The Digital Lowdown

Video Blog with Gerd Leonhard

My good friend, Gerd Leonhard, is one of the official bloggers of MidemNet.  In the midst of a crazy busy Midem this year, I did a one-minute video interview for his blog.  Weary-eyed, I managed to sound somewhat cogent.  Here it is:

Video Interview at Midem

Midem 2009 - Day 2

Here's a brief update from Cannes...

The bad news is that the attendance is definitely down.  The aisles are empty and there are significantly fewer exhibitors.

But the good news is that there is still a lot of business to transact.  I met with many new music services (both Internet and mobile) and our VP of Labels, Michele Ito, was booked solid with new content meetings.

Obviously, the music business is struggling to find a good business model that balances artist rights, compensation and user friendliness.  It's evident that a lot of companies are doing a lot of thinking and experimentation.  Some of these may not survive till the next Midem.  But I'm sure that many will find a viable customer base.

For myself and BFM, it's still an exciting time.  Nothing at this show quells my enthusiasm for the growth and development of BFM as well as the music industry.  We may not know where the future is head (sorry, Gerd).  Some of the uncertainty is scary, certainly.  But for the most part, it's all good.

Reporting from MidemNet (Cannes, Fr)

Today, I attended MidemNet which is the digital music conference that precedes Midem.  This event attracts a wide variety of digerati, labels and music industry execs.  The dark auditorium and comfortable seats makes it a challenging fight with jet lag.  But fortunately, i slept just enough, had plenty of coffee and even took a morning jog this morning which all combined to keep me alert throughout the day.

Every year, there is generally a "hot" topic that pervades not only the panels, but the intense networking that occurs.  The last couple of years focused on DRM (i.e., digital rights management) and subscription services.  This year, the main subject was fan interactions and how to create a compelling relationship that leads to increased revenue.   I will write a more detailed description of the many specific discussions and ideas presented.  But for now, I can easily summarize the common thread to a successful artist/fan relationship.

It is content...and lots of it!  Releasing one album per year is just not enough to create a loyal customer and combat the attractiveness of free, illegal downloads.  The key is to not provide as much content as you can.  The goal is to gather as much information about your fans as possible (least of which should be an email and cellphone number).

One artist sold a subscription for a year's worth of songs for $50 and then he proceeded to write/post a song per week.  Other artists gave away free downloads in exchange for an email or cellphone number.  

Content does not have to be just music.  Jack Penate, a case study presented at MidemNet, created 100's of short videos as did Soulja Boy Tell 'Em.  These can be short glimpses into rehearsals, gigs, sessions or everyday life.  Photos, blogs, drawings, and poems are all good examples of content that help create and sustain interest.

The lesson that I have always advocated and that all the panelists emphasized is that an artist has to always produce something that motivates a fan to want to come back to you.  Without a ton of content, fans' interest will wane.  

More to come from Cannes.

Au Revoir!

A Holiday Miracle: How To Get 50% Back On Your Marketing Dollars

According an IFPI study, 20% of music on iTunes does not sell even one download.  That is really amazing to me.  One would think that everyone who posts music on iTunes (most likely thru a digital distributor such as myself) would have at least a few friends and family willing to buy a track or two.  Yet, BFM's own quarterly accounting reports showed about 100 labels/artists that had no revenue at all during Q3.

My takeaway from a sad number such as this is that these folks are doing nothing to get the word out about their music.  I mean if you can't convince your Aunt, brother, or your buddies at work to buy a track, then how the hell is a perfect stranger going to find out about your music. Personally, I have posted a few tracks that I recorded.  It gives me a giggle to see if my paltry four tracks will make me the winner of the smallest royalty check each quarter.  Proudly, I can say that I've never hit the very bottom ever.  I've been close.  Why?  That's because I am always mentioning to friends that I have an EP online and a few of them inevitably buy them.

The key to selling music on the digital services is two-fold:  marketing and discoverability.  In reality, it is really all about marketing since that only serves to increase discoverability.  But I will write about the latter in a subsequent column.

