Getting Back On Track: Some Strategy Tips For The Music Business
This story was written by Rory Maher.
Last week, in the wake of Sony (NYSE: SNE) and YouTube reupping their licensing agreement, we wrote about how rare it is to see deals between the labels and digital music companies, and we explained why that is. In short, it's a function of the way such deals are structured, and of the damaged psyches that each side brings to the negotiations. The record labels have filed a slew of lawsuits against digital music companies in the last few years, and that bad blood was underscored this week with the news that EMI was suing digital music startup Seeqpod, including its investors and partners.
So what can be done to break this logjam? Broadly, digital-music companies need to do a better job of extracting value from their audiences to use as a bargaining chip with the labels. They also need to develop business models that aren't so dependent on the music itself. The labels, for their part, need to seriously consider developing their own wholly-owned, independent digital businesses, and then striking only a few deals with the largest digital companies as a complement to those home-grown ventures.
Below, some specific steps that both sides can take to make the negotiations more attractive and fruitful.
First, the digital guys. They need to ...
Stop distributing record-label content without approval. The digital companies need to get the proper licensing before releasing the music online, not after. Sure, it is frustrating that it takes so long to license content from record labels (years in some cases), and it's even more frustrating to have to meet their demands, which tend to include large upfront payments and unprofitable revenue splits. But using their content without the owners' consent (as many digital companies do) and then expecting negotiations to go smoothly isn't the answer. If digital companies come to the table openly acknowledging the value of the labels' content, perhaps the labels will be more flexible and creative with their needs.
Provide the labels with valuable data in return for better economic terms. MySpace Music CEO Courtney Holt underscored a valuable service that digital companies can provide to the labels when he said at our paidContent EconMusic conference: "We know whether someone has friended an artist, whether they listened to them on the band page, or their friend's page, whether their friends are listeningand artists that engage will get access to that data." Remember, record labels don't just make their money from licensing agreementsthey, of course, also sell music and recently have taken a financial stake in some artists' ticket and merchandise sales. Providing them with data that helps them understand which cities are listening to their music and watching their videos first, what age group listens to which bands the most, or which markets are seeing the greatest uptake in streaming music videosall of that market intelligence is valuable to record labels when considering how to promote their products.
Consider other forms of music programming besides music videos. Broadband Enterprises demonstrated an effective way of producing music programming without having to pay the labels when it announced the release of "On The Brink," a reality webisode series featuring an up-and-coming band, sponsored by AT&T (NYSE: T). Not only would similar webisode programming offer digital companies a way of producing music content that doesn't require them to compensate the labels, it could provide premium advertising opportunities like product placement, product adjacencies and advertorials.
Some suggestions for the labels, after the jump
Now, the labels. They need to ...
Start internal angel-investment funds that help entrepreneurs develop new and interesting digital-music businesses. The funds wouldn't require an enormous funding commitment. Only $10 million a year would kickstart 20 startups with modest investments of $500,000. The cash outlay, especially when compared to many marketing budgets for CD releases, would be small and the potential reward would be significant. The labels would control a portfolio of assets and participate in the equity upside as those businesses develop. William Morris has successfully done this with its Mailroom Fund, and a Google (NSDQ: GOOG) policy that allows employees to devote 20% of their time to individual projects is similar. (Disclosure: I started a digital music company that was a client of William Morris.)
Stop selling digital music through distributors and instead create their own platform to sell MP3s. Netscape founder and angel investor Marc Andreessen captured the heart of the issue perfectly in his interview with Charlie Rose last week when he said, about the music industry: "How many years of chronic pain do you want to take before experiencing acute pain?" The short-term impact on profits would be extremely painful, but the labels should consider the very attractive long-term benefits of severing ties with iTunes, Amazon (NSDQ: AMZN) and other MP3 stores to create their own iTunes as the only place to buy MP3s online. No, this would not stop piracy, but it would enable the labels to set their own rules, including pricing, quality, and how many songs they choose to sell at a time.
By Rory Maher