A known secret of the music industry: the labels, though becoming open to new business models from startups, are asking for a hefty upfront advances for licensing music and in some cases a substantial equity stake in the company, and Billboard explores the practice. Someone like Universal Music Group is making the equity stake standard in any deal, our sources say.
Among the examples: troubled online ad-supported music service SpiralFrog has given more than $3 million in upfront advances to UMG alone before it even went live, and has paid additional millions in licensing fees since the original term expired. Imeem is said to have paid major advances and gave labels equity in the company, the story says. We reported on the Buzznet-UMG deal last week, which involved equity as well.
Rev share was the norm till a year or so ago, but according to former EMI digital executive Ted Cohen, labels soon soured on that model as services began gaming the system so that labels ended up with nothing. Not that these music services were making any major money in the first place anyway.
“What was once considered a major advance — $500,000 or $1 million — is becoming a $2 million or $5 million advance and really over-the-top requests for equity…If you raise $15 million to start a business, and have to spend $12 million just to pay off the content companies, that leaves you with $3 million to run a company. I don’t know anybody able to do that,” said Cohen.
Is this the cost of doing business, or the new cost of openness?