Now, I am not about to tell you the magic secret for marketing your music.  Usually, it comes down to marketing 101 techniques and there are plenty of books out there that are great.  I am here to tell you about one of the most powerful marketing techniques that has remained unknown (or ignored) by most artists and labels.  

What if I could tell you of a way to get 50¢ back on every marketing dollar that you spend? ...automatically!  That would be incredible wouldn't it.  Well, here is how you can do this.

Gift ONE track from your album to 100 people. (Do NOT send them the whole album.) iTunes has a very cool feature that lets you buy a track or album and send it to someone as a gift.  It won't cost them anything and they will have to come back to iTunes to download the track.  This accomplishes many things.

First, it exposes your music to 100 people who may not have heard it before.  I know what you are saying:  "I don't know 100 people that I can gift my music to."  That is pure B.S.!  If you add up your co-workers, friends, musicians, family, religious organization, college buddies, etc., you should be able to easily come up with 100 people.  Plus, you can also include your local music promoters, critics,  producers and the people at the supermarket.

Secondly, some of these folks may just buy some more tracks.  I think it is quite likely that this may happen.  Of course, there will be those recipients that are not into your music.  It is equally likely that many of them will like what they hear and will want more.  This is why it is critical not to gift the entire album.  Just do one track and let them come back for more.

Third, one hundred people should be enough to start a bit of a viral effect on your album.  Hopefully, they will each tell a friend about your music and spread the word.

OK, now comes the most obvious objection.  Many of you reading this will say that you don't have $100 to do this.  Well, the good news is that for every $100 you spend, you will only be spending around $50.  That is because you'll get about 75-80% back from your digital distributor in royalty payments.  If you have an 80/20 deal with your distributor and spend $100 at iTunes, that means that you'll get $56 in royalty payments the following accounting period. In reality, your $100 of marketing has only cost you $44!  Where else could you get such a great deal and save 56% on your marketing dollars?

When you made your album, I am sure that you spent money on items that were not essential.  For some, I imagine the beer-budget came close to $100.  Perhaps you rented that amp that you used on only one song.  Or maybe you had to slip some money to a club owner to use their space for a studio.  Regardless of your recording, mastering, and manufacturing budget, I don't think that you wanted to spend all that money only to see it languish at the bottom of the lists on iTunes or to look at the zeroes on your royalty statements.

Lastly, please remember that some of the best digital marketing plans began by giving away free tracks.  That works very nicely if you already have the traffic on your site.  It does not work well if you trying to generate interest from scratch.  If this technique doesn't work, you are out only $44.  But if it does work, you can be proud that you took a proactive step and created a buzz about your album.

Happy Holidays!

THANKS FOR THE MUSIC BIZ

Today is Thanksgiving.  Every year my extended family sits around the table and each us gives thanks for something in their lives.  As I was running this morning, I was trying to think of something meaningful (and new) to add to the usual list:  my family, my job, my health, etc.  I didn't come up with anything new for the dinner table.  However, I did come up with music business-related items for which I would like to express gratitude:

1)  Thomas Edison/Emile Berliner:  These two pioneers invented ways to record music into a format that could be easily distributed.  Until then, if someone wanted to hear music, they had to bring in a musician or go to where a musician was.  After the invention of the phonograph (Edison's cylindrical device) and the gramophone (the early version of an LP), music could be widely shared.  You could say that it was the first form of P2P and launched a consumer desire for music products.

2)   MP3:  It is without question that the MP3 file format, invented in 1991, created a revolution that is still rippling throughout the world.  It is undeniably that an MP3 file sounds worse than other file formats (wav, aiff, wma, etc.).  Previous physical, audio formats proved that audio quality was not the main concern of the music consumer.  Does anyone remember how awful a cheap cassette sounded or how bad an 8-track was?  Without the development of the MP3 format, however, we would not have seen the meteoric rise of the digital music industry which was, for the most part, a desperate response to the growing availability of unlicensed, free music content.  So whether you are an audiophile who curses how MP3's are dumbing down our ears or an out-of-work record exec who wonders what the hell happened, we can still thank MP3's for exposing music creators to music lovers on a global scale.

