True goal of SoundExchange offer: Screw artists and indies?

A week and a half ago, the negotiating committee of SoundExchange offered a "compromise solution" to webcasters: They announced at a House subcommittee hearing (and in a synchronized press release) an offer to limit the CRB judges' $500-per-channel minimum to a maximum of $2,500 per service.

This supposed "solution" is a bizarre one for several reasons. It doesn't address the much greater issue of the $.0008-to-$.0019 per song per listener rate that, minimums or no minimums, makes webcasting financially unviable for almost everybody. And it has no impact at all on certain types of webcasters (e.g., streams of AM/FM stations, Internet-only services that aren't massively multichannel, etc.), so it's not really any kind of industry-wide "solution" at all.

But last week, journalists revealed that SoundExchange had hidden two key terms from Congress and the press: (A) The maximum cap was offered only through 2008. (B) The offer was conditional on webcasters giving up their lobbying efforts in Congress to have the underlying law changed.


Solving the mystery of Farpoint Station

So I've been wondering, why those two secret conditions?

What good does it do Pandora (or Live365 or whoever) to tell them, "You may pay royalties of a few million dollars a year for now, but on January 1, 2009, we want a check from you for $9 billion?" (My math: That's assuming Pandora has approximately 9 million users and that the average user has set up two channels.) (That, by the way, is an insane amount of money: $9 billion is about 50 to 100 times more than all of the venture capital money Pandora has raised to date, and I suspect it's more than 100 times more than their total annual revenues will be that year.)

It's taken me a week to figure it out SoundExchange's strategy behind this "offer," but I think I've got it:

Although SoundExchange has been hammering on the theme of "fair payments for artists" as the messaging behind their PR efforts, the effect of these two conditions would be the exact opposite.

Specifically, the offer seems designed to force webcasters to sign "direct deals" with major labels to stay alive.

And if webcasters sign direct deals, artists (and independent labels) get 100% screwed.


Here's how it works:

Under the CRB rates, let's say AOL Radio (to switch examples) would owe around $66 million a year in royalties. (That's an untenable amount, by the way; it would probably be 60% to 120% of their total annual revenues for the year in question. (Math available upon request.))

When that amount is paid under the statutory license, after 10% is deducted for SoundExchange administrative costs, half of the money, by law, has to be distributed by SoundExchange to artists and half (in this example, about $30 million) to labels. According to SoundExchange, the big four labels currently get about 67% of the label money (in this example, about $20 million).

This set-up makes it possible for EMI, Warner, Sony-BMG, and Universal, sometime before 2008, to go to AOL Radio en masse and say, "Tell you what we can do: Sign a private deal with us, promise to play our priority records, and we'll only charge you $24 million a year! (And we'll won't charge you any per-channel minimum fees.)"

If webcasters had in fact accepted SoundExchange's proposed "solution" from last week, what else could AOL Radio do in 2008 but accept? They'd be looking at bankruptcy otherwise... and they'd be prevented from going to Congress for help!

But see how this works? Since the labels own the copyrights to the sound recordings, under a direct deal there's no legal obligation to pay the artists anything. (Actually, there may be a small obligation in their contracts with artists, but it's charged in a "recoupment deal" against the artist's advance from the label, which means the artist will probably see nothing.)

So in offering to discount AOL Radio's royalty obligation from $66 million to $24 million, the big four labels could not only get increased airplay for their priority acts, but they could actually increase their royalty take an additional 20%! Sweet!

But because it's not a statutory license, the artists would GET NOTHING!

And as for the independent labels, most of them want airplay. If this scenario plays out as I've hypothesized, the conditions that the major labels impose on webcasters might leave little room on station playlists for indie-label product anyway, so I would bet that the indies would eventually start offering waivers -- i.e., "Play our music and we won't charge you any royalties." In that event, they would also GET NOTHING!


Holy cr*p! Can this be true?

But how could SoundExchange do this? Aren't they supposed to be a collective representing big labels, small labels, recording artists, and even backup musicians? How could they make an offer that screws small labels, recording artists, and backup musicians?

