Jim McDermott spent nearly seventeen years at major labels like Polygram, Universal Music Group, and Sony Music Entertainment, starting with Warner/Elektra/Atlantic Distribution in 1987. Here, McDermott describes a radically different approach to retailing, one that may completely surprise you. And, make you wonder whether the current approach towards digital retailers really makes sense.
This was originally commented in response to an earlier debate between Walden Venture Capital's Larry Marcus, who called for lower licensing demands, and Universal Music Group executive David Ring, who defended them (that article is here).
"I did twelve years in distribution, at Warner and PolyGram. I was in artist development for the first part of my career. The biggest challenge we had then was convincing accounts (retailers) to take chances on unestablished new artists. Their "open to buy" budgets were largely allocated to hit titles, and catalog that they knew would turn. So in order to get retailers to take a chance on anything new or risky, we gave them incentives.
What kind of incentives? Favorable credit terms, discounts, and subsidies. Often we gave dating on product so a retailer would be able to sell their stock before payment was due. We often sold product at a steep discount, and let the customer return the product months later, but keep a portion of the discount - so they made money on product they didn't even sell.
As an industry, probably hundreds of millions of dollars were given to retailers for "co-op" and "point of purchase" advertising, meaning we paid the retailer to advertise our own products. The retailers of course built healthy margins into this advertising, and it became another profit center for them. We'd spend $25,000 on a Best Buy circular so a major artist's new record would be stocked visibly in stores the day it came out.
The distribution company relationship with retailers was more than friendly, it was symbiotic. Small retailers did not have the volume to buy direct, so they went through wholesalers, and did not get many of the benefits the larger chains did, but we still sent them promotional product, called them, asked their opinions, and understood that especially on developing artists they were a vital part of building success and credibility.
Of course, NONE of these retailers paid an "upfront" or licensing fee to carry our product; direct customers needed to show an ability to pay, and we gave them credit. We shipped them physical product, at considerable expense, and if they went out of business, we often took pennies on the dollar for monies owed.
Most of these companies are out of business now. The business no longer needs to produce huge amounts of product before they even know what demand will be, they don't spend co-op or point of purchase advertising dollars with digital retailers, they no longer need to destroy millions of dollars worth of returned product annually, they have detailed product sales information from retailers and do not have to pay Soundscan millions of dollars, they have the ability (if they desire) to sell direct to any potential retailer, no matter how large or small, or direct to consumers. They no longer have to beg retailers to carry product on developing acts.
Let's also remember that record labels never received a dime from radio stations playing their records and in fact spent billions of dollars over the past few decades to get airplay.
In the mid 90s, when I started working on digital deals, the upfront payment accomplished two things: it separated the jokers and wannabees from serious players, and it made labels feel good taking a risk, because that's what big advance checks do. There was another side benefit to the labels - these demands stalled the progress of the digital business, and kept the physical retail business from collapsing overnight.
In 2012, especially given the decimation of the physical retail environment and the huge shifts in the landscape, a rational mind would deduce that ubiquity is the only way to offset the reduced commercial viability of the product. Make it easy to consume, get your product out there in as many places as is possible, be friendly with your retailers, help them sell.
It's an ugly word, but perhaps it fits: extortion. Remember that scene in Goodfellas, where the guy brings in Paulie Cicero as a partner into his restaurant? He gives him a piece and they end up burning down his place. If you want to be in the music subscription service business today, expect a similar experience.
We never asked any retailer or radio station for a piece of their company if they wanted to sell or play our music. Back in the day we did everything we could to help retailers; we gave THEM money! There is no rational argument or justification for these huge upfront payments, however, it's a great strategy if you want to keep 99-cent downloads alive, and control distribution in a world where that's become nearly impossible.
I often wonder how dire things must become before labels are compelled to be reasonable, responsible to retailers, artists and consumers. The adversarial tone and predatory manner of doing business seemed rational in 1999; in 2012 it's just stunningly dumb. Every friend I have still employed by a major splits time either rationalizing their existence, or shitting their pants as they watch colleagues get laid off weekly.
One day soon, a "label" is going to consist of one lawyer, sitting in a shabby cloth chair in a room with one 20-watt lightbulb, who picks up the phone, shouts "FUCK YOU, PAY ME" into the receiver, hangs up and goes back to checking his Facebook page."
Joe Artist Thursday, February 16, 2012
James Monday, February 20, 2012
No he's absolutely spot on. I work in digital retail and I can't afford to support new artists because I am essentially told what I have to push by the labels. The balance of power has swung further than ever in their favour and it's far too simplistic to think that merely writing a good track will get you sales.
Craig Monday, February 20, 2012
You are so wrong. Great artists come and go, unrecognized because they do not fit into the scheme of things. Not willing to play by the rules or not identifyable by category, (eg. Eva Cassidy). You go nowhere as a creative musician, singer, songwriter, only to be surpassed by great promotion of others who are less talented. Performers become demoralized, and rightly so, because of being used and abused by the industry. Thank God for the Independent Music Conference (IMC) that would nurture independent artists to avoid the pitfalls you assume don't exist. Independent artists survive by sheer determination and learning from conferences like the IMC. As an independent artist, you can always see your name up in lights, The problem is, sometimes it's on a billboard as your new State Farm Agent.