3)  My Staff:  The music industry has an undeniable allure to it.  Music instills passion and there are always many people who want to be near those that create music.  I suspect that there are many industries that one can simply sit at a desk and do the work without caring much about the end product.  But in the music industry, that is really hard to do.  I am very fortunate to have an incredible staff.  Not only are they hard working, intelligent people, they also care deeply about music.  Many of them are budding composers, songwriters, producers and engineers.  I used to think that I wouldn't want to hire such people because they would care more about their music then the work they needed to do for me.  Now I realize that it is the same passion for creating music that benefits a company like mine.  Who better to understand how important an album is to one of our 1000's of indie artists then a fellow artist.  Even the staff who are not actual creators of music still possess a love of music that motivates them to succeed.  So, today, I have to acknowledge my thanks to my entire staff.  They are an incredible group of people.

4)  Artists:  I used to be a self-unemployed film composer.  I have to admit that I sometimes miss creating music.  Nowadays, I don't play very much and my playing chops have significantly waned.  To satisfy my creative urges, I rely on writing, speaking and running the business; all endeavors that tap into the same creative resources that my composing used to do.  Every day, we receive albums from musicians and artists that obviously reflect their dedication to and love of music.  Ultimately, that is where the content comes from.  Even if we are getting music from a publisher or music library, all roads eventually point back to some composer, singer, artist, or sound designer working in their studio and deciding if they have the right amount of reverb, the drums are too loud, do I need to tune that background vocal line, etc.  I can never forget that the source of business success originates from the vision and energies of the people that create the music and audio products that we represent.

5)  CERN:  For some people, Al Gore invented the Internet.  In reality, the credit can most likely be given to CERN, the Geneva scientific institute which created the World Wide Web project in 1991.  Elements of the Web had proceeded them.  But it was CERN that really put it all together.  Everyone can admit that our lives have been transformed by the Internet.  For the music industry, it is more than obvious to state this.  Forgetting the impact of P2P file sharing, the most amazing thing about the Internet is the ability to connect people in disparate regions around the world.  Admittedly, I am still one of those people who is amazed at the fax machine.  But when I think of the empowerment of the Internet, I am overwhelmed.  Ten years ago, if you were a jazz musician in Chicago and wanted to sell your music in Germany, you had to press an album, find a label locally, find a German distributor who then has to convince a German store to carry your album.  Then hopefully a German jazz lover will find it in the bins and buy it.  Now, thanks to CERN and the Web, any musician with an Internet connection can make their music available to any music lover ANYWHERE IN THE WORLD!  That's incredible.  OK, the issue of discoverability is always going to put a slight damper on this.  But that doesn't diminish the remarkable potential we now have at our fingertips.

6)  My Partner:  The ongoing joke here is to say "my business partner".  When I conceived of the idea of BFM Digital (nee Big Fish Media), there was only one person that I could envision turning to. Looking back at the past four and a half years, he has been an excellent compliment to my skill set.  He has pushed me to do things that my instincts rebelled against.  I feel it is important for a business owner to always have a sounding board, partner or not, to give one a sense of perspective.  It is very easy to lose site of the trees for the forest.  I am grateful for my partner to help push me out of my comfort zone in order to build a thriving business.

7)  My Family:  You are probably saying that this last piece should be reserved for the dinner table.  Maybe you are right.  But creating a digital distribution business from scratch involves the support of one's entire family.  When I moved my office out of the house, my children cheered because they each could have their own room.  The flip side of that coin is that I now get a call at the end of each day:  "When are you coming home, Daddy?"  Knowing that they love what I do for a living and give me their complete support is crucial to survive the challenges of being a small business owner.  It sounds corny, but I couldn't have accomplished what I did without it.

HAPPY THANKSGIVING EVERYONE!

  

Yes, You Can Make Money With Your Music!

