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The music kings fight over royalites

Riaa_logo_1 There's a widespread public impression of the music industry as monolithic corporate horde moving in lock-step to a) force brainless pap down our ear canals, b) exploit lowly artists and c) sue the pants off of 12-year-olds, college students, grandparents and dead people. In truth, only a portion of the industry is dedicated to those three goals. Umm, that was a joke, and so is the notion of a united industry front. A good illustration of the divisions in the music ranks is the emerging battle between the major record companies and the music publishers -- the largest of which are their corporate siblings -- over how much the publishers must be paid whenever a song is copied.

Harry_fox_logo_1 Because of the dual copyrights involved in musical recordings, the labels have to pay publishing arms such as the Harry Fox Agency (which collects the "mechanical" royalties earned by tens of thousands of songwriters) 9.1 cents for every song recorded by their artists. That's not a one-time payment; it's a payment due on each CD track or authorized download. The rate, which is set by statute and has risen steadily since 1978, is slated to expire at the end of next year.

Today the two sides asked a copyright royalty board (a three-person arbitration panel) to come up with a new rate for 2008 and beyond. Their proposals reflect a fundamental split, and it's not just over the size of the royalty. The labels want publishers to be paid a percentage of the revenue made from the sale of songs, while the publishers want to continue being paid a fixed amount, at least for CDs, permanent downloads and ringtones. Specifically, the labels propose a rate of 8% of wholesale revenue, which translates to roughly 6 cents per download and 8 cents per song on a CD. The publishers want 15 cents per download, 15 cents per ringtone (as a minimum; they'll accept a percentage of ringtone revenues if it yields more money) and 12.5 cents per song on a disc.

I have some sympathy for the publishers' request for more money, given that the compulsory nature of the license undermines their bargaining power. But fixed royalties are an artifact of a business model that's dying. What's worse, they prevent labels and online music outlets from experimenting effectively with new models that have the potential to make everybody better off. The file-sharing phenomenon strongly suggests that the market is crying out for a low-cost, high-volume approach to music, but it's hard to slash wholesale prices when publishers are guaranteed upwards of 9 cents a track. That's why the royalties should shift to a percentage of sales revenue. And the two sides should start hammering out a deal now, rather than waiting for the arbitrators to decide. It's way past time to test the elasticity of demand for music.

Wal-Mart's not-so-super downloads

Walmart_logo For a snapshot of where the major entertainment companies would like to take consumers, check out the new movie downloading service from Wal-Mart. The king of discount retailers is offering the DVD version of "Superman Returns" with three optional add-ons: a downloadable copy of the movie formatted for Microsoft-compatible portable players (about $2), a higher-quality download for a computer ($3) or both ($4).

Think about this for a minute. If you buy a CD, you can (and frequently do) make copies of the songs to store on portable devices and computers. You assume that when you buy an album, you've bought the right to put the music on every device you own. For most people, DVDs represent the other extreme. Restricted by electronic locks, these discs can't be ripped with iTunes or copied with the burning software that ships with a Dell, an HP or a Mac. (Yes, I know, you can find plenty of tools online to do both of these things, but most people don't.) The studios and their allies have been quick to sue companies that try to unlock DVDs even for what seem like legitimate purposes -- e.g., Kaleidescape and Load 'N Go. And the U.S. Copyright Office has refused to permit people to circumvent such electronic locks for personal use, such as making back-up DVDs or loading movies onto portable players.

So from the perspective of the studios and federal officials, consumers have to pay for the privilege of doing the sorts of things with DVDs that they're accustomed to doing with CDs (and LPs and cassettes). That's where Wal-Mart's offer comes in. Unlike download stores such as Movielink, Wal-Mart isn't positioning downloads as a substitute for DVDs, at least not yet. That's a realistic stance, given that downloadable movies don't yet match the picture quality or even the limited flexibility of packaged discs. Instead, Wal-Mart is treating downloads as a complement to the disc -- the copy you would have made for your PC or portable, had you been allowed to. And it's pricing them accordingly.

The savvy folks at TechDirt seem to like this approach, which is similar to what Larry Kenswil of Universal Music Group's eLabs has been advocating for years. I'm intrigued by the idea of letting people pay for just the rights they want, rather than charging everyone for the whole bundle. Yet this makes sense to me only if we trust copyright holders not to use technology to eliminate some of what Gary Shapiro of the Consumer Electronics Assn. likes to call consumers' "reasonable and customary practices and expectations." Unfortunately, that's what they've done again and again -- witness the DVDs with promotional material that can't be skipped, or the "copy-managed" CDs whose songs can't be transferred to an iPod. And while market forces can certainly tame the worst behavior, the monopoly nature of copyrights means that consumers who don't like the way Company X protects a particular title, they have only two alternatives: buying a different title with fewer restrictions, if such a thing exists, or not buying anything.