Alan Wednesday, February 22, 2012
Are you insane? Even in manufactured goods, quality is about 14% of the purchase decision. Income is never about the artist--at least not the musical artist. It's about the sales artists. That is not bad and it is not good. It just is.
whoa Wednesday, February 15, 2012
David Allan Wednesday, February 15, 2012
joel Wednesday, February 15, 2012
House music Thursday, February 16, 2012
Itunes pay's me well. As a label owner and an artist I keep the majority of my sales and the releases of all artist are carried world wide. I'm signed directly with Itunes, no middle man.
Nothing wrong with digital...I sell way more digital than I did Vinyl.
jimmy conway Wednesday, February 15, 2012
Best post ever.
Distro Wednesday, February 15, 2012
Comparing the old world to the new world just doesn't work, IMO. Correct me if I'm wrong, but distributors' credit departments would cut off a brick-and-mortar retailer if the bill wasn't paid, right? And then that store would go to a one-stop for product. Or another one-stop if that one-stop had stopped shipments due to late payments. Yeah, labels and sales reps were giving those stores promos and coop marketing dollars and kissing their butts to their specific titles into their stores. But their distributors' credit department always had to deal with the very real risk that a store wouldn't pay for its shipments in a timely manner -- or at all. That risk exists in the digital world, too. A subscription service or webcaster starts accruing royalties from day one whether or not they are collecting money against that activity. That was Ring's point, and I think it's a good one. Now, maybe it would be best to give new services a royalty holiday, or phase in royalties slowly over time. Mabe advances should be smaller. I dunno what's best. But I don't see any fundamental difference in the financial risk bore in the old days of physicla retail and the financial risk of the digital era. As a result, safeguards will need to be put in place to make sure digital licensees pay. It's just a reality of doing business.
Jim McDermott Wednesday, February 15, 2012
With respect, you misperceive the entire tonality of the relationship between labels and physical retailers historically, and labels and digital outlets since the digital age started.
Labels bent over backwards to enable physical retailers to get in business, stay in business and become profitable. I sat in many meetings where we figured out how to get current product to accounts who were "on hold", and in fact between the credit dating terms and discounts, it would be months before a retailer actually paid for product sold, let alone delivered. On top of that, we paid retailers to advertise the products. And most large chain accounts had at any time millions of dollars of product sitting in their bins that thye hadn't paid for. The exposure and potential liability was many orders of magnitude higher for the labels in the old retail days.
Royalty Holiday? You've drunk the Kool-Aid pretty good using a term like that. THERE IS NO FINANCIAL RISK TO THE LABELS TODAY! They're not delivering physical product, they're not accepting returns, they're not paying digital retailers to carry their product! If they get paid quarterly for actual streams played or downloads sold, they have far less liability than they ever did in the old physical days.
The huge advances required up front means that only those with very deep pockets can play, which stifles innovation and increases the likelihood that just a few players can afford to offer services, let alone be successful. This is un-American and anti-competitive, relative to how things used to be in the physical retail days.
You know why the labels require huge advances? Because they can, because the law allows them too, especially with interactive streaming services , which are not covered under statutory licensing. And also because, and I know this because I sat in the meetings and heard it dozens of times, "get the advance, cash the check, get it on the books for this year, we need to show digital revenue, if these guys go out of business next year because they made a bad deal, fuck them, we cashed the check already."
That mentality still prevails, its not about working together to build a sustainable business that works for everyone in the chain. The advances should be dramatically reduced, and put in escrow for the label to draw against if reasonable projections aren't meant quarterly. Perhaps requiring an independent party to monitor streams/downloads to ensure the label is being paid correctly is fair. But who's going to mandate this?
Again, there is no liability in licensing these companies without requiring huge advances, other than the more you license, the harder it is for iTunes to keep selling .99 cent downloads. And of course the labels will miss the big up front check.
And oh btw, ask a label how much of these huge advance checks gets allocated to the artists.....
Bart Thursday, February 16, 2012
Jim, thank you so much for your testimony. You just said all I wanted to say, but in good english, packed with some more years of experience. :) Btw, the first paragraph of your last comment was enough for him, hehe
Anthony Hall (Pure Mint Record Friday, February 17, 2012
Well said Jim; the comlexities of licensing and the devastating 'level' of upfront advances are exactly what is killing this industry. I have lobbied at PPL, BPI and IFPI to introduce more transparent blanket licensing of on demand on-line streaming services, so that a comprehensive service (metal.com, randbsoul.com, reggae.com, music.com etc.) could launch where the consumer can hear anything he wants in the genre (or all genres) at a time of his own choosing.
I know the USA does not currently pay out broadcast royalties to sound recording producers (like PPL in the UK licenses radio etc.), but this is the way forward both for radio in the USA, and the internet worldwide. Licenses can then be fairly paid for; content can be ubiquitous, shares of advertising etc. can be split with content providers, AND additional revenue streams can be added in (T-shirts, discounted physical product, ticket sales, 360 elements etc.).
I won't subscribe to Spotify because it is not comprehensive in the music I want to listen to; imagine turning the radio on and there being 4 minutes of silence with the DJ saying, sorry this tune we wanted to play was not licensed; radio would have died a death. There also cannot be competitors to Spotify et al unless they have exceedingly deep pockets. Extortion sums it up well.
As a label boss (and for my sins, a lawyer in the UK and USA) we have to adapt. We can no longer sit like King Canute and order the 'sea of technology' back. We have to add value elsewhere in the chain. We are moving to a future where social networks and P2P will determine our music tastes more so than the oldskool DJ and his real, or perveived, Payola.
steveh Saturday, February 18, 2012
To quote Hermann Goering:- "when I hear the word Tshirts I reach for my revolver..."