OK, Ok.  The title of this blog entry sounds like one of the many "get rich quick" emails that clog up your spam folder.  It is possible to make a million overnight in the music biz.  But that is, by far, the exception as opposed to the rule.  Most of the successful artists and labels that I deal with are in it for the long haul. They know that today's music business requires an equally creative approach to marketing their music as it does to create it.

In the past few months, I have been working on some very interesting, and off-beat, types of music licensing projects.  It made me think about the diversity of opportunities that exists in our modern world.  Even though everyone bemoans decreasing CD sales, I would like to describe some of the more innovative revenue sources in the hope that it gets you thinking of new ways to earn money from your music.

1)  Greeting Cards:  I recently walked into a Hallmark store to buy a card.  The last thing that I expected to hear was the theme to "Monday Night Football."  But wafting from the back of the store was a tinny, yet clearly recognizable recording of this well-known tune.  I stopped my quest for a sympathy card for the death of an employee's pet to find the source.  Turns out it was one of the many hi-tech cards that employ audio devices to play music.  Aside from the obvious "Happy Birthday to You", there are dozens of other songs that make a lot of money for publishers and labels.  It doesn't take much thought to realize that you can license "When Irish Eyes Are Smiling" for St. Patrick's Day and "Jingle Bells" for Christmas.  But how about "Pomp and Circumstance" for Graduation Day or "M-O-T-H-E-R" for Mother's Day.  THe typical compensation structure for audio cards is a either a per unit royalty or a revenue share of the retail price.  Selling a $2.99 card doesn't seem like an adequate substitute for a $12.99 CD.  But believe me; it adds up to a sizable sum.  

2)  Toothtunes:  Imagine having an electric toothbrush that plays music that can only be heard when it is pressed against your teeth.  A friend of mine at EMI Music gave me a few samples for my kids.  One played "Let's Get It Started" (from Black Eyed Peas).  Another one had "Wake Up" (by Hillary Duff).  The song plays for two minutes which is how long dentists want us to brush.  So instead of selling 500,000 CDs to get a gold record, publishers can sell 500,000 toothbrushes (for a gold tooth??).  That may seem like an overly ambitious goal.  But just imagine how many parents want to get their kids to brush more often.  That has to be way more than platinum level of sales.

3)  Online Karaoke:  For several years, I have been working with the first (and best) online karaoke service.  Most people know about karaoke from the many, cheesy karaoke clubs and old cassette systems.  But the karaoke business is a multi-billion industry that, until recently, has consisted primarily of unlicensed content.  Utilizing the sensibility of social communities, a friend of mine developed kSolo.com.  Ultimately this was purchased by Myspace and it is now known as Myspace Karaoke.  In an age where music publishers and record labels are combatting lost revenue from illegal download services like Limewire, Myspace Karaoke attempts to take the karaoke industry, which has been mostly illegitimate and bring it back to the fold.  The revenue model for services like these employ a combination of a subscription and advertising sources.  It enables publishers a way to breathe new life into their back catalog of songs.  Instead of being able to license only eight compositions per CD-G disc, they can now license 1000's of songs for an online karaoke service like Myspace Karaoke.  

I know that none of these sound as glamorous as licensing a song for a national car commercial or a big, studio film.  These types of high-ticket placements are proving to be one way for publishers and labels to offset decreases in mechanical revenue from CD sales.  

As physical sales continue to fall without being completely replaced by digital sales, music owners will need to find new ways to generate licensing revenue from their existing catalog.  I would say that the same Chinese curse is also the salvation for the music industry:  "May you live in interesting times."  The challenges of the digital age also presents new streams of income.  Some of them are wacky and some are simple.  All it takes is a little imagination... and a willingness to tolerate hearing TV themes while shopping for a condolences card.  

Texas Bar Association Speech (Pt. 2)

Note from author:  I recently gave a speech to the Texas Bar Association’s annual entertainment law conference.  It was held in Austin, Texas on October 02, 2008.  This entry is the first of several excerpts drawn from that speech.  Eventually, the entire speech will be posted.  It was accompanied by a slide presentation from which selected slides will be posted here.  

