James Delahunty
5 Apr 2008 21:14
In the growing market for digital music downloads and related services, the companies who can provide the tech have to pay huge sums of cash to get label support. In the last year we have seen the music industry more forward by providing music downloads without Digital Rights Management (DRM) and to back services that allow users to consume music for free with advertisement support.
However, such services pay a hefty price for label support, so bad that it essentially may kill a service before it has a chance to flourish. For example, SpiralFrog, which is an advertisement supported service, paid more than $3 million in advances to Universal Music Group (UMG) before it went live. Ever since, it has paid even millions more in licensing fees.
Imeem is rumored to have paid $20 million in advances and also gave labels equity in the company. It disputes the $20 million figure, but the equity is a matter of public record. Sometimes the demand from the record companies is so much that it makes deals impossible. A mobile messaging company halted negotiations after a label demanded 85% of the company's gross revenue -- music licensing not involved.
"If you were opening up a retail store on Madison Avenue, I think you have to get a lease for the space," one unnamed major-label executive says, according to Reuters. "If you want to build a legitimate business, there are costs associated with doing it, and that's no different in the virtual world than the physical world."
With CD sales continuing to decline and digital music not making up the gap, record companies are willing to stretch any new source of revenue as thin as it possibly can, just to make quarterly revenue objectives. "What was once considered a major advance -- $500,000 or $1 million -- is becoming a $2 million or $5 million advance and really over-the-top requests for equity," EMI digital executive Ted Cohen said.
Cohen continued: "The deals are still unrealistic. If you raise $15 million to start a business, and have to spend $12 million just to pay off the content companies, that leaves you with $3 million to run a company. I don't know anybody able to do that." Despite being controversial, giving an equity stake to a label might be a smart long-term move.
If they have a stake in the company's performance, they have greater incentive to nurture it. Imeem's relationship with record labels has reportedly been very fruitful.