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Investor Accuses Labels of Illegally Setting Subscription Prices…

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The major labels (Sony Music, Warner Music, Universal Music, and others) have been charged multiple times with coordinating and controlling the price of recordings.  That’s illegal in the US, Europe, and many other countries worldwide.  Now, it’s happening again with subscription services, according to New York-based investor David Pakman, himself the former CEO of eMusic.

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“Curiously, the on-demand subscription music services like Spotify, Deezer, Rdio and Beats Music are all priced the same at more than twice consumer spending on music,” Pakman wrote as part of a larger piece on music formats and expenditures.  “They largely land at $120 per year (although Beats has a family member option for AT&T users at $15 per month.)”

“This is because the three major record labels, as part of their music licenses, have mandated a minimum price these services must charge.  While it may seem strange that suppliers can dictate to retailers the price they must charge end users for their service, this is common practice in digital music.

“The services are not able to charge a price they believe will result in maximum adoption by consumers.”

“The data shows that $120 per year is far beyond what the overwhelming majority of consumers will pay for music and instead shows that a price closer to $48 per year is likely much closer to a sweet spot to attract a large number of subscribers.”

 

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Comments (22)
  1. Faza (TCM)

    Would Mr. Pakman prefer labels set a minimum price per stream? I know I would, especially if it’s around 3 cents or so. At around that point I’m content to have streaming services set the price to consumer at whatever point they wish – as long as they pay the wholesale rate for each and every play (hint: no setting maximum number of paid plays per listener, yo!)

    With the current streaming business model, given that it’s the labels (rights holders in general) who provide the actual product for a cut of the price-to-user, there’s no good reason why they shouldn’t mandate a minimum on that price.

    In other words, Mr. P: if you want to get rich peddling other people’s stuff, you gots to pay what they charge for it. Business 101.


    Reply
    1. Anonymous

      Yeah that’s fine as long as the labels aren’t working together to set prices. Like if he has evidence of the record label heads coordinating their deals with the streaming services, that’s actually a felony in the United States.


      Reply
  2. Chris H

    They don’t? Never heard of MSRP? We are going to get into legal semantics battles now as a means to get what you want? Music has a cost and it should never be based on what a study says consumers “would” pay. I’ll assume that study is right on the level too, sure pal.


    Reply
    1. Paul Resnikoff

      MSRP is a completely different mode of attempting to set prices. That is a recommended price tag, not a requirement. When competitors get together with the purpose of setting strict requirements on end products for retailers, that is collusive and illegal according to metrics applied by the US Department of Justice and the Federal Trade Commission (not to mention other governing bodies in regions like Europe, though I am less familiar with those ordinances).


      Reply
      1. Chris H

        That may be true Paul, and I stand corrected. However, it’s an odd thing to complain about, given that most of these services profitability literally RELIES on the CRB the government sets to be the rates they pay. Just reeks of legal manuvering to me really.


        Reply
  3. Anon

    While it’s true that many labels require a minimum subscriber price for their licensing fee calculations, it is by no means a mandate that the services must charge this amount. The Spotifys of this world can charge the customers whatever they want, although it is in their best interest to match their incoming revenue to their outgoing liabilities. And to the person who mentioned the per stream minimum, many labels also require this and ultimately take the “greater of” the subscriber fees vs. the per stream fees among others. Services like Spotify have to pay to play or they won’t be able to keep the massive libraries that claim to have access to.

    The real loser in this whole game is the investors. The founders of these services build up huge valuations, the labels make a killing for doing very little work, and even the artists reap the benefit from the labels’ revenue streams. The sad truth is that none of the services generate much of a profit (if any at all), so the investors get hosed.


    Reply
    1. JTVDigital

      I thought everybody knew there was this “greater of” concept, it is the case in all downloads or streaming deal.
      eMusic is sinking so they’re suddenly scandalized by practices they had to comply to themselves for getting major record labels licenses…
      Let’s just remind the eMusic payouts were insanely low for a download service, and this was caused by their “low-cost”/discount business model.
      And if you let the consumers “set the price” it would certainly be close to 0 since nobody wants to pay for anything nowadays, and especially when it comes to music…
      And yes investors are getting f&@!€/ up, they suddenly realize music retail is not a viable business.


      Reply
    2. Paul Resnikoff

      “The Spotifys of this world can charge the customers whatever they want, although it is in their best interest to match their incoming revenue to their outgoing liabilities.”

      David Pakman is saying that this is not the case, that Spotify does not have a choice in what they can charge but rather must follow the price edicts of the three labels, who are acting collusively (according to the accusation).


      Reply
  4. TuneHunter

    There is no price policy, actually there is no merchandise, we have ad and sub supported FREEEEEE!

    Since Edison invented phonograph music became and for 110 years was monetized as merchandise.

    Few big shuts overslept the real value and/or cancerous properties of music ID and discovery.
    Free music ID means free music.
    To this date labels do not see potential value or devastation in progress done by 400M Shazam users.

