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Summary:

I was talking to an executive at a major label the other day. We were talking about startups and he noted that they either sue these companies out of business or legitimize them out of business. That is not far from the truth. How many legitimate, […]

I was talking to an executive at a major label the other day. We were talking about startups and he noted that they either sue these companies out of business or legitimize them out of business. That is not far from the truth. How many legitimate, standalone digital businesses can you name that rely on licenses from the labels for their primary business and are profitable? Let’s categorize by business model:

E-Commerce/Transaction-based: iTunes immediately comes to mind. It may be profitable on its own, but we all know that Apple’s main business is to sell iPods and now iPhones. eMusic is the other one, and I think it has a real business on its hands — of course the vast majority of its repertoire is non-major label.

Music Subscriptions: This segment is dominated by Rhapsody and Napster. Neither is solely a music subscription service, but that’s what both are best known for. At any rate, neither is profitable. RealNetworks’ music business lost $1.9 M in the second quarter of this year. Napster? Well its stock chart kinda says it all; it’s currently trading for a little less than the cash it has on its books.

Ad-Supported Music: This includes on-demand audio and video and also Internet radio. The major players here are the radio divisions of companies like Yahoo, AOL, CBS (Last.fm and CBS Radio), MTV, Clear Channel, MySpace, Facebook and then independents like iMeem, Last.fm, Pandora, Live365 (my alma mater) and a number of others. It has been widely reported that the standard license for on-demand consumption is $0.01 per play, which amounts to a $10 cost-per-thousand plays, not including other costs such as publishing, bandwidth/streaming and ad sales and serving costs.

In short, I think its very hard for any of the ad-supported players to build a meaningful basis from licensed music. Instead, many of the larger players will use it as part of a larger strategy to attract audiences and offer related products that generate higher-margin revenues. For instance, Clear Channel might have a sponsor for its Stripped series, which will probably not have the same license cost as a regular music video. Or MySpace will sell an ad campaign around an event that it hosts. As for Internet radio, there is a lower royalty rate, but the CPMs are lower, too. Pandora’s founder was recently quoted as saying the service may have to throw in the towel if things don’t change with the fee structure. iMeem has licenses from several labels but it’s been reported that it gave up a significant piece of the company and agreed to onerous terms, so, needless to say, it likely isn’t profitable on its licensed music either.

This is by no means a comprehensive list of business models nor of the companies within each segment, and there may be companies within each that are profitable. But that’s beside the point.

The point is that the labels have been lulled into the conviction that their rates are ‘market’ since some of companies have been willing to pay such rates to license music as a loss leader. The labels have been penny-wise and pound-foolish in cutting deals with seemingly lucrative rates. However, that is not the recipe for a vibrant, competitive ecosystem of licensees large and small, with no one company having too much market share — which is exactly what I’d want if I were in their shoes.

The good news is that I know this has been recognized by people with the major labels, and they’re experimenting with new licensing schemes. Hopefully it’s not too late.

Raghav “Rags” Gupta is VP of International Partnerships at Brightcove, where he has worked since ‘05. His blog can be found at www.ragsgupta.com.

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  1. David Hjortsoe Thursday, August 28, 2008

    Dear Rags,

    There is actually another model that I thought I’d share with you. TDC — the Danish teleco incumbent — has introduced a service called TDC Play, which allows for all its mobile, fixednet and broadband customers to download music on a subcription-model base (disclosure: I work for TDC). The point of this being that as long as you are customer of TDC you will have a license (the license is renewed every 30 days) for the music (which is DRM’ed and can only be played by WMA-compatible players).

    All the major 5 labels are licensing their music under the TDC subscription-model.

    Further, you can actually share the music between ie. cellphones as long as they are both TDC customers (via bluetooth or MMS typically).

    The point of all this – and the business rationale for TDC – is of course retention…

    BR,
    David,

  2. George Kirikos Thursday, August 28, 2008

    You’re absolutely right, and its been that case for “ages” in internet time. Years ago my company acquired the Jukebox.com domain name, hoping to make a digital music store competitor to iTunes, Napster, etc. Perhaps we were a bit naive, but it turned out that the technology providers (e.g. LoudEye.com) who seemed to offer “turnkey” systems could provide the backend and billing, but you were on your own in terms of negotiating a license agreement with each music label. And, if you wanted to do that in all countries….well, unless you want to spend millions of dollars worth of billable time in legal fees, forget about it. I like my lawyers, but not enough to buy them new cottages. :)

    Hopefully one day there will be a dramatically simpler and predictable process, just like for any other product be it shoes, videogames, jewelry or cameras sold on the internet. Without predictability, the reward would have to be gigantic to justify the risks involved in investing in this area.

  3. Napster confirms getting out of campus-wide subscription programs…

    Digital music vendor Napster has confirmed today that it will phase out its university subscription program that gave students subsidized access to Napster’s music subscription service as part of their tuition fees….

  4. I wish I shared your (relative) optimism.

    Each individual working at a major label – no matter what kind of executive title he or she brandishes – is woven into a sticky web of bosses, board members, artists, lawyers, other rights organizations, copyright law, media and incentive schemes that simply makes it impossible to initiate radical change. After a couple of years at such a place, the standards for what constitute “radical change” have sunk so low that nobody is even able to envisage it.

    I believe we will need to see them crash hard and lose significance before a new paradigm for legitimate business can arise. I’ve met some real nice people who work for major labels, and I don’t envy them.

  5. The sad thing about the dim hopes of the Ad supported players is that they help prevent piracy. At least, they prevent piracy in so much that they are legitimate and sate the ‘need’ to try out new music.

  6. Distorted-Loop.com » Napster’s lucky cat running short of lives Friday, August 29, 2008

    [...] right now ($1.33 per share) trades for less than the cash it has in hand. We think the company – famous for its cat logo – may need to use another of its nine [...]

  7. Social network music by Qbox.com lets you search and discover music on artists’ profile pages that stream promotional tracks for free. Similar to the way Google brings traffic to online media properties that they do not own, Qbox simply brings the user to artist pages that stream legal and free music. This approach allows us to stay clear of the constraints imposed by the labels.

    Once advertising space is carved out, it will help Qbox generate and share ad revenues directly with musicians/copyright holders. In this way, artists may be able to realize meaningful revenues even with free streaming (as long as their fans enjoy and consume their work).

  8. Music Licensing Schemes Today Limit Innovation : InnovatingMusic Monday, September 1, 2008

    [...] ‘Rags’ Gupta, current VP of Partnerships at Brightcove and previously at Live365, reiterated what many have been saying for years, that current music licensing schemes are hamstringing growth of the music ecosystem.  He laid out [...]

  9. Why MySpace Music is Likely to Fail – GigaOM Monday, September 15, 2008

    [...] not facing the proverbial music and understanding that their business model is completely broken, including the licensing end of the game. They need to learn that they don’t need to start a company, but instead encourage a thousand [...]

  10. Is Warner Music Killing Music Startups Thursday, May 7, 2009

    [...] up on these ad-supported digital music startups and moving on. This comes as no surprise to us: Rags Gupta had pointed out in a post for us that music startups are destined to fail because the labels are gouging them silly. At a royalty [...]

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