by Sony in Japan. The fan logs on to Amazon, locates the CD, and purchases it. But Amazon can’t fulfill the transaction, due to a copyright infringement lawsuit initiated by Sony Japan. As the local distributor of Sony product in that territory, Sony Japan owns the rights to sell that product in their region. By allowing the consumer to purchase directly from Sony in the US, Amazon is infringing on the copyright. And it’s true, even though Sony Japan has no intention of making the record available in Asia. As the copyright holder, the local company has the right to distribute the product or not, at their discretion.

In part, this explains why a consumer in the US who wants an album by a French artist released only in France can’t simply go on iTunes and purchase it. He or she can go to iTunes France and see the album or hear samples of the music. Certainly, the consumer can steal the record on any number of illegal sites. But purchase it? Nah. That would be copyright infringement. Go figure.

Anyone who reads this blog regularly knows that I’m a staunch defender of copyright. I’m not a believer that information wants to be free. I am however realistic enough to know that information wants at least to be available, at some generally reasonable price. Right now, our copyright laws are a hodgepodge of political compromises and outdated principles, all changing from country to country. In a global world, they are structured territory by territory. In a society based on instant access and immediate gratification, they are restrictive and reliant on step by step negotiations with half a dozen different parties for a single use. They can’t survive like this.

Unfortunately, there are no attractive solutions. Clearly, any reform needs to be done on a global level. The web is worldwide after all. That should be easy. We can take it up right after we solve the problem of world hunger and get everyone to agree on global warming.

Even worse, the only viable answer to the internet-related problems seems to lie in some kind of system of blanket licensing, similar to that used by the performing rights organizations to collect on music being used in public venues. In some form or another, a tax or surcharge would need to be assessed on electronic equipment or computer technology, or directly on internet service providers, mobile phone networks and other “distributors”. The money collected would then be shared among the entire creative community, from publishers and labels to artists, writers and union members.

If that seems like a simple and clean resolution, it’s not. The problem is that all of the money would go into a fund, and then be distributed to the copyright holders without any clear way of attributing it to a specific use. Worse, the ability of each individual copyright holder to negotiate fees on his or her own behalf and to collect them would be lost– thus eliminating two of the major functions of a music publisher in one fell swoop. In essence, such a move would make much of the music publishing role obsolete. If only for reasons of self-interest, it’s not a proposal I relish.

The only thing worse is the alternative, which is what’s happening now. We are already becoming obsolete, simply because people are ignoring us. Sure, we can still make things grind to a halt with a major lawsuit here or there, or exact our revenge with a jumbo copyright-infringement settlement–after about ten years in court, fighting appeal after appeal. But the judges are getting less sympathetic, the law is seeming less and less just to society at large, and the internet generation is moving ahead without us. Most importantly, we’re leaving stacks of money on the table every day, by not being able to take advantage of licensing opportunities for our music. There’s no value in owning copyrights if no one has the time, patience or money to license them. Already, more and more creators are simply making new product which they own in its entirety, and licensing it directly to individual services.

There was an article in the New York Times today, about an inmate who after having been wrongfully imprisoned on death row for twenty years had just been set free. His one request to a benefactor had been a Walkman, only to be informed that no one used them any more, and handed an iPod. As the surprised ex-con acknowledged, it’s painful sometimes, but things change. You have to move on.

Otherwise, you’re an artifact in a museum window.

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.

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.