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Part Two:

It is sometimes easy to forget that the digital music services are only 4 years old. The illegal services are a bit older but still only go back to 1996.  It’s hard for us to remember a time when we didn’t have emails, the internet, cable TV.  But compared to those technologies, stores like iTunes are mere babies. 

Here's a look at the growth of digital music sales:

The percentage that digital sales has continues to grow.  But let’s not forget that it is a two-prong process.  Digital sales are growing as physical sales decline.  So this will give an inflated growth curve.  Eventually, most pundits predict that digital sales will be primarily all that there is.

When we talk about digital music, it’s important to define what is being discussed.  There are really three distinct verticals:

• Subscriptions services like Rhapsody and Napster
• Online Downloads like iTunes and Amazon
• Mobile Services like Verizon and Sprint (downloads thru your mobile phone)

Here’s a breakdown of the average market segments worldwide.  Obviously in some territories these figures can vary widely.  For example, in Japan, the mobile market segment is 91%.

Just to put things in perspective, here are the three top selling artists in the download market.  In this slide, we see the top three best selling artists in the download world:

Some other interesting statisics are:

• 4 million tracks downloaded at least once (937k majors / 3 mil indies)
• 1% of all digital tracks accounted for more than 80% of track sales in 2007
• 1 mil only songs were downloaded once
• 9 tracks sold more than 2 mil DLs ("Crank That” by Soulja Boy led with 2.9)
• One track did so in 2006

(Source:  IFPI)

Statistics continued:

• There are more than 500 legal music services worldwide, ten times as many as four years ago.About 6 million individual digital songs are available legally.
• 1.7 billion digital tracks were downloaded legally last year, up 53 percent.
• Tens of billions of songs were swapped illegally.
• The ratio of unlicensed tracks to legal tracks downloaded is 20 to 1

One thing to remember is that the music industry has adopted digital distribution more than any other media.  It is more advanced in terms of digital revenues than any other creative or entertainment industry except games. Its digital share is more than twice that of newspapers (7%), films (3%) and books (2%).  Many of you will instantly note that that music files use much less bandwidth than video files, for example.  Regardless, there are a lot of lessons to learn from the exploitation of music in the digital world.  

Youtube Goes Out Of Business: Last Day Will Be...

Imagine waking up one day and seeing this headline on your computer.  For most people, Youtube represents a form of entertainment and communicating with friends.  Personally, it's a great way to instantly share videos of my kids with my out of town relatives.  It's also a great diversion when my work gets too serious or overwhelming.  I can always rely on my staff to keep me informed of hidden gems (with the knowledge that they are finding these videos on their own time, of course).  

For the music industry, Youtube is seen both as the largest infringer of copyrights and as potentially large source of new revenue.  While it is true that some big name artists, such as Avril Lavigne, have made significant royalties, the vast majority of copyright owners have not made anything more than coffee money from Youtube.  For most artists and labels, their lives would be unchanged if Youtube were to suddenly disappear.  

Aside from creating 15 minutes of fame for outrageous celebrity impersonators and talented dancers, Youtube has failed miserably as a new revenue stream.  TV Networks are finally beginning to adopt it as a promotional device that has measurable affects for its TV shows.  But artists constantly ask me how to translate 10,000's or 100,000's views into  bankable transactions.

The obvious tricks are to embed URL's to your CD store in both the video, description and reviews of the video.  But these are ineffective much like the Snocap stores were ineffective at driving download sales on Myspace.  (There are obvious exceptions like Soulja Boy.  But these are exceptions that prove the rule.)

There are cases where even million-plus views do not translate into substantial sales.  If there an artist had a million radio impressions (i.e., spins), then it would be a foregone conclusion that the single or album would go gold.  In this day and age of disposable entertainment, a million views or plays is almost the bare minimum to begin generating buzz.  It is not, in itself, "buzz".  

