State of Mind of The Art

Spotted on: Ars Technica

The major labels are very outspoken about the evils of piracy, and aggressively pursue those who chose to download music and not pay for it. That being the case, there is great ironyin the fact that up to 47% of Sony-BMG’s software is pirated.

Recently, a tech support call for a program called Ideal Migration (a Windows server management tool) was made by a Sony BMG employee, and the product code given was pirated.

The ensuing drama included a seizure of some of Sony-BMG’s assets.  Paul Henry, The CEO of the maker of the software, was quoted as saying “I think piracy is linked to the policy of a company. If the employee has the necessary funding to buy the software he needs, he will. If this is not the case, he will find alternative ways, as the work must be done in one way or another.”

Bottom Line: A company that is using pirated software should not be surprised when their products are pirated.

Spotted on: Hollywood Reporter

“Music publishers, the record labels and digital music distribution outlets began a three-way legal wrestling match Monday over just how much songwriters and the publishing houses should get paid for digitally delivered music.”

At stake in this debate is mechanical royalties for internet streams. Major labels, Apple, and Yahoo want the royalty rate for artists to be lowered. The big publishing houses are currently promised nine cents a song, a figure that often gets negotiated lower, and the consortium against them wants that rate moved to 8%. Apparently, publishing revenues are up, while major label revenues are down. The Digital Media Association is upping the ante, pushing for the royalty rate to be dropped to 4%.

On the other side of the fence, the National Music Publishers Association wants the rates raised to 12.5%.

The driving concern here is the financial ‘burden’ that paying these royalties puts on the large companies that offer music. The claim is that streaming media should be treated like terrestrial radio.

Bottom Line: Without content, there is nothing to stream.

Spotted on: Techdirt

Although the details are sketchy, the US Justice Department is looking into whether a subscription for the Big Four labels is an antitrust violation. Back in 2001, there was an antitrust investigation against the major labels for…. a subscription service. According to The Register, the Big Four have already been served notice this time around. Although the details are sketchy, it is apparent that the Dept. of Justice has an eye turned toward the industry (again).

Investigations around “Big Music” have been ongoing for the last few years. In 2000, the Federal Trade Commission settled with the major labels on price fixing and unlawful advertising practices relating to “Minimum Advertised Price” policies.

Super producer Rick Rubin has said “The subscription model is the only way to save the music business. If music is easily available at a price of five or six dollars a month, then nobody will steal it.” He also said, “Until a new model is agreed upon and rolling, we can be the best at the existing paradigm, but until the paradigm shifts, it’s going to be a declining business. This model is done.”

While a subscription service may stem the tide of file sharing, will it provide any kind of sustainability for artists? CD sales are falling end over end, but digital sales are brisk, and touring and merchandising are still viable revenue streams.

Everyone agrees it’s time for a new model, and noone seems to know what the new model will be. The sky may be falling, but music is still a multi-billion dollar business. The future lies in creating a model that generates positive public perception, convenience, and collectibility. The platform may be shifting wholly to digital music, but that doesn’t necessarily mean people won’t buy music anymore. The advent of the “360 deal” shows that the industry is embracing a new kind of marketing, where the band is the brand, not the content. At the end of the day, it’s all about the music, and people will pay for convenience and for music that they love.

Bottom Line: The paradigm shift at the heart of the music industry is upon us.

Syndicated from: Digital Music News - Paul Resnikoff

Despite strong digital gains, recent quarterly losses at Warner Music Group are part of a continuing profit slide. But just how serious is the financial picture?

This isn’t a rosy period of double-digit gains, that’s for sure. And flagship CDs are in a free-fall. But the financial picture at Warner is showing more resilience than you might imagine under the circumstances.

Warner Music Group first went public in 2005, a period that featured far more investor optimism. But the profit picture has been slipping since, and Wall Street has been mostly unsympathetic.

What was once slightly-in-the-black has now gone red. During Warner’s calendar fourth quarter of 2004, profits landed at $36 million, only to improve to $69 million the following year. But by 2006, the holiday story started losing steam. The company earned a smaller $18 million during the period, though profits turned to losses - of $16 million - during the most recent Christmas buying quarter.

But not everything is so bleak. Major label executives often temper the picture by pointing to more stable revenues, less severe profit declines, and bullish digital gains. Of course, some of that is spin, but in the case of Warner Music, balance sheets actually support those claims.

In fact, the revenue story has not been disastrous. Revenues topped $1.088 billion during the fourth quarter of 2004, roughly 9.1 percent greater than revenues reported during the recent period. Of that total, digital assets now account for 14 percent of total revenues - up from nearly zero several years ago.

On an annual scale, a similar revenue picture emerges. Dialing back to the fiscal year ending November 30th, 2003, revenues neared $3.23 billion. Fast-forward to the fiscal year ending September 30th, 2007, and revenues of $3.39 billion appear - hardly an implosion. Not the envy of companies worldwide - after all, a flattening revenue picture is rarely good news. But not exactly a sinkhole, either.

Why the revenue resilience? Is creative accounting at work? Almost every company dances the numbers a bit, but artistic accounting has its limits - especially in the current regulatory climate.

And ugly profit losses year-after-year prove the point. Warner Music dropped $21 million during the most recent fiscal year, and actually gained $60 million during the previous year.

But the worst financial losses happened during the earlier part of the decade. In 2005, the company lost $169 million, an improvement over 2004 declines of $1.42 billion. And losses hit an immense $1.35 billion in 2003, and a disastrous $6.03 billion in 2002, in part because of accounting methodology changes.

Those are major drops, though at least the earnings picture is showing improvement. The question is whether Warner - and other majors - can survive the current turmoil, one that now includes a massive, 15 percent US-based album sales decline in 2007.

The current terrain is characterized by serious overhead cuts and slippery traditional retail declines. That is a worsening picture, though major labels like Warner carry enviable recording and publishing assets.

Perhaps the best prognostication involves a breed of smaller major labels ahead, though survival depends on a leaner, greatly diversified model. And in the case of Warner, and other labels, the financial picture is less severe than generally reported - and that spells a little more wiggle room for radical reinvention.

Spotted on: Ars Technica

Although still unconfirmed, rumor has it that EMI is seriously considering pulling their funding from the RIAA.  According to a recent Variety article, EMI has taken early steps to exit from the IFPI, the international version of the RIAA.  Part of the move is a demand by EMI that the RIAA and IFPA produce a proposal on restructuring by March 31.

Citing the massive cost of participation in these trade organizations, it seems EMI is very unhappy with the results being produced by the RIAA and IFPI.  The public relations nightmares these organizations have created has been a major contributor the devaluation of music.  If file sharing wasn’t labelled an almost terrorist act, it could have a huge impact on the perceived value of music.

More as this develops….