Visitor2 Thursday, February 16, 2012
Well written and a great opinion, I enjoyed reading and seeing his point of view but unfortunately I think it reflects on someone a bit out of touch with the tech/content holder relationship. This and the relationship between physical retail are different in one major way and that way is that as the physical retailers got big so did the artists/labels which isn't the case in tech.
The music industry has watched companies over the past 10 years get big off their content: Youtube, Myspace, Apple etc all blew up as a result of the content they held and sold for massive amounts of money (or in the case of Apple this is reflected in their stock), all while the content industry was left trying to catch up and ultimately never did (and likely never will).
The labels clearly have realized that these companies/execs are getting massively rich while they're continuing to struggle, they need in on the action (especially when they're a major reason why these companies are seeing success in the first place).
What the VC's arent seeing is the opposite opinion (and the opposite opinion of the fellow who wrote this article), that up until recently it was the tech companies extorting the content holders. They're the one who got rich and got out while the content industry continued to flaunder. It has to be a two way street, both parties need to be able to win in the end.
Jim McDermott Thursday, February 16, 2012
I transitioned from Artist Development/Distribution to New Media in 1994, and from the very first meeting we took with a tech company seeking to license music, we argued exactly what you're arguing - the content is what makes the tech company have value, not the tech. I personally made your argument to hundreds of companies seeking licenses between 1993 and 2004: Liquid Audio, Real Networks, A2B, Rio/Creative, Sonicnet, Napster, mobile network operators, and dozens of others I can no longer remember. Your point was valid in the past, but in 2012 it's just not.
Content was certainly an aspect of these company's success, and in many cases, we argued for (and got) shares of the company in addition to advances and healthy royalties for the use of our catalog. But for every YouTube, MySpace and Apple you mention, there are another twenty companies who went under, because music content itself does not guarantee success. In fact, you could argue that music contributed to only a small% of YouTube's success; same with MySpace, and certainly, Apple's riches are due to great hardware, not music I.P. in and of itself. If music content alone were the ingredient needed for mass success, then we'd all be listening to Liquid Audio files on on Diamond Rios.
It is an utter falacy that a music license is the key to riches for a content company in 2012 - do you think Facebook's IPO would be one dollar less if music suddenly was no longer integrated? The license was worth money at a time when music wasn't easy to find on the web, when streaming content wasn't ubiquitous, before a whole generation was raised on file sharing. Before music as a product was worth literally nothing to an entire generation whose age bracket traditionally made up the meat of music buying consumers.
It pains me to say this, but in commercial terms, music as a product is worth almost nothing. By that I mean the pricetag of a song, or an album, or a listen or a view, to consumers. There is a portion of the audience that will pay .99 cents or $9.99 for an album, but the greater mass doesn't need or want to own it.
So if the content is worth almost nothing commercially (we're not talking about artistic or ethical worth, just what a punter will pay) then what's the license worth? Well, it's worth whatever revenue can be generated by having the license. If a song listen has a real market value of a tiny fraction of a penny, then clearly, the license is only worth millions when trillions of people listen to the songs - which inherently means a low price point to consumers, and ubiquitous availability of said content, in order to achieve the scale necessary for success.
The labels are trying to sustain the value of these licenses artificially through scarcity. Few can afford the license/advance - they must have large audiences paying probably $10.00 per month and a user growth curve that looks like a hockey stick to make it work. They're forced by the labels into terms that just won't work, and then label people get up on panels and say "don't blame us if your business model isn't well thought out."
Really, anyone who wants a license should get one easily, with little or no advance payment up front. Labels should make it so easy and painless to get content, so it's on every blog, every site, every service. So a blog doesn't need to link to a YouTube file that ends up broken after a takedown notice; they get the content directly from the label, no hassle, reasonable fee per stream, painless. Because that's how labels will truly regain control of distribution: by empowering everyone, making it easy, getting everyone into the tent pissing outwards instead of the current way, everyone outside pissing in.
Labels don't get, WON'T GET, that their product isn't worth $9.99 to most consumers anymore. Similar to performing rights societies or publishers, the labels should/will be getting fractional payments from the streaming usage of billions of consumers. But they still want that .99-$1.29 per song, and that's a factor in these obscene advance demands, which are meant to discourage/limit growth in streaming services.
Music needs to be like water, everywhere for everyone, consumed so widely, so available that's it's perceived to be valueless, but we cannot live without it, and some people will pay dearly just to drink a bottle with a fancy label on it. Unfortunately the industry will need to burn to the ground before anything changes.
Visitor2 Friday, February 17, 2012
I agree with you on some points but others I do not. One major thing you're overlooking is that it is that music is one part of the content industry which contains movies, UGC etc, there are many types of avenues for content creation.
Ask anyone at Myspace what the must successful and defining part of their product offering was and they'll all say it was and is still music. Youtube sees the value in music and premium content which is why they're so focused on it, only 4% of Youtube's revenue comes from UGC, the rest from premium content partners. Apple's modern day success was spearheaded by the ipod which would be nothing if not for the content it holds, as a result of its success they built the cash reserves from near bankruptcy they needed to become the great company they are todya. All of these companies absolutely built their business on the shoulders of content creators.
