Record Labels vs. Internet Companies: UMG pulls vids from Fuse, WMG from Yahoo

Last week, Universal Music Group, the world’s largest record company, pulled its videos from FUSE, a music television network. FUSE is a subsidiary of Cablevision Systems Corp. of Bethpage, NY. Cablevision is the main provider of triple-play (cable, phone, and Internet access) services in the greater Tri-State (NY/NJ/CT) area, with the exception of some parts of New York City including Manhattan.

According to a Wall Street Journal report, UMG and FUSE could not come to terms on a license fee to allow the network to show its music videos.

In a dispute with Yahoo over promotion of their music videos, Warner Music Group, one of the big four music companies, pulled its music videos from Yahoo’s web site.

Audio playback of music generates a peformance royalty set by U.S. law, which is collected by the country’s performance rights organizations, ASCAP, BMI, SESAC and Sound Exchange. These organizations bill radio stations, television networks, satellite radio, wireless providers and Internet companies for each instance of a song performed in the public realm and subsequently distribute monies collected to their member recording artists.

With music downloads cutting into record industry profits, major record labels are changing their stance on music videos, demanding high license fees in addition to performance royalties, passing along the costs of producing music videos, which were once strictly for promotional use, to companies generating revenues from their use.

To make up for lost dollars, record companies are raking in hundreds of thousands of dollars from television networks, cable companies, wireless providers and Internet companies to make up the difference, all the while complaining about losing money from digital downloading.

Because these traditional and Internet media companies are generating revenues around music videos, record labels want a slice of that pie, without taking into consideration the operating costs of these companies or the fact that music videos are only a portion of a digital media company’s offerings.

I’ve had to personally negotiate fees with one major recording company. Instead of partnering with my company, StarStyle, to build a new business on sales of products shown in videos, the company demanded a straight license fee to use all their music videos. We told them we didn’t need ALL of the music videos, just the one’s relevant to our audience, which skews 18-35 female.

After taking our money, the company has done relatively little to assist us with our core request, which is to work with all their label units to generate revenue around sales of the products used in the music videos. The digital business unit signed the deal, but they said it’s up to us to work with each individual label in the umbrella to get the additional information we need.

After signing the deal, there was no account management to help us with our needs. There are no thank you’s for taking our money and providing us with the support we require. It seems as if record labels don’t understand they have an obligation to fulfill the terms of the deal’s they close. And, for lack of a better word, it’s disgusting, because they expect their partners to jump when they say so, but they do NOTHING in return.

There was no mandate from the corporate parent to the sub labels to work with us. Basically, the person I did the deal with said, you’re on your own now and we have no control over what our labels do. BUT THEY SIGNED THE DEAL ANYWAY!

Since they own the videos, but the artist’s have final say over third party deals, many of the company’s strategic marketing heads won’t even pick up the phone to ask. One even told me directly to my face that I had to bring something BIGGER than StarStyle to the table in order for him to even move a muscle. So, basically, our deal isn’t important to them, but it needs them to actually create the revenues…and no one seems to want to even try.

The response I get usually is, well, there are too many hoops to go through, they’ll just ignore my request hoping I’ll just go away or they’ll pass the buck to someone else in another department, who then ignores the request too and so the cycle goes. And no one has any recourse, because this is the way the record industry works and people just accept it as status quo. In any other business, you’d be fired for ignoring your partner, but in the record industry, you get a promotion!

One would think that a record label would see the value in working with us, because they could generate more than just the license and performance royalty, but this is a record industry that is on the ropes, and all they seem to be concerned about is selling music the old way, instead of finding new ways to profit from their products.