Well, the law that led to the creation of SoundExchange (the DMCA) was proposed by the RIAA. (BTW, when I say "RIAA," I'm really referring to those big four labels that comprise most of the revenues of and power behind the RIAA.) The SoundExchange organization was set up by the RIAA. Most of its key executives came from the RIAA. Most of the board members representing small labels, recording artists, and backup musicians are individuals who were hand-picked by the RIAA. Most of the negotiating committee members are representatives of or closely associated with the RIAA. And, in fact, I believe the key negotiator for SoundExchange with large webcasters is in fact a full-time RIAA executive.

So it's not inconceivable that this proposed "solution" could be a deal that devolves to the benefit of the RIAA's big four labels at the expense of everyone else.


Does any other explanation make sense?

Here's the proof that I'm right: Is there any other explanation that makes sense?

Why else would SoundExchange propose a short-term reprieve that ends in 2008?

Why else would SoundExchange try to deny webcasters the ability to ask Congress for relief, unless the goal is to leave them no alternative than cut direct deals?

(Need additional proof? Note that two of the biggest-name webcasters who didn't participate in the "Day of Silence" a couple of weeks ago -- Last.fm and Slacker -- have both publicly announced that they're not worried about royalty rates because they're cutting direct deals with labels. )


So what do we do now?

Key members of Congress have been telling both webcasters and SoundExchange, "Work this out among yourselves. Come up with a rate that's fair and that keeps webcasting alive."

The CRB decision is not that: The CRB judges based their rates on a per-performance rate from the world of subscription-based, on-demand streaming -- not ad-supported! And not radio! -- because they needed to find a transaction in which they could see a "willing buyer" and a "willing seller." (And the CRB judges believed that their assignment, as given to them by Congress in the DMCA, did not obligate them to consider whether the rate was "fair" or doublecheck whether the webcasting industry could survive at the rate they picked.)

But what is "fair"? To the layman (i.e, a reasonable person)...

• "Fair" might be the same compensation that composers get for the "musical works" royalty from AM/FM, satellite, or Internet radio -- i.e, about 3% to 4% of station revenues.
  
  
• Or "fair" might be the same amount that AM/FM broadcasters or satellite radio operators pay for this "sound recordings" royalty -- i.e., either 0% or about 4% of station revenues, respectively.
  
  
• Or maybe "fair" could be the 7.5% of revenues that webcasters are proposing in the Internet Radio Equality Act.
  
  
• Or perhaps "fair" could be whatever decision the CRB makes in their currently-ongoing hearing to set the sound recordings royalty rate for satellite radio's next five-year period (in which the judges have been instructed by Congress to use the traditional Copyright Office standard that does, in fact, look at concepts like "fairness" and practicality).

But the deadline for a decision is now one week away. And (1) There is great pressure on Capitol Hill, from constituents, for Congress to either legislate or force the negotiation of a solution. (2) Congress must be peeved at SoundExchange for deceiving them on the terms of the "offer" ten days ago. (3) Webcasters are already starting to go out of business.

I think it would be fair to say that it's time for SoundExchange to make an offer that is good for all of its members.

================================

P.S. I was naive

Until writing this essay today, I was naive.

When friends and journalists asked me, "Why is SoundExchange pushing for such high rates that they'll shut down the industry?," I told them I didn't understand it.

I thought maybe the deal was being driven by aggressive, take-no-prisoners litigators who only care about winning and not about the ultimate long-term impact on their industry. (I think that's what was going on when the record industry had Napster shut down, even though they knew it would unleash a much worse generation of P2P services; I also think that's what's going on with these P2P lawsuits against children and senior citizens.)

But I underestimated them! What I didn't see is (1) that the people at the big labels hate the entire concept of statutory licenses, with terms set by judges or arbitrators or legislators. They want direct deals -- ones that they can control and set the terms of. And (2) that the big labels are in control of the entire SoundExchange process.