Today the main licenses are happening in the world of streaming content, where the majority of innovation is happening. These brands such as Spotify, Rdio, Netflix, Amazon Prime etc exist 100% to deliver premium content to their users, they would 100% be nothing without the content they provide, so why shouldn't the content holders get their dues from it?
I also disagree with your opinion that labels don't get that users don't see 9.99 in value in their product, if they truly thought that that was the value at this point they wouldn't be allowing the innovation with their content from services like Spotify which allow for a free ad-supported tier. I know for a fact that they see this as the future landscape as I've sat in many meetings hearing this argument with heads of digital at majors and indies alike.
Lastly the argument about music being like water is very outdated. Music will NEVER be like water because no matter how passionate one is about music, you will not die without it. Very few water purchasers buy water because of the label, this idea is only one shared by people of financial means to view this arguement. The average person only makes water purchases for some level of necessity. If you're out and about and are thirsty, you NEED the water so you're more than willing to day a dollar or two for it. This is the reality for your average water consumer, the "mainstream" if you will which is the market the industry needs to tap into for profitability.
Now, I'm a huge supporter of streaming music and strongly believe in the model of stream + valued upsell as the future of the content-based industry but the water argument needs to be retired, its a completely different level of necessity.
All these disagreements stated I value your opinion and find it to be well thought out, I just stand by my statement that its a tired argument. Content holders deserve to maintain value in their content and tech companies need to be understanding of that especially if they are really in the game of being good partners with content creators. There is a massive pay day at the end of the tunnel for tech companies that have the ability to innovate and create a great product, that success needs to exist for the cows in the field as well.
the-odb Friday, February 17, 2012
Visitor2 has some nice points...as well as Jim.
I agree the water shit should stop.
the tech companies got big partly off content (music, movies, etc)
what do you think Facebook got big off of???? CONTENT -- just happens to be personal user content that they didn't have to pay for. FB is nothing more than a massive inbox for messages. big deal.
Visitor Saturday, February 18, 2012
"Labels don't get, WON'T GET, that their product isn't worth $9.99 to most consumers anymore. "
Is this really true, or does it only seem so because it is so easy to steal the music? If the music were not easily stolen, I bet you would find many are willing to pay $9.99 for an album.
$9.99 is actually a great price for an album (an album with lasting artistic value, at least) that provides a lifetime of listening. Consider that a $9.99 album, corrected for inflation, would have cost $3.63 in 1980. That's quite a great deal. If people are willing to spend $100-200 or more to see a concert, I think they can afford $9.99 for an album.
SOPAthetic Sunday, February 19, 2012
You're missing the point. Music is now, and always will be in the future, "easily stolen" as you put it. Whether you think it's wrong, terrible, illegal, immoral, whatever.. it doesn't matter anymore. This is the reality of our business. Adapt or die.
Luis G. Pisterman Wednesday, February 22, 2012
Hi Jim, long time..., Labels are and had been lazy !!! That is why as of today none of them converted their portals to be able to sell digitally direct to the consumer, instead they choose to let a "hardware company" to use their catalogs to sell more phone, players, etc.
Aristotle Friday, February 17, 2012
Visitor 2 and McDermott, what do you guys recommend an artist - hypothetically who has many hit quality songs but has no frikken idea how to proceed to turn them into reality vis a vis the labels or online or whatever - do, in as specific terms as you can?
Econ Thursday, February 16, 2012
"I often wonder how dire things must become before labels are compelled to be reasonable"
The answer is never... as long as the thieves in DC are taking that upfront money retailers used to get and arde willing to change laws and send soldiers after John Q Public to suit the needs of the executives and lawyers executing business plans that paying customers have overwhelmingly rejected.
Remember, it's not a failed business plan, it's an entitlement.
The only problem I have with the article is that he is describing a retail relationship that died BEFORE Napster existed. By the mid 90's major labels basically ended their return policies - a major contributor to Tower failing. And have we forgotten the early 90's when labels threatened to pull ad dollars if the retailer was selling pennies above cost or lower?
The labels COULD negotiate lower license fees with the streaming services in exchange for higher per-stream payouts, but that means the labels would be closer to operating like they did in the mid 80's instead of the mid 90's. The thing that really changed was the debt load at the labels - they have more debt now and are geared more toward revenue certainty than possibly making more (or less) money on developing talent.
Bill C. Sunday, February 19, 2012
The labels COULD negotiate lower license fees with the streaming services in exchange for higher per-stream payouts, but that means the labels would be closer to operating like they did in the mid 80's instead of the mid 90's.
This is I believe the key, and what nobody is saying. By insisting on equity, and large advances in exchange for low per stream payments, the major labels are building a business model that means they collect money without any need to pass on the full value to artists. Large advance plus low per stream rate equals unrecouped advance. Term ends, and the unrecouped balance is written off, and new large advance is received, while only a fraction of royalties on that advance needs to be paid to artists. And by owning equity in streaming services, there is an inherent conflict of interest.
JSS Friday, February 17, 2012
Anyone here a musician selling their own product on the road? If you are you know the bullshit you have to go through with the label to get your own cd's to sell at the club. Another example of how the labels are out of touch with consumers.
This is well-spoken advice from someone who lived it and it watching it diminish. Those who snark at the logic are never going to get it.
Visitor Saturday, February 18, 2012
Yes, never had a problem with that. Both labels with whom I have deals have given me a few dozen copies for free, and as much as I need at cost to sell.