Giving record labels the benefit of the doubt, it’s not the industry as a whole, it’s PEOPLE who work in the industry who are either too lazy, too disinterested, too busy, or too incompetent to accomplish anything new. It’s a group of people who forgot somewhere along the road, that it’s their job to find new ways to promote artists and generate revenues wherever they can. Of course, not all ideas are good ideas, and I shouldn’t be complaining just about my dealings at StarStyle, because some people might think what we’re doing is the best idea (but from where I stand, everyone seems to love it). But, it’s not just StarStyle. I hear the same story, day after day, week after week, of people who are working in power positions in the record industry, frozen from fear of making a new decision because it’s simply too daunting for them to figure out.

I’m hoping that a new generation of digital music executives is born out of all the new college-level music business programs out there, which will change the record industry forever. Today, that’s just wishful thinking.

Wherever music is played, from television, radio, wireless and satelite to bars, nightclubs, restaurants, retail stores and sports stadiums, recording artists receive a performance royalty for rebroadcast of his or her body of work. For the record label and recording artist, this translates into receiving a small slice of the net profit of company’s that use music to create, in the the case of retail stores, background ambience spurring patrons to buy clothing or in the case of nightclubs and bars, which use music to drive patronage resulting in liquor sales. The long-standing rule is: if music is being used to create profits for someone other than the recording artist, then the recording artist should be compensated for that use.

Generally, the music buying public are not savvy to the inner workings of the recording industry. Ask most people if $500,000 to record an album goes directly into the pocket of a recording artist and they would probably say that’s true. In fact, when an artist signs a recording deal, the money actually goes to paying the attorney’s fees, paying the manager, and then paying the costs associated in making and marketing the album. The artist sees little of this money, unless he, she or the band use their own home recording studio, which allows them to profit a bit after equipment and studio expenses.

From recording sessions and promotion to marketing and manufacturing, the advance is spent on creating and publicizing an ablum. More often than not, contracts between label and artist state labels can recoup advance payments of recording fees from the money generated by album sales.

Most albums lose money for record labels, never generating the dollars needed to break even. Although one hit record can wipe away the losses of ten flops, those artists who didn’t do well won’t see a dime from the artist with the hit record. That’s because each recording must pay for itself. If it doesn’t, an artist can end up owing the label real dollars, which is recouped from sales of that artist’s next album, and so on. An artist can have two low-sellers, then a massive hit, and the hit will have to pay for the money not recouped on the first two releases.

Unless a record sells in the multiple millions, a recording artist generally makes more money from music publishing and other revenue streams than album sales. Publishing–the big secret that the public is generally unaware–is when a royalty is collected from the requested reuse of that artists music by a commercial entitiy, for example a radio station or advertising agency. If a hit song is played 1,000 times a day across 100 radio stations, cha-ching! That’s where the real money is made. If an ad agency needs a song for a commercial, fees can range from the ten’s to hundred’s of thousands of dollars.

Artists also make money from tours and merchandising, but it’s publishing and licensing to third parties who use music to generate profits in a myriad of ways, for example in an advertisement for Progressive Auto Insurance, which can generate tens of thousands of dollars for both label and artist in licensing and performance fees. Some songs command a million dollars to be included in a commercial. There are many artists I know who still get checks in the mail from rights agencies worldwide collecting performance fees on their behalf.

I’m generally in agreement with these policies. Or course, Netmix is licensed for public peformance by ASCAP and BMI through Live365. We’re not profitable, so we pay the minimum fee a small webcaster is obligated to pay.

Music videos profit structure is different, because labels and artists collect a performance royalty, but labels are also asking for additional license fees from broadcasters. My contact at FUSE says the network feels that the license fee asked for by Universal is simply too onerous to pay. If FUSE capitulated, a precedent would be set whereas record labels could then demand high fees in addition to performance royalties they already receive from anyone who wants to show videos, without taking into consideration a companies size and revenues.

The common theory about why record companies are doing this is that record labels seem to be operating with a one size fits all mentality, refusing to consider individual deals that will create more revenue opportunities across multiple platforms over the long term. They see a way to squeeze cash in the short term, but like the artists they represent, they aren’t building businesses over the long term. They’re looking for one hit to pay for all the others, instead of building value in the longevitiy of the artist, like they used to do 20-years ago.

