This Is a UMG Executive Defending the Huge Upfront Licensing Fee

The major labels are amazingly open-minded about licensing your startup – as long as you have a spectacular pile of upfront cash.

A willingness to fork over substantial ownership shares also speeds the process, though even Spotify waited years with both in hand.

But this game is proving corrosive: not only are these demands delaying the arrival of heavyweights like Spotify and threatening their financial survival, but it’s also causing talented entrepreneurs and moneyed investors to shift their interests elsewhere.  That includes Walden Venture Capital’s Larry Marcus, a top music investor who noted at SF MusicTech that big label licensing demands remain “essentially unchanged” over the past decade, and largely “insurmountable.”

 

Which brings us to this dialogue Monday afternoon between Marcus and Universal Music Group executive David Ring.

Larry Marcus (Walden Venture Capital): I think this is an advertisement for why entrepreneurs are not really innovating initially around licensed content.  So if the seed isn’t planted and nurtured, it can’t grow into something big if it gets stepped on or can never get watered.

So I think that the industry – the labels – would be really well served if instead of saying, ‘look, you need to pay us upfront for IP,’ actually said, ‘look, we’re going to actively fund you guys to innovate, and figure out how to create a win-win deal’.  And then people can be energized, because when I hear all the licensing, I see everybody going, ‘oh God,’ it kind of weighs on the entrepreneur.

[Instead] the innovation can begin, engage the users, and they can figure out how to get paid and build value.  Because I think they’re all thinking, ‘how do I innovate without going directly to the licenses out of the gate,’ because it seems kind of insurmountable.”

 

David Ring (Universal Music Group): Yeah, I know but Larry, I think where you and I are going to disagree is, we’re enabling and empowering hundreds and hundreds of companies to do this thing, and it is not as you suggest as something that’s going to be unreasonable, outrageous or unfair, or earth-shattering.

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.

25 Responses

  1. Yves Villeneuve

    Beware of pipe dreams. There are always a good number who fall for them.

  2. poor pirates

    Thank you, David Ring, for pointing out what should be rather obvious.

    • PY

      I second this – Kudos to David Ring for stating what should be obvious. This escapes me: sympathy for the startup who makes no money, yet makes no products, and has little/no set up cost of doing business… vs. the one who DOES have costs, already took the REAL risks in signing/funding artists for unknown return, made/marketed a product people want…who’s product is 20-to-1 downloaded illegally vs. paid, 4 times more likely to stream via YouTube (pittence) vs. sold via any form of retail…and our sympathy is the guy who sets up a streaming site? I say pay the people that make the stuff you want first, and the people who start up some new store front or delivery service second.

  3. Visitor2

    This is the thing about tech companies, they think just because they have an idea they should be able to get everything they need to create it. No, you need a business model too. Stop bitching about being forced to be a real business. YOUR idea isn’t more valuable than the artists music you need to do it.

  4. Bart

    This is a problem since the beggining of the digital era. The first ones (meaning Steve Jobs and likes) made the mistake of paying the upfront fees, and now the market is upside down in this matter. If anyone had to pay upfront, in my opinion, that should be the labels, to have the chance to sell their content on a given platform. The Majors never invested on ways to sell digitally by creating their owns platforms. They use other platforms, that cost a lot of money to develop and demands huge upfront cash for the catalogue to be ingested. And this upfront cash normally doesn’t account for artists. I could back it up, if a good part of it went straight to the artists, but it doesn’t. Why is it like this, when in the physical market we see something quite different? (many times labels that don’t invest on in-store promotion, paying to the store for the placement, will not see their products on the best shelfs.)

  5. Rastamouse

    If Larry Marcus invests capital in a start up, he’ll want equity. However if the start up wants to build a business on the back of a record label’s IP, they should license it cheap. This guy really needs to grow up.

  6. Spoken X Digital Media Group

    Trying to simplify this ongoing debate about music and music users that has ideas on how to be the new middle man in the food chain of music revenue on digital convergence: When a contractor has an order from the architect to brick and mortar the vision, the contractor goes out to buy one brick by brick=the music license. . . : The name of the ‘To Do’ list concerning your first project is called. . .Music Clearance. . .

  7. David Allan

    The outrage shouldn’t be directed at the innovators, it should be directed at the greedy major labels who hold their content as ransom for outrageous fees, yet don’t pay their artists equal share of the money.

    It makes it very difficult for start ups when they have to hand over 60% of their gross profits upfront, and then still have to pay for hardware, developers, office space, staff, advertising and marketing, etc. After which, that 40% is reduced to virtually nothing – and yet they are still required to be innovators?? On what capital??

