Are the new digital music business models already broken beyond repair?

April 2009


At the beginning of April an almighty row broke out between Google owned YouTube and the UK’s PRS for Music which was escalated after the online site took down all “premium” music videos saying that it had been unable to reach a rights deal with the main songwriters’ collection society. Youtube said the PRS, who represent British songwriters and music publishers, was asking it to pay “many, many times” more than the previous licensing agreement that has expired. “The costs are simply prohibitive for us – under PRS’s proposed terms, we would lose significant amounts of money with every playback,” the company said in a blog on Monday saying that the move was a “painful decision” as they argue that potential advertising revenues would never be enough to pay PRS’s proposed rate. PRS argue that YouTube are using the licence renewal to try and pay less money, while adding that they are basing their royalty demands on rates set by the UK Copyright Tribunal on digital royalties.  The move is the latest sign of the tension between YouTube and the music industry as both sides try to develop workable business models for the digital age – but also indicates the video site’s resolve to keep operating costs under control as it strives to generate meaningful profits for Google. The PRS disputed YouTube’s version of events and said it was caught by surprise by the announcement in the middle of ongoing negotiations. “We were shocked and disappointed to receive a call … informing us of Google’s drastic action” said PRS for Music Chief Executive Steve Porter saying he was “outraged” on behalf of consumers and songwriters by YouTube’s move. Youtube is also in strained relationships with some of the major labels (Warners in particular) over use of sound recordings online.

Within a couple of days executives from YouTube and PRS For Music met in London although commentators added that it seemed that money isn’t the only sticking point, with reports that YouTube want PRS to provide it with details of its members and their catalogues, with a view to paying songwriters and publishers directly. PRS clearly prefers YouTube to pass over viewing stats and payment so they can distribute the money to their members. Both sides reportedly claim the other side’s unwillingness to share data and contacts amounts to a lack of transparency and the  PRS argue that YouTube are using the licence renewal to try and pay less money, while adding that they are basing their royalty demands on rates set by the UK Copyright Tribunal on digital royalties. After these talks, PRS issued this slightly non-commital statement saying “Talks between PRS For Music and Google took place today to discuss the licensing of YouTube following Google’s sudden decision to block premium video content on the service in the UK. The meeting was positive. We are committed to ensuring our 60,000 songwriter and composers members receive a fair deal and that UK consumers continue to enjoy music videos on YouTube”.

As YouTube and PRS continued to talk, others in the industry began to comment on the former’s video blocking decision. The record companies, who co-own the blocked videos and most of whom have live licensing agreements with YouTube, have remained quiet on the issue, despite the decision potentially directly hitting their own digital revenues. The music publisher and songwriting communities who PRS represent did comment though, most speaking up for their collecting society. Representing the music publishers, the UK’s Music Publishers Association told reporters: “This action is particularly disappointing in light of the landmark deal agreed between PRS and YouTube in August 2007. That deal, brokered with the assistance of the MPA representing the UK’s music publishers, was a pragmatic licensing solution, enabling YouTube to provide copyright content whilst providing the songwriters and publishers a fair return for their creativity and investment”.

Speaking with his songwriter hat on, Billy Bragg meanwhile told the Times that “Google, YouTube’s owner, is a company that makes billions in profits; we think they should be paying artist royalties from the advertising revenue they make”. Co-founder of the newly formed Featured Artists Coalition’s Blur’s David Rowntree, told CMU daily “The digital revolution has swept away the old music business of the 1960s, and changed forever the relationship between artists and fans. For companies who made their living sitting between the two, these are increasingly hard times, but for music makers and music fans this should be a fantastic opportunity. YouTube’s row with the PRS is the most recent example of just how fast the music industry is changing. There has never been a greater need for the collective voice of featured artists, whose music generates 95% of revenue in the industry, to be properly heard” adding “As this revolution gathers pace featured artists must seize the initiative. We are looking to forge a new deal, built on fairness, with our fans, the music industry and governments. To achieve this, we must own our future, take real control of our rights and genuinely work together. Acting alone, artists’ voices will not be heard. Acting together, we can be a powerful force. Our rights are our power. By making ourselves heard and arguing for what’s fair, we can help reshape the industry for the future so that it serves the interests of those who want to make new music, as well as those who want to hear new music”.
At the heart of this is the actual structure of new business models for the digital The boss of Dublin based online music video service MUZU, Mark French, said that whilst YouTube’s arguments that PRS’s royalty demands were not commercially viable it did not necessarily mean the collecting society was being unreasonable, there’s always a chance that the problem is with Google’s business model saying “it’s not the music industry’s fault that YouTube’s business model doesn’t stack up. The model doesn’t support paying the current PRS rates let alone the payment to artists, because they cannot command high enough advertising rates” adding “because sites like YouTube are built off the back of user generated content, and have a storied past of allowing ‘illegal’ content to be viewed – brands are resistant to pay premium advertising rates”. But the problem is that there are no obvious new models that are working – even the success of Apple’s iTunes is, to an extent, based on the profitability of selling iPlayers. US streaming service Pandora has already left the UK market after failing to reach a deal with PRS and websites such as, 7Digital and Spotify have bemoaned the difficulty in working with the music industry to launch new business models. The co-founder of UK-based streaming music service’s Martin Stiksel expressed sympathy for Google’s situation and agreed that online royalties are a big issue for all digital music providers. He told the BBC: “It has been a bold decision for Google but we are all working in a very competitive environment and the fees need to reflect that. It is a fundamental problem that we have been facing in that online music licensing is getting more complicated and more expensive” adding “we have to find commercially workable rates otherwise illegal services will win and take over” and Paul Jones, partner at Harbottle & Lewis told the Financial Times that Google’s move might be just a negotiating ploy, but added: “Services are not getting launched because people cannot agree rates.”  Giving evidence to MPs yesterday, Lord Carter, the communications minister, agreed with suggestions from other online music services that the dispute could foreshadow more rows over how to price content. Ministers are planning to establish a rights agency to bring together holders of copyright and content distributors, such as internet service providers. “We clearly need some legislative backstop for the protection of rights,” said Lord Carter. “In addition we need a mechanism for the distributors and rights owners to work out new business models for how rights get priced and accessed in a digital world”. And that is at the heart of this – if music firms and web providers cannot agree on new models then all that happens is that consumers migrate towards illegal unlicensed services where no one wins – and from recent history we know that the consumers never come back.  (accessed 11 March 2009)