So what does this all mean?  Should an artist skip Youtube?  Absolutely not!  Every bit of exposure is helpful, of course.  The key is not to rely on creating a Youtube hit.  Creating a buzz that translates to sales requires a multi-prong attack plan.  Don't expect a "post it and they will come" attitude.  Keep up the "marketing 101" efforts (see the link below).  They really work.

P.S. - check out our new association with the PR Gold program from Mi2N below

BFM-Mi2N: PR Gold

Links:

The Skinny on YouTube: Revenues Are Still a Bit Skinny...

Anatomy of a Successful Digital Marketing Campaign...

Texas Bar Association Speech (Pt. 1)

(Note from author:  I recently gave a speech to the Texas Bar Association’s annual entertainment law conference.  It was held in Austin, Texas on October 02, 2008.  This entry is the first of several excerpts drawn from that speech.  Eventually, the entire speech will be posted.  It was accompanied by a slide presentation from which selected slides will be posted here.  Lastly, there are some references to panels at that conference.  Likely, they will seem odd.  But laziness prevents me from deleting or correcting them.)

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As an homage to the famous “Last Lecture” by Carnegie Mellon professor Randy Pausch, I’d like to begin this presentation by letting you know what will not be discussed today:

1)  Is the Music Industry Dead? 

In June, the IFPI reported that the worldwide sales of music were at a 23 year low.  Combining digital downloads, at a equivalent rate of 10 tracks per album (an unrealistically low estimate), with physical sales, there were only 1.86 billion albums sold last year.  That is down 11% from 2006.  The last time album sales were this low was in 1985 (remember “We Are The World”?).   The peak year since that time was 1996 when album sales were 3.4 billion units worldwide.

The knee-jerk reaction to this news is to predict the inevitable death of the music industry.   It seems natural to join the chorus of the doom and gloom advocates.  I must admit that sometimes I wonder if digital distribution companies like mine are part of the future of the music business or merely the top deck of a sinking cruise ship awaiting our ultimate drowning.
For the past 10 years, nearly every prediction of future revenue, trends, and activities beyond a year or two have been dramatically off.  I refuse to partake in such speculations.  There should be one of my articles in your packets that more fully explore my feeling about the doom and gloom forecasts.  Suffice it to say that I believe the music industry is still facing major paradigm shifts and will take several years to settle down.

2)  Is the CD Dead?

One of the best conferences that I ever attended was called MB5.  This took place in Berkeley in 2001.  Not only did I meet one of my creative idols, Alan Parsons, I met some of my best business partners and friends at this particular event.  There was a particular panel that I fondly recall.  Sitting in a small classroom with about six of the leading Internet music pundits on the dais, the subject was discussing the future of the CD format.  At that same show, I remember a guy walking around with a small, quarter-sized disc that could hold…a whopping 500 megs.  It was going to replace the CD. Back on the panel, the moderator asked for a show of hands of those people that thought the CD was going to be gone within 2 years.  I am proud to say that only two people did not think so.  One of these was Alan Parsons.
I think that it is inevitable that the CD will disappear.  But the music industry will survive.   A client of mine put it well.  When 8-tracks came out, you didn’t see Warner Bros. Records change their name to Warner Bros. 8-Tracks.  

3) How Do You Make Money From 1 Million Plays Of A Music Video On Youtube?

Regarding how you can take millions of plays on Youtube and convert this to a revenue stream…I don’t know how one does this.  Sharing ad revenue, click thrus, etc.  are all possibilities.  But none of these are really working right now.  So we’ll leave this mystery alone for now.  If I figure out the answer, I probably will make an infomercial and sell “how-to” kits on late night TV.

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(Note: this is a taste of future excerpts)

WHAT WILL BE DISCUSSED TODAY IS:

 1)    An Overall View Of The Digital Music World

The music industry has many facets and components.  Dividing it between digital and physical goods is an obvious, but not easy, demarcation.  Within the digital arena, there are distinctly different revenue channels of ringtones, downloads, streams, etc.   The music buyer can still be distinguished between digital and physical.  So I’ll give a brief state of the digital music industry just to give us a perspective.