The entertainment industry can blame some of the problems on immature technologies that weren't sophisticated enough to allow legitimate uses but not illegitimate ones. That's a tough distinction to make, and the next generation of DVDs -- HD DVDs and Blu-ray discs -- are a step forward in that regard. For starters, they can enable consumers to make a limited number of copies for home video jukeboxes and portable players. The question is whether the studios will enable those features, and if so, what they might charge for them. Will they expect a premium for high-def pictures, then another premium for the personal copies? Should they?

Addendum on 11/30 -- For the perspective of someone who really understands copyright law, instead of just pretending to, see this post by Fred von Lohmann of the EFF.

HBO's meek broadband play

Hbo_logo_1 Maybe content isn't really king, as Sumner Redstone has famously declared. Maybe it's just a regent, or a viscount with seats in the royal box. Otherwise, why would so many top content owners be such wussies in the face of their distribution "partners"?
The latest example is HBO, the source of such hot properties as "The Sopranos," "Entourage" and (in previous seasons) "Sex and the City." In an interview last week with the Financial Times, HBO CEO Chris Albrecht said the network was developing a plan to offer its shows online. Brilliant and long-overdue move, Chris! But then the story threw in this groaner: "Mr. Albrecht stressed that any internet offerings would be launched in partnership with cable operators, which it relies on for subscriber fees, the main source of income for the advertising-free network...." That means limiting HBO's Internet delivery to people who already subscribe to the channel on cable (or, presumably, satellite).
That's not how a king thinks. A king would say, HBO's content is responsible for raising cable operators' ARPU. HBO's content also helped to force-march reluctant consumers onto cable's digital tier, when numerous operators shifted the network from their analog channels to digital. HBO would be in deep trouble without cable, but cable can't live without HBO. We're not talking about dropping a few NFL games, as Time Warner did sans souci when it refused the NFL Network's attempted shakedown. We're talking about not having the final season of Tony and Carm.
The Internet offers HBO something cable operators cannot: the ability to reach anybody anywhere. As other networks have shown when they took shows online, there's no cannibalism here. People would much rather watch TV on their living-room TV set than on their PC. It's still too hard for the masses to display downloaded or streamed video on their TVs, so if they have a choice between watching HBO via cable/satellite or the Internet, they'll choose the former. It's the latter audience that Albrecht ought to be thinking about.
Sure, the calculation for HBO might be different from a free over-the-air network like CBS, NBC or ABC. Its existing contracts with cable operators may limit its freedom to move online. And a broadband offering for existing subscribers might make the service more valuable to them, just as HBO's on-demand channel already does. But shouldn't a network with 40 million subscribers (as of the end of 2005) be more concerned about pulling some dollars out of the, oh, 70 million households that aren't subscribing?

Spreading those Jon Stewart moments

Comedy_central_logo The TV network most affected by YouTube may be Viacom's Comedy Central, home of "The Daily Show with Jon Stewart," "The Colbert Report" and "South Park." The site has become something of a memory bank for the three shows, with users posting clips of virtually every celebrated segment. For instance, there's Stewart's deadpan take-down of Sen. Ted Stevens' stance on Net neutrality rules, a bit that immortalized the phrase, "It's a series of tubes."
After tacitly approving the YouTube posts, Viacom caused a stir last month when it demanded that the site remove a bunch of its clips. Within days, though, much of the same material returned, and Viacom executives signalled that they were negotiating a licensing deal with YouTube for the media company's content.
It makes a lot more sense for Viacom to try to monetize the clips on YouTube than to stop them from appearing there. It also makes sense for Viacom to find other outlets that cut YouTube out of the deal, which is what Comedy Central plans to start doing soon. The network's Web site has been providing numerous clips from its broadcasts, but the videos cannot be moved easily off the site. As of next Monday (Nov. 20), the site will switch to a format that enables users to post copies of those clips on their blogs, their MySpace pages and any other Web site they control. The clips will have embedded advertisements, helping Comedy Central make money even after the clips (and their viewers) leave its site.
Kudos to the company for trying to harness the Web's power to distribute media by sacrificing control over where the clips wind up. It's a leap that some content companies have been unwilling to make, for fear that their works will wind up in unsavory corners of the Web (or savory places that their advertisers would rather not be associated with). Michele Ganeless, the network's executive vice president and general manager, said the company doesn't know what to expect from the move. "This is such uncharted territory for everyone," she said in an interview. But her hunch is that the effort will boost the network's popularity, just as the growing traffic at comedycentral.com and the sale of downloadable shows at the iTunes Store have done. It's refreshing to see a network roll the dice on a new way to reach viewers, rather than waiting for someone else to demonstrate all the things that could go wrong.