So, the record labels see any deal as an opportunity to receive a large, upfront license fee for their music videos, and its clear there is little exception to this rule. It stands to reason, that the more radio stations play music, the more television networks show videos and the more Internet companies stream videos, the more record labels and artists get paid.

You would think this would apply to music videos on the web, but that’s not the case. By forcing both traditional and new media companies to pay high license fees, many companies will decide that it’s not in their best interest to show videos at all, which reduces the outlets, subequently affecting the artists promotional efforts and in the end, the record labels profits.

If record companies look only to companies like Viacom, that can afford to pay these onerous licesning fees, they are alienating a number of other companies operating in the new media, which will contribute to their bottom line over the long term and expose their music to a greater audience. If anyone’s read Wired editor Chris Anderson’s book, The Long Tail, the point Anderson makes is true; the longer the tail, the more people will interact with a body of work over time than in it’s initial release.

I believe this is the reason why Warne Music Group forged a deal with YouTube; they’d rather get a piece of the ad revenue and performance royalty, then an upfront license fee. That, to me, is the smart, long term approach. If YouTube fails like Napster did, under lawsuits and cease and desist orders, it sets both the Internet and the record industry back ten years. Why not take a piece of the ad revenue? And in StarStyle’s case, a piece of the sale of the product in the music video? This is what consumers want, why not give it to them today, instead of fighting tooth and nail to control every single element of your copyright?

Record labels are under assault from music pirating. Yes, the losses are staggering, but there’s something to be said for the fact that the labels shot themselves in the foot. And, those losses can be made up in licensing or publishing with a clear and consistent strategy of working together with young businesses who use music to help them grow, and all parties will profit in the long term. Where they are losing money on downloading, they will be generating revenues elsewhere to make up for that loss. Especially if they start attaching a piece of the ad revenue generated.

After the birth of music videos, labels would do anything to get a slot on MTV, in the hopes that a video would be added in rotation on the network. Receiving MTV exposure meant instant credibility with music fans, spurring sales and creating multi-platinum recording artists overnight.

For many years, MTV along with a few national music programs, including Soul Train and regional music video shows were the only outlets for music videos. On the success of MTV, Viacom purchased BET (Black Entertainment Television) and CMT (Country Music Television). Just a few years ago, amid complaints that the network was not showing enough music videos, MTV created MTV2 to showcase emerging artists. Around the same time, Cablevision bought back it’s U.S. rights to Much Music from Canada’s Chum Television and launched their own music video network, rebranded FUSE, stateside to compete with MTV.

Since that time, broadband penetration has risen nationally and Internet companies including YouTube, MySpace and Google to name a few began to show music videos, which can now be accessed on the web, cable, or satellite. Verizon and Cingular are streaming music videos over wireless. As music video catalogs have grown on the web, so has the major labels insistence that these companies not only pay a performance royalty to them and their artists, but also a license fee for the right to show the videos at all.

Whereas radio stations continue to add new records everyday, and only pay a per play fee and a percentage of ad revenues to the recording industry, why are Internet companies expected to pay additional for the right to show the music video? And, it seems as if they must license the entire music video catalog from a label, even if they only want to show just a few videos. Is this right? Of course not, but in today’s music market major record labels force new media companies into these arrangements. It used to be that music videos were for promotion to sell the artists music, but not any more.

All of these factors play into FUSE’s resistance in paying a license fee to Universal. As the world’s largest record label, UMG knows that without their music videos, FUSE’s ratings may suffer, and with that, advertising rates go down. With Internet companies forced to pay a license fee, UMG has leverage now, feeling that it doesn’t need companies like FUSE as much as they used to, because now they have Yahoo, AOL, MSN and retail outlets, like Champs Sports, to promote their music videos.