With that perspective, everything becomes clear:

Bankruptcy-level statutory rates are perfect, because they force webcasters into direct deals with the big labels.

The reason I missed this was a naive assumption on my part that SoundExchange was acting for the benefit of all of its members -- big labels, small labels, recording artists, and backup musicians -- the latter three classes of which would be massively hurt by direct deals.

But thanks to this "offer" ten days ago, the scales have fallen from my eyes: If SoundExchange is actually acting only for the benefit of the big four labels, then everything comes into focus and makes sense.

Ah, sweet clarity.

To reiterate my conclusion above: It's time for SoundExchange to make an offer to webcasters that is good for all of its members.

Nine days left

In publishing their decision in the Federal Register, the Copyright Royalty Board (a trio of judges working for the U.S. Copyright Office, which is itself an agency within the Library of Congress) established that their decision would become effective on July 15, 2006. That's the date when [blah blah blah, 17 months of retroactive payments, blah blah blah...]

Meanwhile, record sales are in free-fall. CD sales fell from 256 million units in the first six months of 2006 to only 205.7 million in the same period of this year, a 19.3% drop.

Download sales could be a savior of the industry -- costs of the physical handling of product have been stripped out of the equation! -- but they aren't quite, at least not yet. Sales of digital albums were up 60% -- from 14.3 [check] to 23 million units. In a sense, excellent!

But that's down 50 million CDs and up only 9 million digital albums, so it's a net-downward trend.

SoundExchange's John Simson has argued that this is due to increased Internet radio listening. This argument is not credible, nor supported by any evidence. It is actually due to a combination of declining interest in music in general, increasing consumer interest in DVDs (e.g., when I buy a season of a TV series, I can get several hours of audio+video for the same price that the record industry is trying to charge me for 40 minutes of audio on a CD) and video grames, disappearing record stores, and consumer antipathy caused by the RIAA indiscriminately suing children and grandmothers (it is the only industry in America whose primary image is that of screwing its artists and suing its customers).

Killing Internet radio will not fix the problem, it will exacerbate it.

The outlook is decidedly blue

Congress doesn't like to set royalty rates; they prefer to set procedures by which royalty rates are determined.

Musicians don't know what to think.

Meanwhilek there's a Dr. Evil-esque scheme hanging around in the background: SoundExchange uses "The artists deserve fair payment" verbiage to argue for Congress leaving the CRB's bankruptcy-level royalty rates alone. [SEE ESSAY ABOVE.]

Ai yi yi!

Download sales

Nielsen SoundScan left off three points: (1) There's increased interest in buying song by the track from iTunes, et al., and they didn't mention that. That's millions more dollars narrowing the gap. (2) There's other record label income coming in this year that's ahead of last year -- ring tones, satellite radio royalties (at ~7.5% of revenues). (3) The issue holding back download sales is, again, pricing! Teenagers own MP3 players that hold 20,000 songs. The record industry wants them to buy tracks legally to fill those devices. But at current prices ($1 to $1.30 per track), they want to charge each teenager $20,000 to $26,000 to fill up their $250 device!

Record labels have never been marketers. Historically, they have been (1) lawyers cutting deals with artists (and largely screwing them thereafter, or at least so the story goes), (2) manufacturers and distributors of the physical product. The actual marketing, as it turns out, has been done by artists and managers. (Did EMI break Norah Jones, or did Norah Jones and her management company break Norah Jones?) That crazy $1 to $1.30 price was set by lawyers (A) trying to get as much money per track out of Steve Jobs as they could (ignoring the effect of pricing on volume) and (B) wanting to match the price per track they get from the manufacturing-and-distributing-physical-product side of their business (ignoring the disappearance in the digital world of all of the costs of associated with those processes).

What in the WORLD is the record industry doing?

Okay, offering to renew the noncommercial stations, reasonable. Offering to renew the Small Commercial Webcasters deal, fine -- except it's unclear why they want to keep small guys below $X million in revenues, except that they think they can get more than 12% of revenues out of them if they're at $X+.1.