2)    The New Role Of The Artist/label

The buzz phrase of the past year has been”360 deals”.  I admit that the deals being offered to Madonna and Jaz Z are incredible.  But the majority of indie labels and artists have always had a “360” perspective.  I’ll explore the concept of disintermediation and the new responsibilities that artists now have.

 3)    The Various Types Of Digital Services

It seems that new digital music services (aka Digital Service Providers or DSP’s) are launching every week.  There are a wide variety of business and marketing models.  Though time doesn’t permit me to be completely detailed about all of them, you should get a good overview here.

 4)    Licensing/legal Challenges

Other panels today and tomorrow will discuss this subject in greater detail.  Today, I’ll cover some practical challenges and issues that many labels and artists face as they attempt to get their music distributed around the world on various DSPs.

 5)    New Opportunities That Are Available

Lastly, I want to end this presentation on a positive note.  The digital world creates a lot of headaches and worries for content owners and creators.  On the flip side, it also creates a wealth of opportunities that are truly exciting.  

NEW MUSIC ROYALTY RATES

This week had some very important rate decisions by the Copyright Rate Board. For over a year, they have been hearing testimony about the statutory mechanical rate as well as the rate that subscription services should pay for publishing royalties. Both rate structures were announced this past week. Since it affects nearly everyone in the music business, I think it’s important to give you my initial take on these rulings.

Since 1909, there has been a set royalty rate the record companies had to pay publishers whenever a reproduction occurs (i.e., LPs, cassettes, CDs, etc.). From 1909 to 1976, the rate was 2¢ per track per unit sold. It was increased in 1976 to 2.75¢ and has risen regularly to 9.1¢ in 2006. 

That rate expired December 31, 2007. So for the past 21 months, the rate has been unchanged and everyone has been awaiting the new rate structure. The major battle here has been between the publishers on the one hand (represented primarily by the NMPA). On the other hand, there are the music services and the record labels represented by DiMA and the RIAA respectively. The publishers had been arguing for an increase in the mechanical rate. They sought a rate from approximately 12¢ to 15¢ pre track per unit. DiMA and the labels wanted the rate reduced to 5-6¢. 

So, after a year of testimony and months of deliberations, the rate has been finally set at…. the same rate of 9.1¢. This is now the official mechanical rate for all physical goods and permanent digital downloads (e.g., iTunes, AmazonMp3, etc.). The most important fact to know is that this rate is fixed for the next five years.

In the same ruling, the CRB has set a statutory rate for ringtones that involve master recordings commonly known as ringtunes, master tones and trutones. The rate for these ringtone products is 24¢ per tone. This does not apply to polyphonic or monophonic, MIDI ringtones, however. 

On the subscription side, the rate ruling is much more complicated. Early last week, the parties agreed (and the CRB will likely validate) an agreement whereby publishers will earn 10.5% from subscription revenue (which includes streams and tethered downloads) after the cost for the performance royalty license has been deducted. There is actually a very complex and confusing grid of rates and services that will apply. 

There are two important considerations to remember. First, this means that the bold threat iTunes made to close down its store, in the event of a royalty hike, is now meaningless. I really didn’t think that this was a likely, or even a possible, scenario. Fortunately, that bullet, real or otherwise, was dodged. 

Secondly, the rate is now going to be stable for five years. This may seem like a long time. But before you know it, there will be the start of discussions for the next rate adjustment. If the predictions of the death of the CD and the rise of the subscription services live up to general expectations, then it is quite likely we may be looking at a fundamental change in the statutory royalty structure. Instead of a “penny” rate, it is probably that this will be converted to a percentage rate. 

This remains to be seen. In any event, I laud the CRB’s decision. I look forward to a period of modest stability during which all sides of the table can continue to develop business models that support the artists and labels while meeting a consumer’s needs. 

In the meantime, it is too early to understand how these recent rate changes will affect indie labels and their aggregators. We will try to keep you informed about any new developments.