How The Record Labels Kill Off Innovative Startups With Ridiculous Licensing Demands

from the an-inside-view dept

Fri, Aug 27th 2010 7:44am — Mike Masnick

We recently showed a graphic description of the ridiculous licensing spiderweb any new music startup needs to go through these days. That was a UK depiction, but it's quite similar in the US and other parts of the world as well. What's not seen in the graphic, however, is just what some of the demands are from those copyright holders in order to secure the necessary licenses. We've heard time and time again from innovative music startup after innovative music startup, that when the major record labels come calling, they do so with outrageous demands for upfront payments, excessively high ongoing royalties and a demand for equity. Quite frequently, the record labels try negotiating through lawsuit, by suing the startup as a part of the "negotiation." While many of these lead to "settlements," the results are ridiculously burdensome, leading many of these startups to go out of business.

Playlist.com is a startup that has gone through much of this cycle, including lawsuits from the majors and "settlements." Except, the settlements were so burdensome that Playlist declared Chapter 11 bankruptcy to try to get out from under some of its liabilities. What that's also done is given us a glimpse behind the scenes of just how much the labels end up getting from such startups. For example, Playlist apparently owes the four major labels a combined $24.4 million for helping people find and listen to music.

These fees were the result of the settlement licenses worked out by the labels, but the company can't even come close to paying them off. And, because of this, people will just get the same music elsewhere -- from offerings that probably don't pay the labels a dime. It's really quite impressive when you look at the long list of innovative music services startups killed by ridiculous major label demands.

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Filed Under: licensing, music
Companies: playlist

30 Comments

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Hephaestus (profile), 27 Aug 2010 @ 7:57am

One question
Can someone explain to me why the record labels are so self defeating?
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Adam, 27 Aug 2010 @ 8:03am

It's a short-term gain for long-term pain mentality. Grab what you can get now before you die is what's killing them.
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Andrew F (profile), 27 Aug 2010 @ 8:04am

Compulsory Licensing
I wonder how these lawsuits would turn out if compulsory mechanical licenses were extended to music start-ups. I'm sure the labels would abuse the system nonethless, but the overall cost would at least be much much lower.
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darryl, 27 Aug 2010 @ 8:22am

Peak of stupidity !!..
wow, are these guys mentally retarded, or idiots or just stupid? I dont work out quite which yet.

But anyone with even two brain cells to rub together, would be able to work out AFTER THE FIRST lawsuit, and settlement that they are not working within the law.

But to do it over and over and over, and lose OVER and OVER AND OVER to the tune of $24 MILLION DOLLARS..

Idiots.. what else can you say ??

Serial offenders, they are lucky they are not in freaking prison. But a 'business model' that is based on activities that are against the existing laws is bound to fail.

Im sorry, but I find their actions indefenseable and down right stupid. To be stung over and over and over like that and not learn a single lesson. Shows they have no place in business..

If you cant pay the fine, dont do the crime.. :)
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interval (profile), 27 Aug 2010 @ 8:28am

Re:
Its a symptom of the culture I think. A lot of these people are looking at their retirement portfolios and trying to force these small players to make a big payoff. Or they simply don't see the value in a bunch of bit-players paying them a nickle each.

I used work for this old Irish guy back east who had a vending machine business. He would beg municipalities to put vending machines in the oddest places, do some "dirty dealing" to cut out competitors, and just get as many of HIS machines out as possible, which sounds a lot like the tactics of the labels. But he'd also undercut all vendors by as much as he could stand. Sometimes he'd sell sodas, matches, whatever, at a loss. He was getting ready to retire to the Hamptons when I left NY to go to school out here (he ended up with a huge operation that netted him millions every year, but it took him years.) I asked him how he made a fortune selling crap food and matches for nickels (back then.) He responded in a way that makes so much sense, and we've all heard it;

"A nickle here, a dime there, pretty soon you're talking real money."
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darryl, 27 Aug 2010 @ 8:31am

What Innovation?
What is the innovation that you claim playlist.com has created ?

Is a play list innovative ? or being able to stream music, or download music for free ?

Where is the innovation?

Or was the 'innovation' the break the law constantly, not learn how NOT the break the law, and run the business into Chap 11 for not paying your bills, and fines.

Great system, Im sure their shareholders are pleased !.
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imbrucy (profile), 27 Aug 2010 @ 8:41am

Re: Peak of stupidity !!..
I think you missed the point. They worked to get the necessary licenses when they started the business. The different labels sue them to give them a bargaining chip in the licensing negotiations.
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Chronno S. Trigger (profile), 27 Aug 2010 @ 8:48am

Re: Re:
"A nickle here, a dime there, pretty soon you're talking real money."

Far too few people think this way any more. From the RIAA thinking they want many dollars instead of nickles to consumers thinking that a nickle is nothing. It's the same reason my back account is always empty.
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interval (profile), 27 Aug 2010 @ 8:55am

Re: What Innovation?
I'm still trying to figure out how linking to a music file is infringement. I'll get back to ya when I figure that one out.
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Chronno S. Trigger (profile), 27 Aug 2010 @ 8:56am

Re: What Innovation?
Here's an opportunity for you. I challenge you to start a online music shop without breaking the law. You'll end up with three outcomes:

1)You try to not break any laws and end up not starting anything
2)You manage to start something and end up breaking an obscure law that doesn't really apply to you, but are getting sued under it anyways.
3)You manage to start something that's not breaking any laws, but get sued anyways because you have the ability to infringe.
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Havier, 27 Aug 2010 @ 9:05am

Darryl, you're a moron.. re-read the article over and over until you understand it.

