How Can the Music Labels Save Themselves?

Fred Wilson recently pointed me to David Hyman’s manifesto on how the music labels can save themselves. It’s well worth a read, but David’s point is basically that they should:

  • Drop their penny-per-play streaming-on-demand rates by 90 percent, to one-tenth of a penny
  • Link streamed songs to a commerce opportunity, such as buying the MP3 from a store such as Amazon
  • Upsell a premium subscription

I’m not sure that this will fully replace the foregone revenues from a decline in physical CD sales, but it does make a lot of sense. I’ve been privately telling my friends at the labels that their licensing pricing strategy has been flawed, notably that it’s skewed towards short-term financial rewards. I’ve also been telling them that they’ve priced out a large part of the market, which is one reason that so far it’s made more business sense for even well-meaning startups to beg forgiveness instead of asking permission.

In other words, the labels were able to ram the penny-per-play rate down the throats of major portals and distributors such as Clear Channel, AOL and Yahoo. These large companies were financially able to do the deals, and most likely looked at the licensing of the music as an investment or a loss leader to acquire users cheaply. A penny-per-play equals a $10 CPM. At that rate it is very hard to break even, let alone sustain a viable business (don’t forget to factor in other COGS like bandwidth, sales commissions, serving costs and songwriting royalties, which I don’t think are covered by the label’s rate). Factor in assumptions on CPMs, ad frequency and sell-through, and it’s hard to make the curves cross.

I’m not sure what the optimal rate should be — David’s suggested rate may well be it, but I don’t have the data. Another approach would be for the labels to get some equity participation from companies wishing to leverage lower rates, which would allow them to capture greater upside for the additional “risk” they’d be taking, whilst charging market rates to companies that can afford it.

Regardless, to use a tax metaphor, instead of having one tax rate aimed at the super-rich — which simply encourages tax avoidance in the lower strata — the goal should be to broaden the tax “base.” I know that the labels are already experimenting with this but, like David says, they need to act fast.

Based out of London, Raghav “Rags” Gupta is VP of International Partnerships at Brightcove, where he has worked since ’05, prior to which he was a senior executive at Live365. His blog can be found at www.ragsgupta.com. The views expressed here are personal and do not necessarily reflect those of any company with which he is affiliated.