In October 2014, SoundCloud - free service of streaming music with impressive 175 million monthly users - seemed to be running out of money. It reported that the company, based in Berlin, had lost $ 29.2 million in 2013 and when a purchase offer by Twitter worth $ 2 billion did not work out, it looked like the hottest music startup I was in danger of failing.
Then something strange happened: Warner Music Group became the first major label to close a licensing agreement with SoundCloud, instantly legalizing a huge amount of songs posted on the service. More surprising was the fact that Warner has disbursed a value greater than $ 120 million to acquire 5% of the company, which is now valued at over $ 1.2 billion. However, despite the credibility they gave each other, Warner and SoundCloud have largely avoided talking about the partnership (neither side wanted to give an interview to Forbes) and protected with zeal the agreed conditions. Why? A source who knows the contract says that the record company acquired its interest in SoundCloud with a 50% discount on the price than other investors paid. And these details illustrate a silent revolution in the music industry scanning all involved seem to prefer to go unnoticed.
Given up for dead by most investors and experts, the great survivors labels - Warner, Universal and Sony, known as "Big Three" - come in quietly, acquiring stakes in digital entertainment startups that are more up, including 10% 20% together as consecrated streaming services such as Spotify and Rdio. The conditions for the newest startups are equally unconscionable: the record companies get shares for free or for low value and often give up after the right to buy larger pieces at substantial discounts to sell in the future. Not only in streaming: the record companies come snapping up stakes in startups ranging from a provider of interactive music videos Interlude to giant recognizing Shazam music, which was valued at $ 1 billion and has among its investors Carlos Slim, the second man richest in the world.
And what record companies are giving startups, and legitimacy, to achieve these agreements with such favorable conditions? General access to the artists and their music - a nice trick. Of course it extracts a minimum royalty value of these new channels, but get no control. "This is the story of the music business," says John Oates, the duo Hall & Oates, part of the Rock and Roll Hall of Fame and became independent 20 years ago due to frustration with the financial arrangements with the record companies. "It comes from the beginning. It is a return to the scheme 'take a bottle of wine to him and take all rights for the rest of your life'. "
Artists are beginning to fight back - and not only when they leave the system. This year, Jay Z bought the Swedish service streaming of high resolution wimp and Tidal for $ 56 million, merging them into a single service to compete directly with Spotify. At the official launch, 16 major music artists were presented as the new "owners" of Tidal, including Beyonce, Calvin Harris, Kanye West, Alicia Keys, Jason Aldean and Daft Punk. Reportedly it was offered to each of a 3% stake. Representatives of the three major record companies - as well as the Beats, Spotify and Rdio - refused or not responded to requests for comment on whether the great demanded or not free or cheaper participation in streaming companies as part of the price of doing business. However, in industry circles, the practice is an open secret.
It calculates that the three great writers have obtained positions in digital music startups valued at nearly $ 3 billion - or about 20% of the approximately $ 15 billion that the record companies are worth together. This percentage will rise further when the Spotify go public. And some bets have given return: the Universal Music Group then acquired earlier a position in the Beats by Dr. Dre and owned 13% when Apple bought the company for $ 3 billion last year, resulting in a great goal from US $ 404 million for stamp. Artists + = influence digital profit. It is with this kind of mathematics, applied to all of your revenue models, which record companies hope to put himself back on top of the food chain of the music.
To understand the urgency that the record companies feel it is good to remember what happened to them. Total sales of albums in the United States peaked at 785 million in 2000 - a year after two teenagers called Shawn Fanning and Sean Parker created Napster, which allowed the exchange of music who had a computer and internet access reasonably fast. In 2008, annual sales of albums had fallen 45%. Since then, even the record companies have stopped illegal downloading, the music industry is cashing annually $ 7.9 billion less than a decade and a half ago. At first, the reaction of the record was combat piracy in the courts and merge together. There were six major labels in 1999; today, there are three.
Apple provided a relief. The sale of billions of songs to 99 cents on iTunes gave the record a few years to catch my breath while the revolution of streaming approached. Now that MP3 is following the same path of the old cassette tapes, it appears that the record companies have learned from their mistakes. Led by the new owner of Warner, billionaire Len Blavatnik, the CEO of Universal, Lucian Grainge, and the musical director of Sony, the industry veteran Doug Morris, the big discovered that it is smarter to force entry into companies that want to take their space than perpetually trying to sue them to get them out of the market, which would be like dry ice.
So far, there have been two dominant models of streaming: radio companies via the Internet, such as Pandora that allow subscribers passively listen to suitable music to your taste, and interactive services like Spotify, which allow users to choose the songs. The former may operate under a license granted by the government, which determines how much must pay.
