Conclusion: “Why license them and make a little, when you can sue them and make a lot?”

Aram

July 30, 2012

¶ 1 Leave a comment on paragraph 1 0 The rapid developments in digital media and networking technology over the past fifteen years have contributed to a golden age of experimentation in music production, distribution and audition akin to (and possibly outstripping) the early days of electromagnetic storage and transmission. The concepts I have discussed in this chapter, such as playable playlists, cloud music services, and blanket immunity for peer-to-peer distribution are three excellent examples of ways in which developers and entrepreneurs have tried – and failed – to create business models around these experimental innovations. Though not all five of the companies I profiled would necessarily have become profitable enterprises given full participation from the music industry, there can be little doubt that stonewalling by the major labels prevented them from testing their full market potential.

¶ 2 Leave a comment on paragraph 2 0 An interesting theme that emerges from my interviews is how consistently these innovators are inspired by aesthetic, or even altruistic motivations. From Ouellette’s desire to solve the “user experience problem” to Pakman’s focus on producing “elegant software” to Griffin’s “proselytizing,” these initiatives were driven primarily by enthusiasm for music and technology, rather than by either calculating avarice or antipathy toward the industry. “I definitely didn’t start out to disrupt anything,” Ouellette told me; nor was he “interested in being a millionaire.” Similarly, Foreman says that in his opinion, Griffin is still so selflessly committed to the spirit of Choruss that he “would die penniless if he knew that there was a pool of money and a fair way to split it.”

¶ 3 Leave a comment on paragraph 3 0 Yet if these innovators harbor neither ill will nor evil intent towards the music industry (at least at the outset), why are the labels so reluctant to work with them? I asked Larry Kenswil, who worked in business affairs at Universal Music Group for fourteen years, and then ran eLabs, UMG’s digital licensing and business incubation unit, from 1997-2008. As he described it to me, one of the labels’ primary motivations for refusing to license on reasonable terms, if at all, was their desire to cut out the middle man completely and sell music directly to online customers (this is something they have attempted a number of times, most spectacularly with their failed subscription initiatives, MusicNet and PressPlay, in the early 2000s). In Kenswil’s words, “there was a general reluctance to outsource by licensing if you could do it yourself.”[1] Furthermore, the labels feared that, if a third party successfully developed a business selling their content, that they would “just become licensing entities like the music publishers” and lose the position and power they had enjoyed in the days of cartelized distribution.

¶ 4 Leave a comment on paragraph 4 0 As to why the majors wouldn’t even do business with Choruss, which was itself a division of a major label, Kenswil (who was “involved with” the initiative) says that “if Choruss came out of Warner, that would mean all the other labels would be immediately suspicious of it, because of the not-invented-here problem.” This happened frequently, he told me: “one label would sort of invent something, the other labels would hate it immediately. Down deep, they hate each other.”

¶ 5 Leave a comment on paragraph 5 0 Kenswil and Silver also offered some valuable insight into the labels’ negotiating (or anti-negotiating) methods. For instance, the massive cash advances the labels requested of companies like MyPlay and Muxtape served many different functions. At their core, they served the purpose that one would expect: namely, to mitigate the risk involved in doing business with an untested licensee, and to guarantee that the labels would see at least some money for their efforts. Yet, this doesn’t explain why the advances were often set so high as to cripple or chase off would-be licensees. One of their secondary purposes was apparently to provide startups with what Kenswil calls an “entrance ticket.” As Silver explained to me, “we needed to make sure that we didn’t do deals with companies that had no means. So by making sure that we sucked a ton of money out of them, in theory that meant they had means.”

¶ 6 Leave a comment on paragraph 6 0 Silver never particularly believed this rationale. In his opinion, the huge advances were motivated primarily by the fact that “we liked cash.” Specifically, the labels viewed venture capital-funded digital startups as a source of easy money with few strings attached. When he was at EMI, he told me, “we talked very regularly about ‘shaking the VC tree,’ and that the dollar bills would fall very readily from the branches. And we felt no compunction about doing that whatsoever.” Similarly, Kenswil says that labels can be very “cynical” in their approach to cash advances:

¶ 7 Leave a comment on paragraph 7 0 If they think this company has no chance of ever succeeding, and there’s some stupid money behind it, they’re just gonna pull as much of that money out up front as possible. Because they figure there’s never gonna be anything on the back end. And there’s been enough advances paid for companies that never launched, that it becomes something they look for: “Wow, is this a company we can just fleece an advance out of, and never have to have to worry about it again?” But when that becomes the only way you’re doing business, it’s very cynical and not very productive.

¶ 8 Leave a comment on paragraph 8 0 During the internet boom years, Silver told me, this practice got so out of hand that “many of the majors introduced quotas,” requiring executives in charge of licensing to reach revenue targets on an ongoing basis. “So if you didn’t get two million dollars a quarter in business, on the back of all these startups, there was something wrong with you,” he says. “And there are individuals who are now the head of digital for large corporations who were very successful in doing that.” Nor was this money simply “gravy” from the labels’ perspectives; in at least one financial year, Silver says, digital music advances at EMI “made the company’s budget when the retail sales would have failed. . . . so the appetite was pretty keen.”

