Back in February I blogged that unrealistic pricing assumptions from the music majors are holding back the development of free ad-supported music services. At the time I didn’t have any hard data, but was drawing on comments from ad-supported music startups at the Midem conference.
Now, courtesy of Reuters, we have some numbers:
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.)
I understand that the equity stakes are 5-10% per major. Plus, in addition to all this there are per play fees of a penny per play or a 50% rev share.
These sums are way too much for any would be ad-supported music business and I hope they come down soon.
According to the Reuters article labels are using the following sorts of justifications:
it’s just the cost of doing business in today’s music industry
“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.”
Worse, according to former EMI executive Ted Cohen the labels are becoming more greedy:
“What was once considered a major advance — $50 ,000 or $1 million — is becoming a $2 million or $5 million advance and really over-the-top requests for equity,” he says. “The deals are still unrealistic. If you raise $15 million to start a business, and have to spend $12 million just to pay off the content companies, that leaves you with $3 million to run a company. I don’t know anybody able to do that.”
At the heart of the problem is that labels are looking at this the wrong way. They are starting from a price point defined in an era when the economics of music were completely different. The price of a CD has to provide margin for the artist, label, manufacturer and retailer. In the digital age the manufacturer is no longer necessary and the cost base of the retailer is a fraction of what it was. The final big difference is that the labels previously enjoyed quasi monopoly status via their control over distribution.
Put all that together and one would expect that the natural state of affairs in the digital age will be both lower price points and lower margins for the record labels. Unsurprisingly they are rejecting this view of the world and are instead holding out for the sums of money described above.
As the title to this post suggests I think they are being too greedy, and the price they will pay is lost revenue through a missed opportunity to develop the ad-supported music business more quickly.