Video Killed the Distributor

Music videos started out as ads for albums in the early '80s, and stayed that way throughout the initial stages of the online music revolution.

But about two years ago, the major labels -- led by UMG -- realized they were missing out on a cash cow that, along with ringtones, could help them weather continued declines in music sales. Ever since, a battle has been brewing between the labels and their online distributors, who claim they're being run out of business by the high costs of licensing music videos. On Tuesday, at the Digital Music Forum keynote panel in New York, the fight was, at least, entertaining.

In front of a crowd of 400-plus industry execs, label reps and digital music professionals, Polar Levine, a musician and blogger, snagged the audience mike during the Q&A session and baited execs with, well, the expected: "Behind all of this bullshit," he said, "is the actual music."
But then, things got interesting: Levine got a one-armed hug from moderator Ted Cohen, the former top dog of BMI's digital music group and current managing director of digital media consultancy TAG Strategic. A breakthrough in relations?

Not really. Levine, while pointing at Thomas Gewecke, senior vice president of Sony/BMG's Digital Business Group, said: "The major labels have run so counter to everything human except for making money that you (the major labels) are the California (of the music business) that's going to drop into the sea."

He went on to predict that music will split into a "two-tiered system, where (the major labels) can do Britney and her hair (or her 'not hair'), and everyone else can do the music." Gewecke, of course, countered, denying that the majors have been gouging their online distributors, and claimed that there is "no benefit to us in having our distributors go out of business."

The scene with Levine nearly stole the show, but it didn't reveal anything particularly new. Many -- from industry analysts to a few outspoken big label music execs -- have speculated that the major labels are charging online distributors an unfair price to license their music and music videos. As a result, licensees often face financial hardship, and some eventually go under -- after fulfilling their financial obligations to the labels, of course.

Cohen, at least, broached the subject by mentioning that SpiralFrog -- a widely hyped, ad-supported online music distributor, which had announced licensing deals from the majors -- is now either dead or in hibernation.

Subscription services haven't had an easy time of it, either, despite the fact that they pay labels less per song than download services like iTunes. Gabriel Levy, a general manager of label relations for RealNetworks, said that Real's Rhapsody service has been limited by the labels' inflexibility on licensing fees. Greg Scholl, CEO of distribution company Orchard, found the fees unfair, claiming, "The labels shouldn't be saying, 'I just spent a million-and-a-half dollars developing this act -- help me make that back.'"

He's not kidding. According to David Del Beccaro, CEO of Music Choice, it would now cost "between $200 (million) and $500 million" to license all of the major-label video content to supply a site with on-demand music footage. "There isn't a single player in music videos online today that can get a CPM to offset the variable cost of providing the video," he said.

But the difficulty in making money hasn't stopped budding online businesses from going to the labels for content. In the end, they need the traffic and community gained by posting the videos. According to Downing, "Major-label artists create an SEO [Search Engine Optimization] effect: People search for Kravitz or the Stones, and because we're hosting that content, we get a secondary benefit" -- the resulting traffic.

So the strong demand for the major labels' music and videos continues. Sony/BMG alone has between "100 and 150 (licensing) deals (with online distributors) at any given time," according to Gewecke, who also mentioned that the company hired more staff in order to keep up with an increased demand for licensing.

But having all that bargaining power concentrated in the hands of just four companies makes for tricky negotiation from the perspective of an online distributor, and could ultimately mean fewer, less innovative options for consumers. Who knows? If the fight continues, Levine might just get his two-tiered system. The surprise, however, could be that the majors, with their restrictive licensing attitudes, could find themselves at the bottom tier of that system.