July, 2009


Why musicians should hold strong and Internet companies should curb their arrogance

By Mike Iacuessa

Lost in the talk about the music industry crash is that music is still popular even in an age with a dearth of hit recordings. iTunes has paid out $4 billion in royalties so far. MySpace streams more than a billion songs per week. More than half of teenagers listened to online radio in 2008. Four-fifths of YouTube's most watched videos are music related.

It is not listeners, or even potential sales, that are the problem. It is revenues and who should get them when they do start rolling in again. And while there has been a deluge of vitriol hurled at the major record labels by Internet companies lately, perhaps some of it rightly so, those Internet companies would be wise to drop some of their own arrogance. They want the reward without the risk and risk has always been what the music industry has been about.

At issue at the moment is royalties. Streaming sites, such as online radio stations, currently pay between 0.4 and one cent in royalties per stream. The royalty rate for purchased downloaded songs is set at 9.1 cents. The 9.1 cent figure is a compromise. Publishing companies, which collect money for the artists, lost a bid to raise it to 15 cents last year while the Internet companies were asking it be lowered to less than five cents.

Nobody is denying that, at least at the moment, the royalty rates are hindering startup Internet companies (although startup record labels and producers of music are hindered the other way). Even the more established YouTube, which analysts believe earns about 0.4 cents on average every time a video is viewed, has bandwidth, licensing and operation costs that exceed that by almost double.

The streaming rates are a particularly difficult obstacle for online radio stations because, unlike traditional radio which broadcast just one playlist to everyone, the online stations stream different programming to every individual who logs on. This, as many have pointed out, means if someone logs on to a station and then leaves their computer on when they go out, the end result is that the charges are being run up to the station for songs no one is even hearing. It has been reported that some startups are even trying to keep listeners away until they can become profitable!

While one can feel sympathy for these companies, and certainly some kinks need to be worked out, none of this if the fault of the musicians who continue to persevere, writing songs, rehearsing and recording before making any money at all. Musicians have traditionally been among the poorest of society, a profession even aspiring actors waiting on tables feel sympathy toward. For every Metallica and Madonna, there are a dozen charting artists making less than $30,000 a year and hundreds more unsigned making barely enough for gas and lodging on tour. If the Internet truly is going to level the playing field, in the end those musicians are going to need the royalties to survive. And now that copyright laws have held firm, that reality might finally be coming to pass.

For many fledgling musicians offering music for free is a valuable marketing tool (not unlike Red Bull handing out free samples at public events) but that is no reason to give up the store. When the Internet companies do start making money, don't expect them to have musicians in their best interest. Many of the companies are not going to survive anyway. In fact, despite the surplus of venture capital, there are still few models that have proven successful on the Internet. It is clear the music distribution model is still being worked out. Until it does, setting a high standard on royalties to negotiate from is in every musician's best interest.

The other reality is that a telltale sign of whether someone is trying to make a quick buck is when they don't display much respect for the industry they are trying to cash in on. One can see that in many of the music-oriented dot.coms over the past decade. The high tech world is laden with hidden business models of building something quick just to sell it. The successful startup of today will probably be owned in the future by Universal or some currently unforeseen conglomerate anyway and, in the end, the musicians will be stuck with it.

As I was writing this, I came across an interview with Jeff Price, CEO of TuneCore, a firm that does business with the Rhapsodys, Napsters and iTunes of the world. He said it well so I'll let him do it:

"Napster raised about $85 million and then eventually sold for about $7 million. How much of that money did the artists get? None. So, Shawn Fanning [sic-founder of Napster] and all of his goodwill—empowering the people to have access to music—stepped on the backs of every single musician in order to get there, and took the money and ran.

The music had value because the musicians and artists and the labels and the distributors and the retail stores and everybody else
made it have value. And all he did is come in and create a great technology—I'm not knocking the technology—and climbed up on the backs of other people. Napster was simply a way to get something you wanted for free. And the thing that you wanted for free had value, because the people that created it had value. He got paid $85 million in venture capital and a $7 million acquisition off of the value of other peoples' assets, and he didn't share that money. And that pisses me off. That's not fair, and that's not right."

To use one comparison, the tech startup imeem has burned through $50 million in venture capital and is on the hook for at least a million dollars in royalties it cannot pay. If someone gave me $50 million, I'm pretty sure I could have developed and broken a band or two, paid them their royalties and built a popular Internet radio station on their backs.

Perhaps these companies should begin having some balls and start investing in unsigned musicians in lieu of lower royalty payouts. The future of the industry, after all, is not selling more Beatles albums. It is selling whatever comes next. And if nothing comes next, every corner of the industry is doomed anyway. Of course, developing an artist is not as easy as getting content for free. It takes some understanding of the music, a knowledge of the industry's history and a long term commitment. For all the evil conglomerate record labels, there were still the Jerry Wexlers (Atlantic Records) and Berry Gordys (Motown) of the world who built their empires on being good at spotting talent. And if you can't spot talent and can't scout those with the other characteristics necessary to make it, maybe you shouldn't be in the music business in the first place.

Mike Iacuessa is a music producer and founder of the Independent Music Foundation.

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