PlayStation 3, XBox 360 and the digital home

Playstation_3_1 The arrival Friday of the long-awaited PlayStation 3 is expected to provide a badly needed boost to consumer-electronics giant Sony, which has been off its game since the end of the 20th century. Based on surveys conducted in June, Interpret, a media research firm, estimated that nearly 9 million people in the U.S. would buy a Blu-ray equipped PS3 at full price, with total sales of 36 million. Rival consoles from Microsoft and Nintendo are each projected to sell around 20 million.
Interpret presented its survey findings Wednesday morning at an invitation-only briefing and panel discussion inside the LA Times' mothership in downtown Los Angeles. More interesting than the sales projections, at least to me, were the observations about gamers' behavior. Although game consoles are found only in about a third of U.S. homes, more than half of U.S. consumers between the ages of 13 and 54 play video games in some fashion, whether it be on a console, a PC or a portable or a cellphone. These gamers -- and particularly XBox gamers -- are early adopters and heavy consumers of media, according to Interpret. And these two qualities are likely to put gamers in the forefront of the shift to the much-hyped but little-realized "digital home," that is, a place where media loses its traditional associations with specific devices and distribution methods. (Movies and TV shows flow over the Internet and home networks to all manner of devices, photos and MP3s beam from PCs to TVs -- you know the drill.) Both the PlayStation 3 and the XBox 360 are designed to become hubs of this digital home, conveying movies, TV shows, music and photos from the Net or a home PC to the TV.
Interpret urged the entertainment industry to view its findings optimistically. Making titles available in new formats and through new media will add to existing sales, not cannibalize them, said Jason Kramer, Interpret's chief strategy officer. He pointed to one response in particular by the 54% of those surveyed who said they played videogames. About 30% of them, representing about 27.5 million Americans, strongly agreed with the statement that "the more options there are for watching a TV show or movie, the more likely I am to actually see it." Only about 11% strongly disagreed. That's not so surprising, really. These folks are such active consumers, they're more likely to tune in when they can control the schedule. The new generation of consoles will give consumers more power to control when and where they are entertained; companies that do not accommodate them risk being swept aside by those that do.

TiVo goes YouTubular

Tivo TiVo made more announcements Monday about its broadband strategy, which struck me as  interesting more for their implications than for their actual impacts. The one that seemed to get the most attention was a plan to let subscribers upload home movies into private channels that their friends can tune in (or rather, download from). I think it's a better idea than some other observers do, mainly because I send DVDs of my kids' antics to every member of my extended family. Of course, this won't be a useful feature for me until my relatives get TiVos -- something that's not likely to happen anytime soon. But the point of this announcement is to herald an important change in the infrastructure for consuming TV. TiVo is enabling users to become television programmers, just as websites like YouTube enable people to cast their videos to hundreds of millions of computer screens. Think about how useful this might be not just for individuals, but also for companies that want to distribute videos but can't crack the cable/satellite channel lineups.
Something similar can be said for TiVo's promise of a "unified search" function next year that will let users comb simultaneously through the TV channel lineup and Internet video offerings. Unless TiVo signs more deals with online content providers, this feature won't be terribly meaningful. But this kind of searching capability is a boon for independent programmers and other online video outlets trying to compete for eyeballs with CBS, ESPN and company. It's an important step toward a level playing field between video from the networks and video from the Net. (The networks would still have the upper hand when viewers scroll through TiVo's electronic program guide, which doesn't include Internet content.)
Of course, the proliferation of options threatens to overwhelm viewers, just as subscription music services and online stores can daunt users with their ever-growing catalogs (more than 2.5 million songs and climbing daily). In response, TiVo plans to do a version of the celebrity music playlist: celebrities' recommendations for what movies and TV shows to watch. I could see why that might have some appeal, but its value will depend on how much effort the stars put into their critiques. If it winds up being a bunch of actors and directors plugging their own works (or, worse, shows and films that are already hits), then it will be just another TiVo feature that subscribers turn off.

