DENVER - A stark truth facing any aspiring digital music service these days is that working with record labels is going to carry a hefty price.
The last 18 months have seen the major music labels accept new technological and business models - such as dropping digital rights management and allowing ad-supported free music - that have given rise to a new generation of digital music services. But the flip side of this willingness to experiment is a demand for higher upfront advances for licensing music and in some cases a substantial equity stake in the company.
Ad-supported download service SpiralFrog, for instance, paid more than $3 million (NZ$3.76) in upfront advances to Universal Music Group alone before it even went live, and has paid additional millions in licensing fees since the original term expired. Imeem is said to have paid advances as high as $20 million and gave labels equity in the company. (Imeem disputes that figure but the equity stake is now a matter of public record.)
Sometimes the price is so high it sabotages the deal. A mobile messaging company recently walked away from negotiations in which a label demanded 85 per cent of the company's gross revenue, even though the deal didn't involve any music licensing.
Labels say it's just the cost of doing business in today's music industry. Critics say it's stunting the establishment of a viable digital entertainment marketplace.
With CD sales in continuing decline and digital revenue still not making up the difference, labels are unapologetic about their insistence in mining every new revenue stream to its fullest potential.
"If you were opening up a retail store on Madison Avenue, I think you have to get a lease for the space," one major-label executive says. "If you want to build a legitimate business, there are costs associated with doing it, and that's no different in the virtual world than the physical world."
Truth be told, digital services - or their forebears at least - bear some of the blame for the deal terms getting to where they are today. Just a few years ago, revenue-sharing deals weren't that uncommon. However, according to former EMI digital executive Ted Cohen, labels soon soured on that model as services began gaming the system so that labels ended up with nothing.
That led to labels building "perceived value" of music into subsequent agreements along with various other checks-and-balances and advances designed to mitigate the risk of entering experimental deals. But even Cohen, now a consultant working on behalf of several digital music services, says the practice has gotten out of control to the point where economics are simply unsustainable.
See Also
