Blog Post

Why Digital Music Companies And The Labels Have So Much Trouble Getting Along

imageYouTube and Sony (NYSE: SNE) Music Entertainment reached an agreement last week on a music-sharing deal, providing a welcome break from the nasty back and forth between Warner Music and the video behemoth over their collapsed deal. The Sony/YouTube agreement will provide music videos for all to see and presumably will make money for both parties. So why aren’t the labels and digital startups (not just YouTube, but others as well) inking more deals? The answer lies in how the deals are usually structured and the way that the two sides approach the negotiating table. (I know a little bit about this subject, having founded a music company and been involved in negotiating sessions over the same types of rights.)

First, the details of the deals, which for the past few years have consisted of the following terms:

–The digital company makes large upfront payments to the label (aka advances) — millions of dollars in the case of a company the size of YouTube — that are recouped as revenue from ads sold on the streams.

–The record label receives a penny for every stream whether or not advertising is sold on the content. Recently I

12 Responses to “Why Digital Music Companies And The Labels Have So Much Trouble Getting Along”

  1. Musicholic

    In my view record labels have to protect their artists as they ensure the artists are well paid even before their music is sold and as we know all artists ask for certain requirements to be met before they sign up to a label.The only issue with labels is they keep most of the profit to themselves

  2. These tensions between YouTube and Sony, were repeated in the UK with the Performing Rights Society, and with PRS counterparts GEMA in Germany. Their squabbles led to YouTube pulling all premium music video content in those territories.

    It just goes to show that they are prepared to play hard ball with the music companies. Perhaps because they see they are an increasingly important distribution outlet for the them.

    Having said that, if the economics of their relationship is as Steve describes above perhaps it is no wonder that YouTube is looking for more.

  3. A great article, and it highlights some of the challenges our business is facing right now. The fact is Apple has a fantastic system for distributing music and movies that really works for the consumer. This system has come about through a long trail of hard work and is based on practicing what they preach – "Think Different". Digital/online distribution is the future and labels need to support innovation in this area of the market instead of trying to combat it.

    Our company is bringing a revolutionary new music product to market that gives music fans the choice of having synchronized scrolling song lyrics embedded on the music video, which allows them to learn the words to their favorite songs… on their mobile, laptop anywhere – without the need to install any software.

    Here in New Zealand the record labels have embraced the new technology allowing us to bring it to market. The artists love it, the distributors get current content and the fans form a deeper connection with their favorite artists.

    Ultimately it is the labels that will reap the benefits by working with the likes of iTunes, Myspace, Facebook, Youtube and the digital startups like SingQ that are bringing innovative content to market.

  4. songwriter

    Since Dec., a song I wrote for Julio Iglesias has had almost 12 M
    plays on Utube. It was a Sony release in 1988, and I guess it's part of this new
    deal. If I see any money from it, I'll be very surprised.
    If I get money, of course I'll take it. However, I'd rather have the 12 M video
    plays, regardless of whether I get money or not. This is a new age and a new
    time and new ideas need to be formulated. I don't know exactly how it might
    benefit me at the moment, but I think the opportunity will show itself if I keep
    In the meantime, it's a gas to have that many people see my work !

  5. David Holbert

    The underlying (and not necessarily valid) premises of the two business models are paradoxically incompatible and dependent. Labels – vet and limit options to concentrate promotional power; Digies – don't vet, don't limit, just aggregate and resolve choice. The ability of the labels to make large spends on promotion leads them to over-value their approach. The underlying character of the medium lead the the digies to over-value the characteristics they attribute to their medium. Meanwhile, consumers have gone to the web and yet, they are still responding to the managed choice of the labels. Digi's will have problems going straight to musicians. Musicians will still need some kind of agent. Labels can work so long as they can drive demand. A large share of consumers will always be befuddled by unqualified choice. There are undoubtedly business models that have not been thought of or explored that will reconcile what are largely perceptual barriers.

  6. Clearly, both sides of the discussion have valid arguments on their side. From my personal perspective, I tend to side with the labels, simply because I know the costs involved in generating and marketing content. These costs have to be recouped before the label makes any money. On the other hand, it is also apparent that music-related content is a major element of the digital companies' business model and that they aren't the ones who do most of the value-generation (compare the view counts on videos by bands who have been established with record label backing to those made by do-it-yourself independents).

    One solution I see is for digital companies to cut out the middle-man and conduct deals directly with musicians, providing the financing and marketing thrust that so far has been the role of the record label. It won't happen, of course, because no one wants to take on more risk than they have to.

  7. We've all seen the doom and gloom stories that chronicle the demise of the music industry in the internet age. It is true that CD sales are in sharp decline, profit margins are evaporating and deals for new artists are few and far between. Certainly, the availability of free, if not legal, music online has dramatically impacted these trends. While revenue from digital downloads at sites like iTunes, Amazon and emusic are increasing, they are not offsetting the losses on the physical product side. Taking all of these facts into account, I can say with complete confidence, "Now is the time to go into the music business!"

  8. Yes, fans and labels have killed music. The fans by stealing it and the record companies by taking more than a fair share of pound of flesh. While in theory the ad revenue split sounds good, it is based upon X amount of dollars per 1,000 impressions, so we are talking fraction of pennies. And how much really trickles back to the band? The fact is the music is a loss leader for bands due to the thieves I mean fans and the loan sharks…I mean record companies, and no matter what crap the thieves say they don't but the CD's they really like and go see all the shows or buy merch. The answer is attach a tax on the internet download and streaming usage of music and movies and have more bands go the route of Nine Inch Nails for the true fans of us still left out here who buy music , support live shows and buy merch. Shame on anyone be they supposed fan or industry who have done this to muci, as I am sure there is a special place in hell for all of you..

  9. There is only one solution: labels have to change their financial expectations.

    When CPM's can ebb and flow with the economy, or the popularity of a site, there is no way to remain in business when you have a label partner that acts less like a partner and more like a loan shark who says "F#ck you, pay me" no matter what.

    Ad revenue sharing make sense. Sharing equity in companies makes sense in a lot of cases. Per stream rates don't. Period.

  10. Very interesting to see the numbers behind such deals. It becomes quickly apparent why we don't see many new legal and main stream services that unleash music content similar to RSS feeds do with written content for instance. I knew that deals with the Majors were one sided but these upfront guarantees indeed seem "stifling innovation". That said I love the new and innovative service Spotify that I am currently using. I wonder how long they can keep it going. Looking forward to the follow up post.