Cassandra Williams, postgraduate student at the College of Law adds

This week UK users were blocked from accessing professional music videos on the YouTube website.  This is because according to the Owner, Google, The PRS for Music are asking for too much money in royalties. Pete Waterman claims Google are giving everyone a raw deal. ‘YouTube routinely peddles the worthy notion of giving consumers greater choice as a cloak to disguise the fact it is engaged in, and benefits from, copyright infringement.’  He then cites the song Never Gonna Give You Up, which has had a bit of a resurgence on YouTube recently.  It has been used in a Rickrolling campaign in which pranksters post fake links that lead people to his video. That song must have been played more than 100million times on YouTube and has, according to Waterman, become one big advertising campaign for the siteyet last year, they only paid him £11. He also rubbished the idea that YouTube has promoted his work to new audiences who have then gone out and bought it, claiming nobody buys music they can get for free on sites like YouTube.

Almost uniquely, YouTube’s 2007 blanket deal with PRS For Music was created outside of the “joint online license” framework, through which the royalty society mandates most digital services. Just as YouTube’s special deal has ended, so, too, the Joint Online License, which was also implemented in 2007, is due to expire on June 30. PRS wouldn’t say what will happen after that date but it is expected that many more services than YouTube have been lobbying hard for a new deal – “Everybody is; the rates don’t allow you to create an economic model that makes sense,” said We7 CEO Steve Purdham, whose site pays 0.22 pence per track transferred under PRS’ online license. Forrester music analyst Mark Mulligan said: “PRS, right across the board, are upping their fees.  This had to happen sooner or later as the labels are going to be applying pressure to PRS. But when the YouTube deal is finally sorted, that won’t be the end of it, they’ll be revising the contracts again, this is not the endgame.”
The PRS online license asks services to pay whichever is greater—either up to eight percent of their gross revenue, a per-track fee of between 0.05 pence and 0.22 pence or a per-subscriber fee of between £0.20 and £0.60 a month, depending on the particular service. The license was mandated by the UK Copyright Tribunal in 2007 after being agreed to by PRS, the BPI, Yahoo, AOL, RealNetworks, Napster, Sony, iTunes, MusicNet and the mobile networks. That would be sufficent for the many new online services that have launched and reached massive traffic since the license was created—except that, most of them are finding it hard to earn the money PRS wants for these so-called “minimas”. “Fundamentally, Google is not making enough money off YouTube,” Mulligan said. “Video advertising is nascent at best and YouTube is way behind the curve on that.” In other words, the license was inked before YouTube and others took off, before they’ve had a chance to find a workable business model, and before many of the original signatories went andchanged their music initiatives and Purdham said “If it was just eight percent of revenue, that wouldn’t be a problem, but the minimas kick in to scale. We’ve gotten to 500,000 users in just over 90 days and average visit time is 30 minutes—when you scale it up to the number of plays that YouTube and we have, the numbers become very significant. You’re talking about roughly a penny a stream for on-demand streaming.

PRS has already acknowledged the growing importance of online income, which grew by 40 percent between the first six months of 2007 and 2008. Indeed, some 14 million YouTube plays accounted for a whole 40 percent of the total transactions PRS processed between July and September. But, whilst PRS aims to collect a fair share for artists and others, some say the agency should see the bigger picture. We7’s Purdham said  “It’s not about whether it’s a penny or 0.22 of a penny or whatever—it’s about the overall value of what this world could be. You’re not talking about tens or hundreds of listeners; you’re talking about perhaps billions of listeners.”, in GooTube’s wake this week, has also called for a fixed online fee like the one radio stations enjoy. Mulligan: “PRS maybe feel now that they’ve overplayed their hand a bit – no one anticipated Google doing what they did. Google have managed to spin the situation to leave the PRS looking like the out-dated, money-grabbing behemoth, whereas Google is looking like the consumer champion. YouTube’s public protest may just be part of the PRS negotiations – but its defiance could help shape the coming, wider relationships between online services, labels and royalty societies. Mulligan: “It’s a bargaining tactic, and it’s Google playing off against the labels as well. They’ve pulled major-label content and blamed it on the PRS, who have only just come out of a torturous tribunal experience with the labels. Google know very well there are festering wounds there that they’ve dug in to.” A positive outcome is likely – but don’t expect the eventual configuration of this business to be simple, or without losers.

The Latest PRS for Music Statement in relation to Google/YouTube released on the 10th Mrach  claimed Talks betweenPRS for Music and Google took place today to discuss the licensing of YouTube following Google’s sudden decision to block premium video content on the service in the UK.  The meeting was positive. We are committed to ensuring our 60,000 songwriter and composers members receive a fair deal and that UK consumers continue to enjoy music videos on YouTube. The issue has become such a bench mark for how future online deals will be shaped that Fergal Sharkey had to intervene.  Sharkey accused Google of blocking videos in order to force the PRS to lower its price.  The key questions are how profitable is YouTube, how much ‘free’ advertising do the video plays represent?  The talks are ongoing at the time of article.

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