But the big guys: Claiming that they'd NEVER meant that the $500/station minimum should necessarily apply to massively-multichannel stations like Rhapsody's and Live365's and Pandora's... but then agreeing to a cap on that only through 2008, and only if DiMA would quit trying to lobby for any long-term legislative change. That's chutzpa!

What next?

Starting one week from Monday, the risk-averse will begin to go out of business...

Welcome to Radio 2020, the blog

Remember 1994? From my point of view, it seems like it was only a few short years ago. But the decisions that were made then shaped the radio landscape we know in 2007: The satellite networks were developing their business plans. Broadcasters were deciding which form of digital broadcasting to support (Eureka? IBOC?). Early experiments with structures like LMAs were precursors of consolidation. And so forth.

In just a similarly few years from now, the year 2020 is going to be here. What do we know or reasonably suspect radio is going to be like then?

Well, here's what I think is starting to become clear:

• Internet radio will be available on most personal communication devices (i.e., cell phones, PDAs, portable music players).
  
  
• AM/FM simulcasts will be available on the web but not very popular. (Analogy: Some movies are simply plays performed in front of a camera. But not many.)
  
  
• Internet radio will be available in the car dashboard (probably using a simple touch-screen interface, riding along on the car's existing telematics systems).
  
  
• HD Radio will be dead or at best limping along (kind of like AM stereo is in 2007). (It won't be able to "cross the chasm." Significant numbers of listeners won't be interested unless broadcasters across the dial drop their analog signals and broadcast eight HD channels per frequency instead; broadcasters won't do that unless HD is already wildly popular. Chicken/egg.)
  
  
• The big winners will include multichannel brands of Internet radio that offer some form of interactivity and personalization (i.e., a customized stream for each listener). Each of these will be distinguished by its unique user interface rather than by musical genre. (Early indicators of this trend include LAUNCHcast, Pandora, Last.fm, and I like to think AccuRadio.)
  
  
• Because there's always an opportunity for specialists, in addition to the multichannel brands, there will be one or two nationally- (or globally-) dominant brands in each of the important musical genres -- jazz, classical, hit music, country, indie rock, Broadway, pop standards, Sixties-oldies, comedy, blues, and so forth. Each of these will be much smaller than the big multichannel brands, but not insignificant.
  
  
• Many of these leading brands will be owned by a new set of competitors rather than today's radio broadcasters -- e.g., Microsoft, Google, CBS (but not CBS Radio), various entrepreneurs, etc. Some of these brands, on the other hand, will be owned by today's broadcast groups.

The purpose of this blog is to argue for some ownership of these new Internet-only brands by broadcasters. After all, this is where all the growth in audience is going to be and this is where all the growth in advertising spending is going to be.

Broadcasters will be increasingly marginalized by 2020 if they ignore these opportunties today.

What do consumers want?

A recent (June 2007) Arbitron tabulation of diary entries from several dozen markets revealed an unsettling fact: The audiences listening to simulcast streams of AM/FM stations via the Internet are surprisingly low -- comprising less than 1% of the averge market's total radio listening quarter-hours.

Of course, this is reported listening, not actual listening, which might be somewhat higher. But still, let's assume this number is largely, with a certain margin of error, true.

So, what does that tell us?

(1) We know from other sources (comScore Arbitron Online Radio Ratings, Ando Media's Webcast Metrics ratings, etc.) that total Internet radio listening apparently comprises 4% to 5% (or more) of all U.S. radio listening. (Satellite radio comprises another 3.5% of all U.S. radio listening, according to a different Arbitron report.) That means that listening to AM/FM streams comprises a very small percentage of all listening to Internet radio... which means that the vast majority of Internet radio listening is to the Internet-only channels.

(2) Why would that be? Perhaps because listening to a AM/FM station via the Internet does not add any value to the radio listening experience. The consumer isn't getting a different format than they can get on the AM/FM band, or a tighter or deeper playlist, or more songs per hour (except in the rare case where a broadcaster fills their terrestrial spot break with bonus songs), or any type of interactivity or customization or personalization.

