There are now more than 500 legitimately licensed digital music services around the world from iTunes, to Nokia’s “Comes with Music”, to the hugely popular Spotify. You might be forgiven for thinking that it is easy to get a licence to distribute and make money from selling digital music. Think again: there is real a problem under the surface.
The fact is that there is a huge bottleneck in obtaining licences – and generally only large, well-funded licensees are able to secure or pay for licences. An analysis of fundamental negotiating needs, attitudes and bargaining power shows why this is.
Much of the blockage rests with the major record companies. Their negotiating needs can be summed in one key word; “survival”. Their traditional business model is being assailed on all sides, overheads are being slashed, sales of physical products are dwindling fast … they need instant cash.
So, the instinctive major record company reaction is to focus mainly on deals with those who have plenty of cash to provide them with – and that means the larger licensees. Smaller companies or those without much funding struggle to get a look in, even if they have innovative technology or a business model that might promise a longer tail of profitability.
On the other side, the majors’ licensing partners need access to the market. Without this, these partners cannot continue in business unless they choose to use music unlawfully. So, their primary negotiating need is a “survival” need too.
Who holds the aces in this kind of negotiation? One of the key sources of bargaining power is market power. In these negotiations, all that power is concentrated in the majors because they own exclusive rights in the copyrights they represent. Such rights cannot be obtained from anybody but them. This tends to somewhat neutralise the size advantage that even companies like Nokia have.
Nokia reputedly paid eye-watering advances for its Comes With Music offering. Spotify is also reported to have paid upto $10 million in up-front monies – and has to pay a very high per-stream rate every time a track is played on its service. Some analysts suggest that for all its popularity Spotify is losing upto $2 million a month, largely because of these high licensing payments. If this is true, it is not because Spotify has cut itself a bad deal – it’s a great business and deserves to succeed. It’s a function of the negotiating dynamic they find themselves in.
If one party feels it holds all the aces in a negotiation, there is a temptation to be drawn into a “win/lose” situation with your negotiating opponent. And so it comes about that, without even intending to be destructive, the majors negotiate extremely tough deals with a few selected licensees, squeezing large advances and royalties out of them and ignoring most of the other potential services.
Is this sustainable? And if not, why does this matter? Well, for one thing it narrows the development of the digital music market to just a few large or well funded companies paying huge and unsustainable benefits back to the majors.
This is bad for smaller innovative companies, less than good for larger licensees, and self-defeating for majors. And it’s bad for consumers, who are deprived of choice.
The larger licensees are like the goose that laid the golden egg, whereas Digital music entrepreneurs are a new breed of goslings that could create exciting new sources of revenue for the music industry. The predicament the majors inadvertently find themselves in, is that they risk stepping on the necks of the goslings while choking the goose they’ve already got.
Interview on deal-making for Smarta.com - the expert website for Business Owners
Clive Rich
Clive Rich, the creator of the Closemydeal app, is also a professional negotiator. He has made deals happen for the likes of Simon Cowell, Sony, MySpace and the Royal Opera House..
Why only services like Spotify get licensed ...
What’s the big deal?
There are now more than 500 legitimately licensed digital music services around the world from iTunes, to Nokia’s “Comes with Music”, to the hugely popular Spotify. You might be forgiven for thinking that it is easy to get a licence to distribute and make money from selling digital music. Think again: there is real a problem under the surface.
The fact is that there is a huge bottleneck in obtaining licences – and generally only large, well-funded licensees are able to secure or pay for licences. An analysis of fundamental negotiating needs, attitudes and bargaining power shows why this is.
Much of the blockage rests with the major record companies. Their negotiating needs can be summed in one key word; “survival”. Their traditional business model is being assailed on all sides, overheads are being slashed, sales of physical products are dwindling fast … they need instant cash.
So, the instinctive major record company reaction is to focus mainly on deals with those who have plenty of cash to provide them with – and that means the larger licensees. Smaller companies or those without much funding struggle to get a look in, even if they have innovative technology or a business model that might promise a longer tail of profitability.
On the other side, the majors’ licensing partners need access to the market. Without this, these partners cannot continue in business unless they choose to use music unlawfully. So, their primary negotiating need is a “survival” need too.
Who holds the aces in this kind of negotiation? One of the key sources of bargaining power is market power. In these negotiations, all that power is concentrated in the majors because they own exclusive rights in the copyrights they represent. Such rights cannot be obtained from anybody but them. This tends to somewhat neutralise the size advantage that even companies like Nokia have.
Nokia reputedly paid eye-watering advances for its Comes With Music offering. Spotify is also reported to have paid upto $10 million in up-front monies – and has to pay a very high per-stream rate every time a track is played on its service. Some analysts suggest that for all its popularity Spotify is losing upto $2 million a month, largely because of these high licensing payments. If this is true, it is not because Spotify has cut itself a bad deal – it’s a great business and deserves to succeed. It’s a function of the negotiating dynamic they find themselves in.
If one party feels it holds all the aces in a negotiation, there is a temptation to be drawn into a “win/lose” situation with your negotiating opponent. And so it comes about that, without even intending to be destructive, the majors negotiate extremely tough deals with a few selected licensees, squeezing large advances and royalties out of them and ignoring most of the other potential services.
Is this sustainable? And if not, why does this matter? Well, for one thing it narrows the development of the digital music market to just a few large or well funded companies paying huge and unsustainable benefits back to the majors.
This is bad for smaller innovative companies, less than good for larger licensees, and self-defeating for majors. And it’s bad for consumers, who are deprived of choice.
The larger licensees are like the goose that laid the golden egg, whereas Digital music entrepreneurs are a new breed of goslings that could create exciting new sources of revenue for the music industry. The predicament the majors inadvertently find themselves in, is that they risk stepping on the necks of the goslings while choking the goose they’ve already got.