Secret On-Demand Music Deal Details Show Struggles for Profitability

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Wow … just wow. We have known that the music labels and artists were skeptical of on-demand services and have made onerous demands on Spotify before allowing catalog access (and also on Apple for ‘iTunes Match’). But never before have we know the details of those demands. Now we have a full report from Michael Roberston, the founder and founder and CEO CEO of MP3tunes and that details all of the stuff in those contracts that should cause some serious concern.

Here are the gory details:

1.General deal structure: Pay the largest of A) Pro-rata share of minimum of $X per subscriber, B) Per-play costs at $Y per play, C) Z percent of total company revenue, regardless of other business areas. As stated previously, this means labels de facto set retail price (they also regularly negotiate floors on price, giving even less wiggle room), which limits the ability of the music service to develop ancillary revenue streams that aren’t siphoned off by the labels.

2.Labels receive equity stake. Not only do labels get to set the price on the service, they also get partial ownership of the company.

3.Up front (and/or minimum) payments. Means large amounts of cash are necessary to even get into the game. In my experience, this further stifles innovation in services and business models.

4.Detailed reporting, including monthly play counts. This seems rational enough — you would assume this information is necessary to pay artists and make other business decisions. The problem is, the labels each make additional demands, including providing additional reports unrelated to payment, including overall market share of sales in various categories. I doubt that, for example, phone manufacturers demand Best Buy provide the percentage of sales of competitors’ phones. The labels effectively offload their business analysis (and the cost of such analysis) onto the music services. I can’t think of another industry where that is standard practice.

5.Data normalization. Labels all provide their data and files in different formats. That data is constantly changing as labels make available new material and make unavailable old material. This might seem trivial. It’s not. Without standard naming conventions and canonical methods for referencing artist, tracks and albums (ISRC and UPC don’t cut it), the services are left to try and match artist, track, album names provided by one label with those of another. It’s incredibly inefficient, as each service must undergo this process separately (although there are now companies that provide a service for doing this for the retailers).

6.Publishing deals. Once you’ve signed deals with the labels, you then need to cut deals with the publishers. Determining ownership is a complete nightmare and there are huge holes in the licensable catalog. The data issues here are worse than with the labels. The long and short of it: Although you may have the rights to stream from labels, you sometime can’t get the rights to stream from the publisher, or worse, even find the publisher.

7.Most favored nation. This is a deal term demanded by every major label that ensures the best terms provided to another label are available to it as well. This greatly constricts the ability to work out unique contractual terms and further limits business models. It is a form of collusion since each label gets the best terms the other label negotiates. It’s also why it’s easy to get one label (typically EMI) because they’ll provide low-cost terms knowing that others will demand higher rates, which EMI will then garner the benefit from.

8.Non-disclosure. Every contract has strict language prohibiting the digital music company from revealing what they pay to the labels. If they speak publicly about any of the licensing terms, they jeopardize invalidating their license which would torpedo their business. Since labels license on behalf of the artists any payment to the artist comes from the labels not the digital music company. This is the main reason music services, not the labels, have been getting heat from the artist community. Music services can’t defend against accusations about low artist payments because they pay the labels who don’t disclose what they’re paying to the artists.

With all of these amazingly restrictive and debilitating conditions, it is small wonder that people like Coldplay and others have stayed away from having their stuff streamed.

As a consumer, streaming media offers me a wonderful supplement to my existing music library. But I cannot separate myself from the value proposition and business model of the companies I attach myself to – so knowing that the labels are trying to leverage the streaming services to grow their own sales business while never allowing them consistent access to music or enough profit to ever gain any leverage concerns me for the long-term health of these companies.

What do you think?

Categories: Music Diary

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