Dave Jackson Friday, February 17, 2012
ctmartin Wednesday, February 22, 2012
Universal, or Fontana-Universal? Big difference, of course, in terms of how steep that uphill climb was...
what a waste Friday, February 17, 2012
He said it all when he mentioned the grossly insane amount of money the labels spent on lobbying politicians. That money could have been invested in developing/building/marketing their own digital delivery systems.
Jeremy Friday, February 17, 2012
Jim McDermott Friday, February 17, 2012
I understand the model being discussed quite clearly. The original post was about the huge advances required to get licenses for these models, and whether it's justified.
The consumption model has changed, and streaming is fast becoming, or has become, the predominant manner in which people get their music. These new services are therefore becoming the new "retailers" which labels do business with. I offered the analogy of how the relationship between labels and retailers used to work because I believe it was a far more equitable, reasonable and productive way to do business than the current environment, and if you don't learn from your past, you're doomed to repeat it.
There is no "economic certainty" in a hard goods model, at least not in my experience selling records. You guessed how many units to produce, tried to convince retailers to carry it, guessed what consumers would buy, guessed how many singles would be hits, guessed what your co-op marketing budgets needed to be, and you saw what happened. We shipped billions of CDs that came back and eventually found their way to landfills.
By comparison, a streaming subscription service has far more economic certainty. A label delivers files, which sit on a server, when they are accessed by a subscriber, the play is logged, and an incremental payment is tallied to the rights holder. Delivery on demand, with no mechanical reproduction, you get paid for what gets played. This is equitable for all parties, so long as the per stream rates are reasonable. An on demand stream is essentially a unit sale, which labels hate because it's a tiny fraction of $1.29.
I don't agree that a startup needs to be "proven" to get a license, fundamentally I think any website or blog that wants to stream music on demand (interactively, not radio) should be able to easily obtain a license and pay a reasonable per stream fee, or perhaps be required to carry advertising to pay for the stream.
I also don't agree in the concept of the "full-paying customer". Every one of these license negotiations is a torturous, unpredictable haggle that involves the licensee being turned upside down by the licensor and shaken to see how much change drops out of their pockets. This means only the richest outlets can afford to get the license - do you really think that's healthy for the industry on any level?
Apple sells a different product, an iTunes download is a mechanical reproduction, something you own. That's fine for a portion of the audience. The larger audience is consuming music in ways that never involve a transaction on their part. This is not going away, it's now ingrained behavior.
I'd love to see every single album review on Pitchfork (or any blog) have a full on demand stream of the record up perpetually, because that's where the listeners are. I'd love to see monthly subscription fees go away entirely, so you don't have to join anything, you just listen where you find out about music. That would be a truly social experience. And the licensee? No multi-million dollar up front payment, agree to the per stream fee, off you go, pay for the actual streams served or serve our ads, faucet is on so long as you play as agreed. Have music be everywhere.
Truth is, it's nearly everywhere already. The labels want to control distribution by making licensing expensive and exclusive, and how has that worked out for them over the past 12 years? The reality is they could regain control by making licensing inexpensive and inclusive. Do this and it no longer makes sense to steal. Do this and your market grows. Do this and your music is everywhere. Do this and you're working with your customers again.
The record labels' legacy over the past decade can be summed up in one word: NO. Meanwhile we're in one of the most innovative times in history. The time for a total rethink of what the product is, what it's worth, and who the customer is, is long overdue.
Jeremy Friday, February 17, 2012
Jim - you are ignoring the fundamental issue here, which also was the leak in your original thesis - these startups are not an obscure record store on the fringe of some college campus. Each digital startup competes with the labels' very best retail customers. Each digital startup has the very real opportunity to cannibalize the other. There will forever be an endless supply of these new companies eager to exploit recorded music, which is a great thing. However the "absurdity" you describe would very accurately explain providing retailers subsidized pricing until they grew to a scale that they could engage in a "torturous, unpredictable haggle" with the content owner. That process never provides the recording owner their necessary return.
Your suggest that "The reality is they could regain control by making licensing inexpensive and inclusive." However, "inexpensive" is a relative term. Jim, you've moved away from the issues David Ring articulated, namely:
"NetRadio went out of business owing $2 million in royalties, they didn't go out of business because the royalties weren't there. They went out of business because there was no revenue for them. So if you're funding a company that doesn't have any revenue model, and they can't afford to pay point-zero-zero-zero-zero-zero-one-cents per play, that's not the record industry's or the artist's or the writer's fault."
This isn't an issue of supply, but rather one of paying for valuable startup assets.
Jim McDermott Friday, February 17, 2012
NetRadio - there are many reasons why they went out of business, they were early for one, the market was nowhere near as mature as it is now. And frankly there's no reason they should have owed two million dollars in royalties when they closed, that's just really bad accounting on the label's part. If you're accounting quarterly your exposure is limited, I imagine that number could include other payments owed like installments on advances. And btw, 2 million isn't much when you divide it amongst all the labels, there are regional chain stores that went out of business owing a lot more to labels. It's kind of a bullshit example.
At PolyGram and Sony, I sat in probably hundreds of licencing sits from 1994-2004, and they were all the same, whether it was for a download store, or a subscription service. No matter who wanted the license, we jerked them around AGES before we gave it to them (if we gave it to them)- made them tweak their business model, their technology, their rights management, pricing, we talked about owning a piece, we fucking TORTURED them before they got licensed. I'm talking about the above board players, not people like Napster. Ask Gerry Kearby formerly of Liquid Audio what it was like trying to get a legitimate license for content from labels.
