Ex-Major Label Exec: ‘You Can’t Develop Artists When Everyone Thinks You’re an Extortionist’

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 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.

At 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 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 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-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.

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 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.”

35 Responses

  1. David Allan

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

  2. 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.

    • House music

      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.

  3. 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

      • Anthony Hall (Pure Mint Record

        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

          To quote Hermann Goering:- “when I hear the word Tshirts I reach for my revolver…”

  4. Joe Artist

    This guy doesn’t understand it must be about the artist, not tech companies.

    Music biz is full of complainers. Get out there and write great music, that’s all.

    Tech companies come and go. Great artists do not.

  5. Visitor2

    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

      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

        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

          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.

      • Aristotle

        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?

  6. Econ

    “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.

  7. JSS

    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.

  8. Dave Jackson

    As a former FMR and ADR for Universal, this post speaks nothing but the truth to the troubles of the major label industry. For your years I went through the same problems trying to climb up hill for my artist and my labels. Great Post!

  9. what a waste

    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.

  10. Jeremy

    Somebody please correct me if I’m wrong, but this conversation seems to be completely confused. The model being discussed by Larry Marcus and David Ring is a subscription-based “all you can eat” type. It does not appear to be a unit sales model at all.

    With that as context, all of this discussion about brick and mortar is completely irrelevant. Extending credit for a hard goods unit purchase arrangement provides *far* more economic certainty to the wholesaler than extending credit to a digital startup with a model that is not predicated on unit sales. In addition, there is minimal ability to scale down a full-catalog licensing cost structure, while hard product sales can scale very easily.

    With that as context, the labels and artists are being asked by Jim McDermott and others to provide product to a series of unproven startups that are all competing concurrently in every market with full-paying customers. If a significant portion of the competition is paying “startup” rates, what’s the incentive for a label’s best customers to pay full freight? Why would labels destroy their pricing in order to incubate startups?

    I think what Jim is missing is that these are not small independent, local record stores that might expand the consumer base. These are all global competitors that displace revenue from other retailers.

    • Jim McDermott

      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

        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

          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.

          It’s indefensible.

  11. dangude

    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

  12. Frances

    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”.

  13. Arthur J. Owens

    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.

  14. Josh Gertz

    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

      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?

      Apple.

      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!

  15. @DonovanJL

    With a few exceptions in his argument, a terrific read on the state of the music industry.

  16. @MusicDreamer

    Possibly the best music business article I’ve read in weeks.

  17. Bill Schacht/Aestheticom

    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….

  18. cipher

    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.