Giving up equity in exchange for copyrights

In Should Music Startups Give Equity to Copyright Holders?, Wired’s music industry blogger, Eliot Van Buskirk, shines a light on the often implemented but rarely discussed trend of Internet music start-ups ceding equity in exchange for the right to exploit rights holders music copyrights.

I agree with Van Buskirk’s assessment on how something like this would work. He writes:

“Why go through the heartache? This lengthy, complicated process is scary for startups, clumsy for copyright holders, and tends to leave indie bands and labels out of the equation.”

Of course, there’s always someone willing to offer up a new idea as to how start-ups might be able to achieve their objectives without having to pay royalties while building their businesses. Van Buskirk discusses this option, saying:

“Will Page, chief economist for the MCPS-PRS Alliance (a U.K. royalty-collection group), and David Touve, a Ph.D. student at Vanderbilt and former Lycos/Sony/AOL employee, have proposed a novel solution (.pdf) to the problem: a music license specifically designed for startups that would give copyright holders an equity stake in the businesses.”

I caught this discussion on the Pho List, of which I am a long-time member. The Pho List is a digital music industry list-serve. What’s a list-serve? It’s a Web 1.0 era technology based on group communication by email. A person may send an email to the main list and everyone on the list receives it. If one person responds to the list address, all list members receive the reply, and so on.

Proper list etiquette dictates that one should ask other list members if it’s alright to post their responses to a blog. In this case, I haven’t haven’t done that, but I will do so in future. I’ve also gone to the trouble of deleting email addresses in my replies for privacy reasons.

In the meantime, I will start to post my comments to the list here. It’ll probably be a bit difficult to follow if I’m not posting other responses to the subject matter. My responses without context may seem a bit hard to follow, but rest assured, I’ll try my best to briefly give a synopsis of the discussion, so that you’ll be able to follow.
Here are two of my responses to the discussion about whether start-ups should give equity to copyright holders in exchange for the right to exploit their content.

fromTony Zeoli <[email protected]>
toFred W <[email protected]>
ccaddress_deleted@pennydistribution.com,
Pho List<
address_deleted@onehouse.com>
dateSat, May 24, 2008 at 10:57 PM
subjectRe: Pho: The Record Industry Innovation Prize
mailed-bygmail.com
hide details 10:57 PM (2 hours ago)
Reply
This is nothing new and its already happening, especially at UMG. They have an investment arm that takes a look at fledgling start-ups. I’ve gone through this process personally. It’s not that simple. UMG, or any label for that matter, has to believe that the business is going to be viable to invest the time and energy into doing the deals. Record labels can’t just let anyone and everyone use their catalogs, because there have to be some controls in place.

According to the writer, the record labels should set up some kind of independent entity where new start-ups can register. The problem with that is who decides amongst the labels who gets the right to exploit my catalog? Each major label has a competing philosophy. And, if I’m the start-up and most of my success comes from two out of the four majors, why should I give equal equity to all four, when only 2 our of the 4 should be rewarded for giving me content that grows my business.

Also, if I’m the business development executive at UMG (or any label for that matter), I’m definitely going to keep a watchful eye on how the companies catalog is being exploited. Remember, the artists control their image, not the label (although it seems so). And if an artist finds out that he or she is being misrepresented or improperly exploited on a 3rd party web site, all kinds of problems can ensue.

I went through this at StarStyle.com with Gwen Stefani’s management, because Interscope simply didn’t notify Jim Guerinot that we were working on a co-promotion with Gwen’s brand Lamb, which was in conjunction with Interscope’s Strategic Marketing. Someone in business affairs at Interscope didn’t realize that we had a deal with UMG or that we’d gotten approval from the SM department. Instead of checking on the rights, that person went straight to management, they complained and we were subsequently asked to take down the video and the promotion. Because we were so small, we had to oblige lest we cause problems and word spread throughout UMG that we weren’t “doing the right thing.” All this, even though we had a deal with UMG corporate and we got approval from Strategic Marketing. It’s all highly political. And in fairness, if I were Jim Guerinot, I would have done the same thing.

Artists like Gwen Stefani command heavy upfront minimum guarantees to exploit their image beyond what the record label can or can’t control. So if I was running a promotion with Gwen Stefani through the label’s Strategic Marketing department, because I didn’t clear it with management, it becomes problematic.

So, although the intent is admirable, the execution is more difficult than one would think. Once you do the deal with the label, you’re on your own to deal with the individual artists both through the label and through management. The politics of this is extremely volatile and needs to be handled with extreme care.


Best regards,

Tony Zeoli, Founder
Netmix Media
• Web 2.0 Design & Product Development
• Digital Strategy & Online Marketing

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fromTony Zeoli <[email protected]>
toJohn Mitchell <[email protected]>
ccFred W <[email protected]>,
[email protected],
Pho List <[email protected]>
dateSat, May 24, 2008 at 11:52 PM
subjectRe: Pho: The Record Industry Innovation Prize
mailed-bygmail.com
hide details 11:52 PM (1 hour ago)
Reply
We’ve all heard the complaints about it being “messed up,” but if I’ve got 100 start-ups trying to engage my company to do business, the right decision has to be made about which companies I believe will grow help grow the value of my catalog, for that’s my bread and butter. I see your point, where you say “king makers,” but we have to remember that labels invest millions of dollars (both wisely and unwisely), have thousands of employees who’s livelihood depends on future success, and who have the right to profit from the commercial exploitation of a product (music) they’ve invested in.

If I’m a label, I need to make sure that anyone who comes to the party can execute against the strategy collectively set internally, and that each independent entity is on board with that strategy. If I just list the pricing and let anyone come to the party, control is lost. I’ve worked for and run music-centric businesses and have been on both sides of the equation. As I get older, wiser and infinitely more knowledgeable about how to run a business, control is crucial. No one yells at Apple for their tight control of the iPod ecosystem, but everyone gets pissy with a major label for not allowing other companies to come to the party. I’m sure that Belkin pays a pretty penny for the right to exploit their after-market products to Apple. You never hear about that, you only hear when people (like me…lol) complain that a label won’t do business. In corporate America, you have to exploit your products while keeping control of the image you want out there.

I’ll give you another example of control. I know that Beatport is actually turning down new labels with few releases who want to market themselves through the site, because they want the perception to be that they’ve got the best underground dance and urban music. That is a form of control. They are gatekeeping the new jacks who need distribution to sell their products. Now, what if that music doesn’t really sell? Many of Beatport’s users would be turned off by the overpopulation of sucky music on the site. So, some sort of control is necessary.

For anyone reading this, I am not getting into the debate of whether artists should or shouldn’t get their just rewards. This is absolutely NOT about that. The point I’m simply making is that if you are a business, you have the right to control your distribution and reach so that you can shape the message to the market. That is business 101. If I’m a singer songwriter, I don’t want to be on a head bangers ball web site. If I’m hip hop, don’t put me on a gay dance music site. So, control goes both ways. The artist want to control their image just as the labels wants to control their distribution. That’s not “messed up,” it’s simply good business.

Tony Z.

About Tony Zeoli

Tony Zeoli is a digital media strategist, innovator, and entrepreneur. He founded Netmix.com in 1995, which was considered by Billboard Magazine to be the "innovation and advancement of dance music on the Internet." Tony has innovated at the intersection of music and the Internet for the past thirty years as a project manager, product manager, information architect. He is also the founder of Digital Strategy Works, a WordPress web design and digital marketing agency in Asheville, NC.

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