Your assertion that these startups are not some "obscure record store" is correct, because only people with deep pockets can hope to get a license, and THAT'S THE PROBLEM. It stifles innovation, it limits distribution. It limits the ability of small companies to experiment with the pricing and consumption models. Only the rich get to play, and that sucks, and it's wrong, and it hurts consumers and artists.
The problem with the advance discussion, and I'm wondering if you've ever participated in this process, is that it's not simple. The label gets to fuck with all these aspects of your business, kind of figure out what they want to change, what you can afford to pay, and it takes months. And they might to own some of your business (hello, Spotify.)
In the old days, you bought a record, put it on your shelf in your store at the price you wanted to sell it at. You sold it to who you wanted to, the name on the outside of the store was yours, you owned the business. You can't do most of that anymore, even with download models. The license is an excuse to extract huge sums from licensees, and to manipulate the consumption model, which stifles innovations, cripples the ability to attract consumers and sustain a business, and ensures that only companies with huge war chess can play.
The labels are not "funding companies that have no revenue model", that's a completely bullshit spin on what actually happens. They're collecting a stiff toll on an bridge that an optimist wants to cross, and when he gets to the other side, he's broke and starves to death.
dangude Friday, February 17, 2012
Great post. If labels had spent the millions, perhaps billions of dollars on developing their own digital distribution system and branding it as something desirable then they wouldn't have the extortionist image they now have
What about... Friday, February 17, 2012
Vevo? Perfect example.
Do it for downloads and streams.
Frances Friday, February 17, 2012
Speaking of extortion, why is it that noone dares to question Google's scare tactics in public?
As an FBI agent recently told me, "if we ever have to go after Google big time, expect a huge online campaign that will target agents by name".
Chris McClure Friday, February 17, 2012
It's hard to monetize scarcity when there is no scarcity.
David Ring doesn't yell 'Fuck You' all day long - instead he beats his head against the wall trying to slow the bleeding while Rob Wells steers the value proposition from a sales based business to a data based business. Are they fucked? The next 2 1/2 years on either of their contracts will certainly tell.
In my opinion, the genie is out of the bottle on intellectual property sales and smart artists and reps should look at leveraging their impact on their audience in to tickets, derivitive merchandise, licensing and advertising.
Do they need a label for this? Well they could use a team...
Arthur J. Owens Friday, February 17, 2012
I agree with Jim wholeheartedly on this, and the bulk of my experience has been in digital. I believe his point was that the majors used to be in the business of cultivating a healthy business ecosystem, whereas at present they are still in fear of the emerging digital ecosystem and in some cases are trying to hamper it. What they fail to recognize is that in failing to cultivate legitimate entrepreneurs seeking to develop new revenue models, a vacuum results which is filled by illegal and unlicensed models.
I've never worked inside a major but I have negotiated & worked with them extensively, and they made it extremely difficult to do business, even when certain factions inside their organizations saw substantial value in doing business with my clients. Massive advances, extraordinarily detailed reporting & delivery requirements were the norm. Negotiations were dragged out and new tech development was almost always req'd, regardless of the product line. My clients have been in online retail, tech, and internet radio, and they held off on introducing innovating tech for promoting music because they knew how costly and challenging it would be to license the music for the respective purposes. So less music was sold as a result.
The majors are so key to the rest of the industry's health, so when they make it difficult to do business, it's bad for the health of the entire industry. And they are making it difficult to do business by seeking short term gain over long term investment. That probably will not change until the senior management at the labels moves on and is replaced by some forward thinkers.
Josh Gertz Friday, February 17, 2012
Jim - you continue to be an inspiration. Amazing post.
Problem is you are comparing retailers of ala carte physical sales to online subscriptions which have a totally different value proposition. We go to Target and Best Buy for more than music - is the same true for Spotify?
Biggest problem is back in the day (when we both worked at PolyGram) we sold units for $12.99 becuase consumers had to buy the whole album. Today you are lucky to sell those same people $1.29 = exacly 1/10 of previous potential.
The internet changes the model of distribution for each industry differently. In the music industry it gave the power back to the consumer to choose what songs they want and not to have to pay for those they don't. So now the labels have to find alternative revenue models if they are to survive. 360 deals and "licensing" fees (even if there is breakage for the content owners) is just part of the new economy.
Jim McDermott Friday, February 17, 2012
Hey Josh, good to hear from you! Been a while since we worked at Sony together.
The essence of my original comment is this: labels used to have a very productive relationship with our accounts, we helped them sell, survive tough times and thrive in good times. Modern "retailers" of digital music, which includes not only download stores but also subscription services in my definition, are just as important - if not more so today, given file sharing - as our customers back in the day. I'm not suggesting we give them co-op or price & positioning dollars, but I do think it's wrong to hold them up with huge advances, which almost insure they can't succeed.
Anyone who's ever worked on digital licensing deals at a label knows that the goal is to get a big advance, a big per stream fee, technical and marketing concessions, and content carve-outs which benefit outlets like iTunes. The tonality of these negotiations is a far cry than the friendly, productive approach we took with new accounts in the old days. And that's a bummer.
Target and Best Buy are not good examples of music retailers, they're mass merchants. They used to sell music cheaply to lure customers in and convert them to higher margin products....hmmm, who else does that?
