Selling Songs for a Song
The music industry is filled with creative types, and many seem to be wearing suits these days. Consider the latest idea from the business suite at Warner Music Group, which is rummaging like the rest of the industry for new sources of revenue: when search engines like Google formally launch their new video-search sites, Warner Music wants a cut of the cash the sites would reap from selling ads next to search results. So if you type in "Madonna"--a Warner act--at the Google Video site (now in its test phase), and the results are accompanied by ads, Warner wants a share of those ad dollars as well as payment for any Madonna videos that are streamed or sold, according to a senior Warner insider who wasn't authorized to speak on the record, adding that the label has approached Google about the idea. Warner Music declined official comment. A Google spokesman wouldn't comment on any talks with record labels, but did say the company believes music companies should profit from their content. Generally, "that's what we are working on," the spokesman said. "We are in the early stages now."
Who can blame music execs for wanting to play offense? The era of digital downloads has upended the industry's business model, and the labels are scrambling as others answer a basic question: what's the value of a song, video or even an artist's name in the age of broadband? It's a matter of heated debate. Last week Microsoft ended talks with music companies, reportedly over what it would pay them in royalties to offer an Internet music subscription service. Universal Music Group has clashed with Yahoo over compensation for videos. A war of words has erupted even between labels and Steve Jobs over whether 99 cents is too cheap for the most popular songs.
The industry doesn't want to repeat a history of undervaluing itself. In the days when its business plan was simply to promote and peddle music, it footed the bill for producing videos, and initially was only too happy to give them to MTV to help build buzz. For the Viacom-owned network, the videos drew huge audiences, building MTV into a multibillion-dollar asset. "We watched people make fortunes and create valuable assets off of our music," says a former top exec who feared risking his role, if he were identified by name, as an industry consultant.
The industry considers Steve Jobs the latest incarnation of this problem. He used songs to sell iPods, and Apple's iTunes site now sells 80 percent of all downloaded songs. The labels get 60 to 70 cents of each 99 cent iTunes download (the same songs digital pirates often stole, which is why the industry initially saw Jobs as its savior). But now labels have started agitating for a more creative approach to pricing, in which new releases would cost more than 99 cents, oldies as little as 60 cents and recent hits somewhere in between. Jobs disagrees and publicly labeled the industry "greedy" last month, arguing that it's pushing for price hikes in a still-developing market. Record executives expressed shock, noting his dominance in the MP3-player business. The dispute has gone beyond name-calling. Two major labels, SonyBMG and Warner Music, have refused to license their music for iTunes in Japan. The stakes are much higher in the United States, where the two parties have to negotiate a new license by next year.
Labels scored a victory in music videos, however, after a battle that was sparked by the grandson of Doug Morris, Universal Music's CEO. Early this year Morris noticed his grandson repeatedly watching a video of 50 Cent, a Universal artist, for free. Morris investigated and discovered his labels were supplying the videos free of charge to promote record sales. Yet Yahoo, AOL and other sites were awash in ad revenue because of the huge audiences the videos helped draw (recently Yahoo CEO Terry Semel revealed that Yahoo expects to stream 5 billion videos this year.) Morris demanded payments--a fee for each time a Universal Music video was played and a cut of the ad money. Yahoo balked, and Morris pulled Universal's videos. After weeks of declining traffic, Yahoo capitulated. One Universal Music exec estimates revenue from the new agreement to be worth $10 million or more to the company. Warner Music is now trying to extend the concept to the emerging video-search business.
Another battle is looming with satellite radio. So far, music companies have collected only perfunctory licensing fees from these services. But music execs are grousing that some satellite-radio companies are morphing into subscription downloading services by offering the ability to digitally record songs onto devices for replay later. And now the industry will likely seek much larger payments when negotiations begin next year. "They're not start-up radio companies anymore," said one top-label executive. And that's the problem--lots of companies are making money from music, just not music companies.