In contrast, Spotify and others should close contracts with record labels and publishers to license songs for legal use in the United States. An industry expert says that YouTube only paid to large more than $ 1 billion in payments over the past two years. Spotify pays out about 70% of its revenue - at a rate of 0.7 cent per run - for labels and publishers, who then pass on a fraction to its artists and songwriters. These agreements provide the record one more way to take advantage of their artists to make money with digital streaming: arbitration. The formula to calculate how much Pandora, YouTube and Spotify pay to record labels is not related to the system that record companies use to pay the artists whose songs are played. The latter is determined by a combination of individual contracts and such an intricate structure, which is called by a nickname that only a discreet hedge fund analyst could enjoy: the "black box".
So how record labels make money on the difference? Let us understand the concept of "breakage". Record companies usually ask that digital partner to pay an advance, something like the way they worked with the old disco clubs. When a contract expires, there is usually a difference between the received royalties and the initial advance. In general, labels stay with a difference. When they deal it is with entities in which they have significant interest and ensure that the same rules apply.
The black box has many other ways to take money out of the artist. For example, "Drunk in Love" is undoubtedly a success performed by Beyonce and Jay Z, but the music appears with different names ("Drunk in Love" by various artists, by Beyoncé featuring Jay Z etc.). In cases of wrong designation, royalties typically do not go to the royal couple music, but for a cash fund unclaimed which ends up being distributed to record companies in proportion to the share of each market. And while the laws of the United States exempt radio stations to pay next recording royalties, foreign laws often do not exempt. When an American artist emplaca a success in the UK, it is unclear how often the UK record company makes payments to the record company and the artist from the United States.
Estimates that the record companies are receiving annually $ 300 million in cash supposedly "non-attributable". "Since there is no good data and there is a worldwide database, the money is easier to stop the black box," said John Simson, who ran the SoundExchange, sector non-profit organization responsible for collecting royalties on digital broadcasts for artists and labels.
Record companies have also increasingly using their influence to keep part of the revenue of the shows. This is relatively new: the tours used to be in deficit, but were meant to boost sales of albums. Now, as this was reversed - most of the profit comes from the music industry shows - the big collect a profit share in exchange for making the promotion and marketing of artists in general.
The agreements called 360 back to the time of the Monkees and began to predominate when Live Nation began about a decade ago, to pay nine-digit advances for the likes of Jay Z and Madonna (both currently investors Tidal) within these schemes.
Today, the 360 agreements are mostly reserved to young artists, with little influence; under these agreements, they usually give in to the record company 10% to 20% of net income of shows. It is clear that this kind of oppressive practice has existed since the early days of the phonograph. Even the Thomas Edison founded the Edison Records - and refused to print the artist's name on their products, the more transparent pay values. The difference is that artists today have alternatives. Most of them criticize the system and, in the end, just entering it in some way. But some invest in what they believe and follow their own path. Taylor Swift owns part of his record label, Big Machine Records, and left the Spotify after a controversy regarding their commission (months later, she agreed to put their music on Tidal Jay Z).
The Hanson band released their own albums, closes its own contracts and brand their own shows. "We have a 360 great deal," says Isaac Hanson, one of three famous brothers of the group. "With ourselves." The alternative rocker Amanda Palmer turned to crowdfunding to fund his latest studio album. In 2012, she raised a record amount of US $ 1.2 million in Kickstarter. "The money I earn in Spotify will probably give me to buy a sandwich," she says. "[But] I think that you can not put the genie back in that particular bottle. I think you'd better face reality, instead of pretending that reality does not exist. "Even inventing new versions of old tricks and accumulating stakes in streaming services guaranteed, the major labels still have a tough road ahead.
Universal and Warner recently reported quarterly revenues equal or lower than the previous year, without taking into account exchange rate variations. Sony Music's revenues rose 13% thanks to launches of Garth Brooks, One Direction and Pink Floyd - and the favorable depreciation of the yen against the dollar. In some cases, who holds the investments in startups are the parent companies of the record, so that the positive results will not necessarily appear on the same balance sheet. Either way, most of streaming services is not making a profit.
This may change as the use grow. According to Russ Crupnick, the Music Watch, in 2013, only 45% of the 190 million Internet users in the United States purchased music in any format, spending an average of US $ 55.45 at the time. A full year of premium service Spotify or Rdio in (or tidal) costs $ 120. "It's a question of mathematics," says Robb McDaniels, founder and former CEO of INgrooves, which manages
digital distribution for Universal Music Group (which is today one of his wives). "If everyone signed, the cake would be many times greater. So that actually is good for artists. The point is that we must do the average consumer signing music, and not only the pioneers consumers. "
Spotify is continually progressing. In January 2015, it had 60 million active users, 15 million of whom were paying for the premium version; these two numbers have increased by about 150% compared to the values of March 2013. And the company does not need to be profitable to go public. If so, the record probably will share a profit of over US $ 1 billion.
Despite all the major labels have refused to be interviewed for this story, executives have been transparent regarding their intentions. In a memo defining your company's goals for 2015, Lucian Grainge, Universal's boss, expressed the desire of the company "be a player with ability to shape and develop the musical platforms of tomorrow." When looking to the future, while at the same time, takes advantage of past models, the label seems to be managing to avoid their extinction.
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