But, record labels also still need airplay anywhere they can get it for their artists to stay relevant and to promote those artist’s recordings. As the media market fragments, there are more places to view visual media, and the record industry has to compete other forms of entertainment, including gaming, virtual reality communities and social networks, for the consumer’s short attention span. You would think they’d want their music videos played millions of times a day across all these networks, and allow the companies broadcasting them the leverage to get them out into the long-tail. But that’s just not the case. It’s all about charging the toll now and forgetting that music videos sell music. The less outlets means less promotion, and translates into a drop in sales because you’ve limited your exposure in one area in the hopes that you generate revenues from those companies trying to build their business around your music, instead of from the fans who purchase music. I believe this a participating factor in why young people think music should be free.

As new media companies begin to pick up the tab for music licensing, labels can become less concerned with overall sales, while depending on the profits of their partners. That’s a slippery slope, as I’d rather depend on the dollars from the wallets of a million consumers, than 4 or 5 companies who can then turn on me and dictate the terms of use, like consumers are doing today.

There’s a balance that needs to be met, but right now, record labels see gold in onerous license fees, because they are in a position to dictate terms. It’s interesting that WMG has pulled its videos from Yahoo, complaining that their videos are not getting proper promotion on the company’s web site. Now, not only are they losing their fees, their artists also suffer because someone high up in the company decided to play hard ball. I’m not privvy to the actual details of their beef with Yahoo, but it doesn’t bode well for WMG artists who need any promotion they can get. If I were a WMG artist, I’d be livid and demand that my video be added back to Yahoo immediately.

Here’s to hoping that FUSE holds out and that other follow, in order to force the record industry into a more rational, long term business approach to music videos, which is the same model as radio; pay for performance.

(I’ve updated this article since it’s orginal post to correct spelling errors and add new commentary)

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3 comments

  1. Christian DeBlis says:

    Anthony,

    Fantastic article. I enjoyed your perspective on this issue – and I think it addresses a larger issue – how to grow revenue in a changing world. Innovation is happening before our eyes every day, and the speed at which we adapt is key.

    Your article also addresses long-term partnerships vs. short-term revenue. I will assume from your stance, that you enjoy building relationships, as do I. I don't run my business transactionally, because it's a time-suck. If we put the time in from the start, and explore creative avenues to make money together, we benefit from sharing creative capital.

    I'd love to connect with you on LinkedIn, and share the music of Camp Clovenhoof with you. I'm helping to promote their music, and you can sample their tracks at http://www.MySpace.com/CampClovenhoof. I'd love to hear the thoughts of a music industry veteran. (I really like the track "soul sale.")

    You can reach me at [email protected]. Let me know if I can do anything for you. I have an extensive network on LinkedIn, and I always try to connect people with relevant requests.

    -Christian

  2. Joe Danziger says:

    Hey Tony,

    Well put. The labels are only shooting themselves in the foot in the long term. The power is quickly shifting into the hands of the artists, and just as music production has become much more accessible, so will video production.

    Don't the execs from the labels read any of these new media books? The chance to adapt will not last forever. "Life moves pretty fast. If you don't stop to look around once in a while, it just might pass you by." -Ferris Bueller

    -Joe Danz

  3. Tony Zeoli says:

    Hi Christian…hi Joe…

    Thanks for both your comments. Christian; yes, I am building relationships and hoping that together, my company, StarStyle.com, the record industry and recording artists can build a new business model that consumers are asking for. You would think it would be easy, but it's not–it's extremely difficult.

    I'll connect with you on LinkedIn as well.

    Joe, nice seeing you down in Longbranch for Jo Jo's wedding. Yes, video production will also be something that is controlled by artists, as the technology to shoot music videos on Cannon or Hitachi HD cameras and cut the results with Final Cut Pro, comes down in price. It's already happening. So many artists are producing their own videos now, or documentary style promo-reels, etc…

    I think, we'll always need major labels for the collection of royalties and publishing, but making albums and distributing them digitally is being controlled more and more by the artist.

    Tony

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