Zune and the new paradigm

Zune Microsoft's Zune, which goes on sale next week, might not fare any better than the Toshiba Gigabeat upon which it is based. Given Apple's head start and superior design, the Zune has little chance of making a serious dent in the iPod's market share. But Microsoft may already have made life more difficult for Apple by cutting a boundary-pushing deal with Universal Music Group to license UMG's catalog for the Zune Marketplace service. As first reported by the New York Times, the most controversial element is the fee that MSFT will pay UMG for every Zune sold -- upwards of $1 a unit. It's probably safe to assume that MSFT will pay the same to the other three major record companies, given how similar their licensing deals tend to be.
Bob Lefsetz burst a blood vessel over this, but it struck me as a sign of things to come in the portable-music world. The fact that devices like iPods aren't covered by the Audio Home Recording Act (which requires device-makers to pay royalties to the music industry) seems like a historical accident now; I mean, what's the rationale for treating MP3 players differently from digital audio tape recorders? And one of the nice things about the royalties provision of the AHRA is that the money is split between copyright holders (e.g., the labels and music publishers) and artists, songwriters and back-up performers. The AHRA also strikes a reasonable balance of interests, forcing device manufacturers to disable second-generation copying (in other words, no copies of copies) in exchange for protection against copyright-infringement lawsuits). More important, the royalties (although small) give the music industry a stake in the success of the device.
The record companies will certainly try to command royalties from other manufacturers not covered by the AHRA, but they have leverage only over the ones who, like Microsoft, are tied to an on-demand music service. That probably doesn't include SanDisk or Creative, but would include Samsung (which wants to launch its own music service) and Apple. Don't expect Apple to be as compliant as Microsoft, however; given the dominance of the iTunes Store, the labels need Apple as much as or more than Steve Jobs needs them.
The Wall Street Journal's Walt Mossberg and the New York Times' David Pogue had the first Zune reviews on Thursday. Both said the Zune wasn't as good as a video iPod. But neither gave enough attention to what makes the Zune different -- the combination of a subscription service and WiFi. For instance, both complained that if you beamed a song from your Zune to a pal's Zune, your friend could play it only 3 times before the DRM locked it down. But what if both you and your friend subscribed to Zune's unlimited music plan -- would the DRM still kick in? The answer is yes, at least in the initial Zune version, but you wouldn't know that from their reviews. What if the song started as an MP3, not a track downloaded from the Zune Marketplace? Would that come under the 3-plays-only DRM? Only Pogue addressed this issue and said the answer is yes. He also railed (rightly) against the DRM being excessively strict. That's something Microsoft can and should tweak, because it seems ridiculous that recommendations can't be passed from friend to friend to friend.
Whether Zune succeeds in the marketplace, IMHO, will depend on its ability to hook music omnivores -- the folks who see value in subscription services -- by offering best-in-class synchronization along with superior abilities to discover music and share it with friends. It's not going to win over customers who view the market through Mossberg's anti-subscription-music prism (and today, that means most people) or who, like both reviewers, obsess over how its features stack up to the iPod. The iPod doesn't support subscription services (yet), and it has no wireless functions (yet). It's practically in a different category.
Robert Scoble offered a non-hands-on review that answers more of the really interesting Zune questions than either the Journal or the Times. Read it here. While he pointed to a strength that Apple can't match, Scoble found some troubling shortcomings. Based on what he and Pogue said, I'm thinking that Microsoft missed the mark with Zune 1.0. I'm still waiting for a player that provides wireless access to a well-stocked online jukebox, then lets me share playlists and podcasts with pals. Maybe a later version of the Zune will do that, but the first one certainly doesn't.

