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Record labels, faced with declining CD sales due in large part to rampant digital piracy at the consumer level, have increasingly been willing to "play ball" with internet companies.

The recently-announced MySpace Music joint venture between MySpace, Sony BMG Music Entertainment, Universal Music Group and Warner Music Group is the latest example.

From deals with services offering DRM-free music to those with ad-supported services, one might get the impression that music industry executives are embracing the internet and new business models.

As an April 5 Billboard article reveals, however, the truth is a little bit more nuanced.

In the article, author Antony Bruno details how internet companies wanting to license music from the major record labels increasingly have to pay hefty fees:

"...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 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.)"

According to Ted Cohen, a former executive at EMI:

"What was once considered a major advance -- $500,000 or $1 million -- is becoming a $2 million or $5 million advance and really over-the-top requests for equity."

In some cases, the costs are simply too high for companies, especially startups with big dreams but smaller wallets (or a smaller desire to open their wallets).

Deals die because the parties are unable to come up with an arrangement that works for everybody.

This has some crying foul:

"Many rankled by these front-loaded deals accuse labels of going for the quick buck in order to meet quarterly revenue objectives at the expense of cultivating a lasting partnership -- essentially treating digital music startups as quick-fix ATMs rather than long-term investments."

Obviously, there is probably some truth to the notion that labels are "trying to match every dollar against a lost dollar."

Piracy has taken its toll on the music business and licensing deals are likely being looked at as a means to offset some of the losses.

But that's not the entire story. The article points out that in the past, labels have been taken advantage of by companies that were given revenue sharing deals but started "gaming the system so that labels ended up with nothing" and thus companies are to some extent, reaping what their fathers have sown.

Of course, revenue sharing deals, which are highly uncertain to begin with, probably don't look so appealing anyway given that monetisation is always questionable. After all, 50% of $0 is still $0.

At the end of the day, I believe that the hefty fees record labels are asking are entirely appropriate and may even be good for the market.

The truth is that the music record labels hold the rights to something that has significant value. The volume of inquiries labels receive from companies wanting access to that music highlights this fact.

These companies are not entitled to this music at a price that they think is fair. Just as you would not expect the local Ferrari dealership to sell you a 2008 599 GTB Fiorano for $100,000 because you can't afford to pay full price, companies should not expect that record labels will license their music on the cheap because they can't afford to pay what it's really worth.

Today, there is no shortage of people who think they know what the music industry needs to do to solve the challenges it's facing.

Many entrepreneurs and investors look at the music industry and see huge opportunities caused by the disruption that is taking place. They see great potential in pioneering innovative new business models that can "fix" what ails the business.

Given the size of the opportunity, these entrepreneurs and investors hope to seize, are millions of dollars and an equity stake an unreasonable request from the record labels who own the music these entrepreneurs need to make it all happen?

The reasonable answer is no. In an increasingly competitive digital music marketplace where everybody is gunning for the dominant player - Apple's iTunes - those companies that are serious about competing will require significant resources and commitment.

Hefty licensing costs serve as a way for record labels to find out if significant resources and commitment exist; to separate the wheat from the chaff. In other words, money talks and bullshit walks.

Companies willing and able to put their money where their mouth is are more likely to build successful digital music services that keep the record labels and consumers happy.

While those with an entitlement complex will argue that the record labels are stifling innovation by requiring internet companies to pay a fair price for valuable music, I would argue that the opposite is true.

Companies that ask labels for everything but the kitchen sink but that can't pay for anything are not likely to create the types of services that give consumers what they want anyway.

Just as the guy who would ask the Ferrari dealer to sell him a 2008 599 GTB Fiorano for $100,000 probably can't afford the gas, the car insurance and the maintenance, companies that offer the record labels less money than their music is worth probably don't have the ability to develop innovative new digital music services that will be long-lasting and sustainable.

Drama 2.0

Published 8 April, 2008 by Drama 2.0

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