¶ 9 Leave a comment on paragraph 9 0 Along similar lines, Kenswil confirmed what many of my other interviewees alleged regarding the motivations driving the major labels to litigate against digital music innovators. While there are certainly instances in which the labels legitimately feel as though it’s the most effective method of curbing unlicensed distribution, there are other cases in which it serves more as a form of leverage. As Ouellette recalls, “It was clear to me early on, even when I got that first call from Universal, that it’s an intimidation tactic. It’s all business. They want to make you feel like you have very little control over the situation so they can work a deal that’s the most beneficial to them.” Kenswil readily acknowledges this to be the case: “Yeah, that’s always true in business litigation. . . . That’s how it’s done. Business litigation ends up in a deal [and] the company uses whatever leverage they have to try to make that deal as good as possible.”

¶ 10 Leave a comment on paragraph 10 0 As with licensing advances, Kenswil says that the potential cash value of a legal decision or settlement sometimes served as a financial crutch for the major labels, undermining their interest in and ability to seek more stable forms of long-term remuneration:

¶ 11 Leave a comment on paragraph 11 0 The main problem here was there had been some success on the litigation side. To the point where, unfortunately, the money that was coming in from some lawsuits exceeded the profits that were being made from the actual digital businesses. And so there was some argument to be made by those who were being paid to litigate that litigation was a more profitable endeavor than licensing. Why license them and make a little, when you can sue them and make a lot?

¶ 12 Leave a comment on paragraph 12 0 While Kenswil says he always considered this a “very short-sighted way to look at it,” he also acknowledges that, in many cases, it was hard to convince the label brass to turn down millions of dollars without a clearly valuable alternative. The digital music startups would either be so inchoate, or so unwilling to compromise with the labels on the finer points of their business models, that “the litigators won the argument because I wouldn’t have a good argument internally for the business case” of licensing to the companies. This sheds some light on Oullette’s “Jekyll and Hyde” experience; he was actually witnessing the labels arguing with themselves over this very question in the course of his negotiations, a dynamic no doubt augmented by his own unwillingness to let the labels participate in his product design process. “There was definitely a schizophrenic attitude going on,” Kenswil agrees. “That’s where some of the most heated disagreements were between different factions within the companies.”

¶ 13 Leave a comment on paragraph 13 0 Ultimately, the labels’ pathological inability to license to promising innovators on reasonable terms can be understood as a factor that impeded the growth of the music business (to say nothing of musical culture) for at least a decade. The cost, and the cause, are clear to those who have tried and failed to move the industry forward. Even to this day, Robertson argues, “there’s not one company who has a license for any innovative service who’s ever made any money with the record labels.” Similarly, Pakman says that “there are very few examples where you’ve seen innovation and disruption from startups in licensed entertainment models.”

¶ 14 Leave a comment on paragraph 14 0 A cursory inspection of the digital music landscape in 2012 appears to bear this out. A decade after MyPlay and Uplister, these models are still seen as dangerously innovative. Playlist.com, a recent iteration of the Uplister model, was sued by the major labels in 2008, and settled in 2010, after which it almost immediately sought bankruptcy protection, because its $203,000 in cash reserves weren’t nearly enough to pay the $25 million it owed them.[2] And in 2011, the launch of the “big three” cloud music services from Apple, Google and Amazon prompted Jon Pareles of The New York Times to speculate that “copyright holders are starting to rethink their licensing terms for the cloud,”[3] offering “hope” to music fans. Yet neither Amazon’s nor Google’s service has, at the time of writing, obtained licenses from the majors, which means that both require the same lengthy upload process that MyPlay did in 1999 (thank goodness internet access speeds have improved since then). And the third service, Apple’s iTunes Match, which offers a licensed “scan-and-match” functionality to accelerate the process,[4] still falls short of MP3.com’s Beam-it solution, in Pareles’ estimation. In other words, the industry has barely progressed since the turn of the century.

¶ 15 Leave a comment on paragraph 15 0 Thus, it seems unlikely that, even in light of these recent developments, either the music industry or their consumers have much cause for optimism. The fundamental tensions underpinning these historic failures – emphasis on short-term gain at the cost of long-term stability, infighting and mistrust combined with entrenched cartelization, and a steady outflux of visionary executives – may very well continue unabated until the industry’s dysfunction leads to full-scale implosion. It’s not that the destination is a mystery; by now, everyone knows there’s a “celestial jukebox” just waiting to be switched on once the labels can agree to some equitable terms. It’s just that there doesn’t seem to be any way to get there from here. And anybody with an idea about the route inevitably suffers the consequences sooner or later, leaving a kind of strategic vacuum where decisive vision is most needed. “It’s very hard to understand if there’s any kind of an overarching strategy going on at these companies,” Kenswil concedes. “Or if there ever was, I guess.”

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