    Our primary source of income is GONE.

    We are actually going back to 1970s when Radio/TV subscriptions and advertising have been activated in most European countries. They are in force to this date, paid some times with your electric bill, frequently in excess of $30 per month. BBC was first in 1927!
    Soon, what was just a cream on the pie will become our only source of income.
    No matter how sophisticated tools and trick we do we will enjoy just secondary financial results.

    Our only hope is to bring back MUSIC AS A MERCHANDISE!

    Discovery Moment Monetization does just that with no harm to any current player.
    100B in revenues has to improve the situation of the most idiotic participant of current 15 billion dollar pot.


    Reply
  5. Anonymous

    Curious who are the other major labels mentioned in first sentence of the article other than Universal, Warner, & Sony?

    “The major labels (Sony Music, Warner Music, Universal Music, and others)”


    Reply
    1. JTVDigital

      +1 good one :-)


      Reply
    2. Anon

      SInce UMG’s purchase of EMI, there are only 3 major labels. Having said that, some of the indie distributors such as INgrooves and The Orchard have enough content these days to be taken pretty seriously.


      Reply
    3. Paul Resnikoff

      Legal settlements on collusive activity date back to the 90s, specifically over MAP, which stood for Minimum Advertised Price at brick-n-mortar retailers. At that point, there were 6 (or, maybe even more) major labels.

      That’s your history lesson for today, kids.


      Reply
  6. Anonymous

    There are a couple other key aspects of these deals that make them collusion. 1. MFN clauses. The service is required to give the “major” label the same terms as the other two majors. 2. Min market share. The service must guarantee that it will pay the label for use of their content equal to their market share. 3. The service can not function with out all three majors so it is has to accept these terms. 4. The label can pull any of the content any any time and the service still has to maintain these minimums. So the supplier is setting the price and aligning that price with the other two majors.

    Yes the service could eat the difference in the price but the point is that the three majors are colluding to maintain their market share or at least get paid for it even if nobody wants to listen to their music.

    Btw, these major label deals also hurt the indie labels since they prevent the service from favoring the indie content as it would reduce the “market share” of the major without reducing the cost to the service.


    Reply
    1. hippydog

      Quote “2. Min market share. The service must guarantee that it will pay the label for use of their content equal to their market share. ”

      thats the part I would like to know more about..
      cause how they define “market share” could (i agree) actually hurt growth of the indie market..

      IE: it seems the labels are still doing the old ‘terrestrial radio circle jerk’ that they enjoy so much, and are trying to update it to the digital age..


      Reply
      1. Anon

        Market Share is a simple calculation: label plays on service divided by total plays on service. Of course the major labels are going to have greater market share than the indies. What equalizes this is that most services pay on a Gross Revenue basis, meaning all labels start with the same amount per stream. Having said that, different labels may have different revenue share rates, which could ultimately affect how much they are due. Additionally, major labels may also negotiate deals that guarantee a minimum market share. Let’s say in a typical month Label A has 33% market share and their contractual revenue share rate is 60%, they would net 20% of gross revenue. But Label A wants to make sure they net at least 25% of the gross revenue, so they negotiate a deal the takes the greater of “gross revenue * market share * revenue share” and “gross revenue * weighted revenue share”. In this case, there is unlimited upside, but a floor on the minimum they can receive.


        Reply
  7. more clickbait

    I read the Pakman article closely when it was published a few days ago. He does not allege collusion. He just states that all three majors mandate a price minimum. That is far from an accusation of collusion. Paul, have some minimum standards of journalism.


    Reply
    1. Paul Resnikoff

      I get the sense that you are not aware of what constitutes collusion. The US Department of Justice and Federal Trade Commission apply standards that you might want to take a look at.


      Reply
      1. more clickbait

        I’m well aware of the meaning of collusion. Nothing in that article constitutes an allegation of collusion. The essence of the article was that the labels were leaving money on the table by mandating that services charge more than mainstream consumers paid historically, but you thought the collusion angle would generate more clicks.


        Reply
        1. Paul Resnikoff

          Okay, you seem quite committed to that accusation, so not sure I can disabuse you of it. I’d advise a quick primer on what legally defines collusion, however. Mandating a consumer-facing retail price minimum qualifies, which was exactly the issue in the 90s with MAP (minimum advertised price). But there are volumes of case studies and precedents that are similar, in other industries, which of course you will not examine.


          Reply
          1. more clickbait

            That’s quite an improper assumption.

            Now you are conflating RPM (resale price maintenance) with collusion. RPM is not illegal. http://en.wikipedia.org/wiki/Leegin_Creative_Leather_Products,_Inc._v._PSKS,_Inc.

            I’m a loyal reader of the blog. I was glad you covered the Pakman article, which is the perfect launchpad for discussion of industry economics. However, you decided to sensationalize it into something it was not.


            Reply

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