The brightest future possible is a world where music consumption does not require a visit to a service or a url, but it's everywhere, and you consume it in the moment. Music integration with Facebook is an early stage example of what that might be like.
Hope you're well!
@eugenesong Friday, February 17, 2012
@DonovanJL Friday, February 17, 2012
With a few exceptions in his argument, a terrific read on the state of the music industry.
@MusicDreamer Friday, February 17, 2012
Possibly the best music business article I've read in weeks.
Bill Schacht/Aestheticom Saturday, February 18, 2012
Great post Jim, nice to see you still thinking/caring about things like this. Me too. First 'album' I've bought in years? Bjork's 'Biophelia'. Been *screaming* for 10 years about returning some of the value proposition (on top of the music, the main 99%, of course) and its taken til now for someone to lay it down (google the presentation if you haven't heard of that release). One outspoken industry lawyer hates it, I love it, just wondering what you think... For me, dare I say, it Is the future, now... Remember, kids born in 1999 (it's true, there are some) simply in there here, now, what's in it for me.... After hundreds of creative solutions I've directed, I'm beginning to think more and more this is where the attention should start to be refocused....
cipher Saturday, February 18, 2012
A well written article and I understand all that. However, the music business is in a transition period and has not arrived at a new business model ....it will in time.The digital age has allowed anybody and everybody to be part of it...the problem is that most lack talent....so to sort out the straw from the hay is time consuming. There is two aspects of music...music and music entertainment...they are different. You would be surprised if I told you who I have played for on cds....they were great on stage but in the studio were hopeless (made too many mistakes) Then again I am hopeless on stage. I smile when I see their name on a cd...when I did the playing.(of course I was well paid but sworn to silence) Hopefully, great music will be the winner one day. The record companies sorted out most of the wannabes...now we have to do it ourselves.As they say rubbish in rubbish out.
Shachar Oren Saturday, February 18, 2012
Hi Jim, been a while, great finding you here with this great article! In general terms, I totally agree with you.
That said, I don’t see the status of the industry as something that was developed intentionally by labels over the years. I think you would agree it’s quite the opposite, since they’ve been rather reactionary all along (at least since I joined in during the mid 90s, this is my point of view). Let’s take a step back for a second and consider our short digital history:
I think record companies got spoiled during the internet bubble days, when the “advance payment” model was introduced and most start ups had lots of cash from VCs to pay for access, pay to play. With many companies then going out of business in the aftermath of paying “advances”, the cash went straight to the bottom line. What a wonderful model!
We are, of course, dealing with (most of the time) public recorded music companies. These companies used to own hard goods – plants, studios, stock, etc. – and the mentality of the public company CFO is to try and drive stock price and revenue and margin increases by any reasonable means necessary.
During the past decade, while labels were getting out of those physical asset management business lines, they were also creating “digital business development” units that were originally designed to explore, approve and license new digital business models. But before you knew it, those units became a P&L center, with their members in charge of driving revenue numbers. Sales. So advance fees became a new business model. Even thought the bubble was gone, with iTunes launching there were plenty of other large profile entrants to the marketplace that could and did pay entry fees.
In the past handful of years, there has been a healthy shift in the industry, and most such “biz dev units” merged with “distribution” – and indeed, the decisions made about “advances” and such today are a lot more strategic in nature and driven by a holistic approach to the prospect, not a dry requirement to meet a red line. They are not punitive, but rather driven by a realistic approach of short and long term opportunity per prospect.
Reality still presents a challenge when one takes “art and entertainment” (where product quality is very hard to predict) and attempts to drive a public company with it. You just can’t make projections like you do with pizza. Back when there was stock to “play with” on the books, and plants, and studios, there were other elements to the business that drove recurring revenues. Catalog was business too.
Today, the revenue is mainly about the art itself, the IP. The result is that well, if the money is on the table with a major opportunity, it is hard to fault a businessman for trying to make a sale. There is no right or wrong in an open market environment. You can of course argue this has nothing to do with the art and is unfair to artists – that is an entirely separate story altogether.
Yes, taken as a whole, over the past say 15 years, the industry’s restrictive and punitive approach has done it more damage than good. I think it was due to a lack of strategic vision and to short-term, quarterly-numbers focused approach. Things are changing for the better, though time would tell if it’s too little too late.
So in the end of the day, I understand both sides of the argument, and believe that, with respect to our 2012 reality, the “truth” is in the middle and in various shades of grey.
On a separate note, I remain curious about the limited long-term vision that record companies take to their business line. They have realized a decade ago that their real assets are the IP. But the largest diversification has been 360 deals? Why not expand what IP means? How come the major labels don’t control Apps, games, and other IP? Why distribute just one line of digital IP (and the smallest at that)? We all know labels would do well staying focused on music, it’s what they know best. But the public entity that used to own plants, studios, stock, the public company that seeks aggressive growth – has so many exciting opportunities in front of its face these days, and yet none have acted on it. Diversification seems to be a more exciting and constructive approach than arguing with digital retailers over pay for play fees. Just an idea.
JD Saturday, February 18, 2012
This is a great conversation! My favorite of the year. I have also
been in the forfront in representing major artists and New Media. Jim
you are right on. Had the same converations etc...
We need to empower retailers to sell music at the same time maintain the "value" of the music. Music envangelists selling music and telling the story for our artists. It's obvious the labels are not that great at it :) Sorry guys but it's true.