The Net as TV's minor league

Gay_robot_1 You know the kind of jokes that you really don't want to laugh at, but you can't help yourself? That describes much of Adam Sandler's oeuvre, particularly the "Gay Robot" skit off of his most recent LP, "Shh...Don't Tell." The raunchy piece is as subtle as its title and offensive in oh so many ways, and yet it's right in the sweet spot for some portion of America (young, male, probably single, probably not gay).
Backed by Sony Pictures Television, Sandler's production company made the skit's sex-starved automaton the star of a pilot for a TV show and tried to sell it to Comedy Central. But the channel that has hosted the cheerfully omni-fensive "South Park" for 10 years balked at "Gay Robot" out of concern that its appeal was, umm, too narrow.
Sony and Sandler's Happy Madison Productions hope to prove otherwise by releasing the "Gay Robot" pilot online later this year. Their plan is to make the show available through as many outlets as possible. Details are still being worked out, but you'll certainly be able to watch the thing on Sony-owned sites such as Grouper. Their goal is to attract so many viewers, a network like Comedy Central will be persuaded to run "Gay Robot" on TV.
If this approach sounds familiar, well, it should. It's 1999 all over again for video on the Net. During the dot-com bubble, a raft of companies tried to put broadcast-quality video and animation online, trying to build an audience large enough either to win a TV deal (e.g., Icebox and Mondo Media) or attract advertising dollars (e.g., DEN). The audience was too small then; by February of this year, however, Nielsen//NetRatings estimated that there were nearly 100 million active broadband users in U.S. homes. By summer, the hordes were averaging 1 YouTube video per person per day.
The potential deal-breaker today is the low percentage of people who can watch an Internet-delivered video on their TV. That's not a problem for short clips, which people don't hesitate to watch on their computer screens. But a 30-minute (OK, 22-minute) sitcom? To its credit, Sony isn't waiting for the TV-PC gap to close. In addition to "Gay Robot," it plans to put another niche-y, broadcast-quality comedy online (with CBS) later this year. Other studios and networks are experimenting, too, using the Net both to promote new shows and to bury failed ones. Business model or no, there's a lot of TV on the Net these days, and more is on the way. As Gay Robot says, "Good times. Good times."

A Cingular sensation

Cingular_logo I'm a reasonably early adopter and, as should be apparent from this blog, a music fiend. As soon as it was time to get another free phone from Verizon, I did -- an LG 8100, with built-in MP3 player. I also rushed out and got a memory card (in yet another format, miniSD ... give me a break!) so I could load up my phone with tunes. Then, after about two weeks of never listening to MP3s on my phone, I erased the songs to make more room for pictures of my kids.
That's why I shrugged when I saw the Wall Street Journal's story about Cingular getting into the downloadable music biz. Ummm, so what? Yes, it's kinda neat that (according to the Journal) Cingular plans to support subscription music services, giving users unlimited access to a library of a couple of million songs for a flat monthly fee. That's an instant differentiator from other carriers' music services, whose phones won't play rented tunes. But it also means supporting a DRM that doesn't play for sure. So good luck, guys. (The one subscription service in Cingular's mix that avoids this problem is eMusic, which provides a fixed allotment of MP3s per month that aren't wrapped in DRM.)
IMHO, there's nothing inherently magical about a music service offered by a mobile phone company. I don't accept the conventional wisdom that music-playing cellphones are intrinsically appealing because people don't really want to carry both an MP3 player and a phone. Tens of millions of people who tote iPods in the U.S. also pack cellphones, so that's a well established behavior pattern. I don't think the convergence of cellphones and MP3 players will really happen until mobile music services become unique, compelling and a better value than they are today. Helio is an interesting experiment along those lines. I also very much like the idea of a portable device that can wirelessly tap into your subscription service or personal music collection, one that doesn't limit you to the songs stored in your phone's memory. But such a service will probably have to wait until the mobile networks have a lot more bandwidth, so users won't have to pay such a premium for using airtime. Another nifty possibility that no one seems to be pursuing is a music service that takes advantage of cellphones' awareness of their location. Imagine getting playlists based on where you're shopping or killing time. The point, again, is that a mobile music service needs not only to be portable, but also to take advantage of the powers of the mobile network.
Today's services from the major carriers give users little more than the ability to download songs through the wireless network (something that Cingular won't support at first, by the way) or sideload them from a PC. And given the cost per track of downloading (about $2.50), you have to either be enough of a spendthrift not to care about the price or simply unable to wait to buy the song through your home PC. There's a surprising number of people who meet these descriptions, but we're not talking iTunes Store numbers.
Personally, I can't imagine downloading a song for the price charged by the mobile phone companies. Besides, I'd rather listen to music on one of my MP3 players, which is dedicated to that task, than on my phone, which isn't. The only compelling reason to drain my phone's battery by playing music is that it's nice to be able to take a call without unplugging your headphones. Maybe if I received more calls, I'd care more about the plug swap.

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Times editorial writer Jon Healey pens opinion pieces about a variety of business issues, and blogs about technologies that are changing the entertainment industry's business model.

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