    If Venture Capitalists are willing to invest in the economy of the music industry, shouldn’t the labels work with them in a more fair way?

    It’s like a sinking ship making outrageous stipulations on the coast guards that are coming to try to save them. It just doesn’t make any sense.

  8. Jim McDermott

    I worked with David Ring for a short time at Universal, and he’s a good guy. But he’s a lawyer, this is how lawyers think.

    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 alllocated 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 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. Ar any time in the US, there were tens if not hundred of millions of dollars of record label product sitting on shelves purely on credit, with no real collateral.

    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 they 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 90’s, when I started working on digital deals, the uprfront 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 offet 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.

    Huge upfront payments mean the companies have less money to market their service. It means they have less cash to keep the lights on, make payroll and survive. Investors know this which makes it tough for innovators to get funded, let alone survive and be successful.

    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 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 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.

    You cannot develop artists when digital retailers, streaming services and blogs hate your guts and think you’re an extortionist.

    One day soon, a “label” is going to consist of one lawyer, sitting in a shabby cloth chair in 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.

    • David Allan

      Absolutely the best post I’ve EVER read on Digital Music News. Well said!!

    • joel

      labels demand upfront money because there is little backend money.

      it’s a fact. that’s how the digital world has always worked.

      90% plus of all digital companies, inside or outside of music, go under.

      artists and labels are supposed to give them free content?

      i don’t think so.

    • Distro

      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

        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

          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

    • paul

      Hey everyone,

      I took Jim’s comment and made it into a new article, here. I’ll carry over the discussion as well.

      /paul

  9. speaking of IP

    Why aren’t the Google Search algos publicly available on github or elsewhere? Information wants to be free. I have an idea for a startup but I can’t be bothered to pay a license to Google. Give me the IP for free and I will give you some money later. I promise. Really. I will. You don’t believe me? Why do you hate freedom of speech, Google?

  10. Andrew Kay

    The major labels’ plan is still to perpetually own the distribution chain; basic economics says that high startup costs mean low competition, so they make the startup costs as high as possible so nobody can compete with their own distributors.

    In a non-corrupt world, competition in the distribution chain would be good for the labels because the distributors, besides competing for the end consumers, are also competing for the custom of the labels, they would be competing on how big a cut they could give to the labels.

    However, in real life, they know that controlling the distribution chain means they can prevent other musicians from competing with them.

  11. MR

    First of all the royalties aren’t point-zero-zero-zero-zero-zero-one-cents per play. But about 1 cent per play for interactive services such as Spotify. The “point-zero-zero…” is just hyperbole.

    Secondly, that’s not the topic – it is the monster upfront payments and equity demanded by the labels. This has nothing to do with the per song fee. If there were ONLY a per song fee I think most would find that reasonable.
    — MR

    • Seth Keller

      According to the statements one of my artists (an independent) received from Zimbalam for Spotify streams in Europe, the per stream payment was €.002 per stream.

  12. Jeff Straw

    Seems that EMI is trying to be innovative in this space and Neil Tinegate discussed their initiative on the API panel. Their Open EMI program is designed for developers to have access to some of their catalog for use in development, clearing the music easily and perhaps with preset fees (this wasn’t clear) and help with distributing and marketing the app when it’s ready to be released.

    Of course with Universal purchasing them, who knows how long this will be around.

    http://www.hypebot.com/hypebot/2011/11/emi-echonest-create-first-major-label-open-sandbox-for-music-apps.html

  13. Allen

    I will have to agree that the music industry is starting to shake-out the upfront millions deals with playing-field, with true pure and talented artists starting to emerge. I couldn’t agree more with the statement that true and passionate producers will make the sacrifice and support development and growth of artists that are simply needing the experience and wisdom behind them that guides and assist toward success. THe incredible level of talent today doesn’t need someone that literlly drains and takes everything only to leave them high and dry when they’ve sucked everything out of them.

  14. Allen

    I will have to agree that the music industry is starting to shake-out and stablize in a completely new paradigm dissolving the upfront umbearable financial demands on artists. The playing-field is becoming more equalized as talented artists now have options to get their music produced and conveyed to the world. I couldn’t agree more with the statement if a Producer or Promoter is truly passionate about finding and developing artist, they will be willing to make the sacrifice and proivde the experience, wisdom, and economics to help discover and develop artist to success. The incredible talent we have today, doesn’t need sharks that literlly drains everything only to leave them high and dry after they have sucked and depleted the artist’s future.