@koedooder Tuesday, February 21, 2012
Voor een droevig verhaal over de relatie platenlabel.
Marybeth Tuesday, February 21, 2012
You talk about labels and you talk about technology companies...what about the artists? Do we get anything for our work? Revenues from digital sales are a joke! 0.01 cents in royalties for 20 plays.....
@yantokuhl Wednesday, February 22, 2012
Labels should read this.
@Industrialpope Wednesday, February 22, 2012
The last paragraph just kills me, great article.
Dreamin' Wednesday, February 22, 2012
This piece could only come from a sales guy. Well written, but my English teacher would say, "Jim, C, fallacious thinking." And this piece, excuse the spelling, no spell check...
The concept of getting next to and "helping" the digital distributors is sweet and wrong. The real music business is a "power law" business. Advice to bond with the digital distributors only furthers the confusion. 95% of the music on iTunes that makes money is a little over 100 artists in the US. And "creating" them in the public's eye and ear, there is no other word for it, costs the labels (or whatever you want to call that lawyer and pot of money and people good with "filtering and choosing", music promotion marketing and music sales) millionsof dollars per "act". For all the little and medium music sales sites, and blooger and pitchfork.com reviewers, etc., they don't really move the tide of profit and sales in our game, and the big gorilla (Apple) has the star game by the throat, and is neither killing it or helping it. And it's a star game and still a volume game and will always be. That stalemate has been, and will remain driven - paralyzed - by that the giant digital stores, particularly iTunes who are making a killing on digital music (Apple with its $100Billion in cash, breaks $500 a share, or the allied Google, more billionaires with its "Free Juke Box" YouTube).
So the "star" system is still, and will always be the business, the costs are still high and realtively unchanging, and... this is the easy part kids, it's cheap at $.99 to get the best track off the best album. The business is now, at best, back to the music business of the '50's, mostly 45's (single downloads), the same costly artists, and much, much lower income. So, do the labels bend over backwards to "digital distributors" (that's anybody with four rented servers in Amazon's back room) or, man up (thanks Sarah! - or woman up?) and demand that Apple permit the record labels (its suppliers of the most desired music content) to enforce a four song, or better yet, 10 song enforced Digital Album when and if the artist or the label wants that as the only product out there? Forget the befriending the digitial distributor. America runs on hard core profit, "The business of Business", etc. The labels need not bow and scrape, they need to figure out where their clout is again. Admittedly this is tough with "free" as your competitor. BTW, they should have sued Steve Jobs (RIP) when he baited and switched to remove the elegant Apple DRM. But., by doing so Apple could sell 500% more of the silicon, plastic, steel and glass called iPods, iPhones, and iPads. With friends like that...
So, no distribution anymore that really matters helping us? Harsh to say, but no. Forget seeking their "clout", there are no friends to be made at the digital interface with IPs or digital stores or behemoths (Google?) who provide artists' music to whoever wants it. The labels got caught in a technological reversal, their "enforcer" was the pressing plant, vinyl and CD, nobody had one, and nobody could copy our stuff. So 1999... But, does the NYTimes or the Wall Street Journal cozy up to their "distributors"? No they lock their content up, sue, and sell direct, which the labels should have figured out by year 2000, a dozen years ago. As well, the musical long tail was and is still ... malarkey business-wise (although fun, culturally healthy and mostly boring to the real general public - exluding online video which doesn't sell anything). So the major labels' star system is the only system that can give any real excitement to the masses, consumed by public willing to pay for it (when free isn't in your neighbors paper bag), and the our brothers in the technology business, who have promoted frictionless reporoduction of our goods, are making a killing on the backs of the labels... whose ignorance and reluctance to grab distribution back when they still had the goods, caused this mess. And, no, it will be only more Spotifys in the labels' futures (practically zero return on that one) until the labels do this. Nobody wants to admit this (Bob Leftsezt's therapist would, though), but the present state of affairs is bad for everybody but the tech billionaires: the public is getting a watered down star system that's moving off of music (too easily stolen, singles only, low margins, getting lower) to only spectacle and show. The labels are to panicky (and broke) now to do Artist Development, selling singles mainly you can't really develop the best of the best musically. And this JIm the Ex Major Label Executive wants us to get next to the distributors for help while Apple and Google (in their own different ways) take what they want from the star system. 40 Million people saw the Grammys and they made money for NARAS, but what about the sound/music business, the labels? The musicians can't really put advertising in their songs, can they? Here's the right advice: The labels collectivize and partner with somebody with enough cash to enforce IP at the ISP level. Or is that CENSORSHIP Mr. Google guy? Probably $750 Million or so collectively (Amazon, Comcast and Verizon and T-Mobile as partner would be good enough) to build real "music stores in every bedroom" and smart phone, and still have $350M to do sufficient PR to buy congress back, (yes, this is America) to enforce the artists' and labels' and recording studios - and music publishers and the whole cast of character Jim seems to now dislike so - all their rights. This is the only path ahead for record labels in this our (like it or not) strictly for-profit world. Make friends with digital distribution when the hard truth is the stars don't really come from there. The digital guys know less about developing a star then the labels do HTML. And, anyway, does Macy's tell Gimbles? Does Apple tell UMG? Compete with new distribution and use stars to do it, make friends later.
@hranaivoson Friday, February 24, 2012
Music industry = the Mob? (I'm just asking...)