More to follow...

"Big radio makes a grab for Internet listeners"... or does it?

A big story on the front page of the Arts section of The New York Times last week said:

"After ceding ground (and potential advertising dollars) for years to an army of autonomous Internet radio stations, some of which are run from basements and spare bedrooms, the nation’s biggest broadcasters are now marching online, determined to corral the next generation of listeners."

But the details in the story didn't support its thesis.

On the one side of the equation are the "autonomous" Internet radio stations: Last FM (which CBS -- the corporation, not its radio division -- paid $280 million to acquire late last month), other venture capital-funded operations with thousands or even millions of channels like Live365 and Pandora, and smaller entrepreneurial operations like Soma FM (11 channels of hip genres likeAmericana and spy movie soundtracks) and BAGeL Radio (indie rock).

Meanwhile, on the other side, we have the terrestrial radio groups. The article says that for broadcasters, "the bigger focus is on developing features that can be rapidly promoted using the chains’ mass and reach."

What does that mean? Live chat rooms. Blogs. Giving away prizes in those chat rooms. Sending out text messages before a requested song plays on their FM station. For Clear Channel, building "miniature social networks" into eight of their stations' websites and "letting fans choose to hear songs posted by unsigned or other emerging artists."

Do you see the difference? The radio broadcasters aren't offering radio programming! They're "marching online," yes, but to what end? To offer chat rooms!

Elsewhere in his piece, the writer observes, "The trick for the big radio corporations, though, is that pursuing listeners online may mean developing a wholly different approach to programming."

Could you go on? "Many Internet-based stations say their medium allows them to offer an abundance of genres far outside the boundaries of traditional over-the-air music stations, often with playlists that can be tailored to the taste of the individual listener."

The writer concludes, "The result may be a showdown to define the future of the medium." True that.

But right now, when it comes to actual programming and content, the real score to date in this exciting showdown to define the future is pretty much Internet-only properties All, radio groups None.

http://www.nytimes.com/2007/06/12/arts/music/12RADIO.html?ref=music

or, in case that link gets disabled,
http://www.financialexpress.com/fe_full_story.php?content_id=167447

The Price is Wrong

In that L.A. Times Dust-Up, on one of the days I proposed a six-part plan of what the music industry could do to try to turn its fortunes around. (Right now, they've given up on trying to sell consumers music; their plan is to lobby Congress to get $2 billion from the radio industry, $500 million from Internet radio, $1 billion from satellite radio, etc. They're using a specious umbrella of an argument that "music is moving to a consumption model." (That means no one's buying it. But that's simply because it's overpriced!) (Why are they doing this? Because they're lawyers, not marketers! And to a workman with a hammer, every problem looks like a nail.))

I'll add a link to the Dust-Up essay HERE soon.

Meanwhile, an Answer is starting to form in my mind... Let me try a rough draft:

First, sell medium-quality MP3s (32k? 64k?) so cheaply that kids can afford to fill up their iPods and that P2P (mistitled files, possible viruses, etc.) just won't seem worth the effort -- maybe 10 cents each.

Then offer full albums in decent quality (96k?) at a price that reflects the fact that there's nothing physical accompanying it. (The Sunday NYT online has all the content of the paper but they're smart enough not to try to charge $5 for it.) (Maybe $3?)

Finally, price CDs competitively with DVDs in terms of content-per-dollar. That probably means a price point of $4.99, I'm guessing... Maybe less. (Crap, I get my DVDs from the Blockbuster previously-viewed bin. When the promotional price gets down to $6.77, I buy armloads of them. But that's for 3 times the minutes of a CD... plus visuals...) Maybe $2.99 is the price point at which I buy armloads of CDs.

THAT'S the answer. Not lobbying and suing for wealth-transfers from other industries.

[By the way, AOL had the guts to do this -- they moved their price point from $15/month to "free"! The record industry needs to do a bold stroke analagous to that.]

This blog post probably belongs in my blog "The Maserati Imperative," not "Radio 2020."