They weren't doing anything illegal
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Anonymous Coward, 27 Aug 2010 @ 9:08am

As if starting a business is not hard enough...
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iamtheky (profile), 27 Aug 2010 @ 9:13am

A new model that still gives the ..i.,
Playlist should just publish m3u files (or one large searchable m3u), so that the users could point their songbird browsers at those links and download the songs, and every other song on that destination URL.

Thats pretty much how I use the service anyway
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Berenerd (profile), 27 Aug 2010 @ 9:16am

Re:
I wish they would just die already....
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Anonymous Coward, 27 Aug 2010 @ 9:23am

The music industry can't offer the service and don't let anybody do it, in the end people just find alternatives legal or otherwise.
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Suzanne Lainson (profile), 27 Aug 2010 @ 9:57am

Just work with independent artists
What I don't understand is why we don't have a service that only offers music from unsigned artists and those from small labels that will provide music for free.

Sure, I understand the appeal of being able to say you offer every song ever recorded (or as close to that as possible). But since the future of music appears to be without the major labels and there's a lot of good music available that isn't owned by major labels, why not just promote what is easy and cheap to obtain? Plus it makes your company look forward-thinking by working with the next generation of artists.
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Chronno S. Trigger (profile), 27 Aug 2010 @ 10:04am

Re: Just work with independent artists
They get sued by sound exchange for not paying the license fee. The justification is they have the ability to infringe.
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RD, 27 Aug 2010 @ 10:22am

Re: What Innovation?
"Or was the 'innovation' the break the law constantly, not learn how NOT the break the law, and run the business into Chap 11 for not paying your bills, and fines.

Great system, Im sure their shareholders are pleased !."

And the great walking retard opens his yap yet again. Hey asshole, I already called you out on the other thread (author wants to publish his original versions) about misrepresenting the facts of things. Of course, being the idiot coward that you are, you didnt respond and now pop up here with more of your specious garbage. You have already proven yourself to be a liar, and refuse to answer for yourself, so your moronic comments carry no weight. You have nothing relevant to say.
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Suzanne Lainson (profile), 27 Aug 2010 @ 10:24am

Re: Re: Just work with independent artists
I was just checking and SoundExchange only applies to non-interactive stations, essentially Internet and satellite radio. It doesn't apply to MySpace, for example.

A Short Explanation of SoundExchange and Why It is Important -- Music Business Heretic: ") What is SoundExchange? SoundExchange is a non-profit performance rights organization that collects royalties on the behalf of sound recording owners and featured artists for non-interactive digital transmissions, including satellite and internet radio as well as terrestrial radio stations who broadcast there AM/FM signal over a digital communication network ."
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RD, 27 Aug 2010 @ 10:27am

Re: Re: Re: Just work with independent artists
Lemme fix that for you:

What is SoundExchange? SoundExchange is a non-profit performance rights organization that collects royalties on the behalf of only the largest sound recording owners and certain specific and big-name featured artists for non-interactive digital transmissions, including satellite and internet radio as well as terrestrial radio stations who broadcast there AM/FM signal over a digital communication network. These fees are returned only to the top few artists across the entire industry. In addition, only a small portion of said fees are returned to the top few artists, the majority of the fees are retained by SoundExchange."
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Suzanne Lainson (profile), 27 Aug 2010 @ 10:45am

Re: Re: Re: Re: Just work with independent artists
I'm not advocating SoundExchange. Just trying to find some ways for startups to avoid licensing fees. It looks like you can avoid paying SoundExchange if you are an interactive music site.

Like I said, I'd recommend that more music startups deal exclusively with unsigned artists and small labels which freely provide their music.
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Mike Masnick (profile), 27 Aug 2010 @ 2:38pm

Re: Re: Re: Re: Re: Just work with independent artists
I'm not advocating SoundExchange. Just trying to find some ways for startups to avoid licensing fees. It looks like you can avoid paying SoundExchange if you are an interactive music site.

Um. No. Well, technically you don't have to pay *sound exchange* but you do have to work out specific deals with anyone whose music you want to use which is not so easy.
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Suzanne Lainson (profile), 27 Aug 2010 @ 5:24pm

Re: Re: Re: Re: Re: Re: Just work with independent artists
Um. No. Well, technically you don't have to pay *sound exchange* but you do have to work out specific deals with anyone whose music you want to use which is not so easy.

SoundExchange only applies to non-interactive sites.

But my whole point was for music sites not to bother with the major labels in the first place. There's a ton of music that is freely available. Promote the future of music, not the past. If the startups are going under because of licensing fees, then use music that comes with no fees. There's a lot of it out there. And the unsigned artists will be very happy for the attention.
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Suzanne Lainson (profile), 27 Aug 2010 @ 5:36pm

Re: Re: Re: Re: Re: Re: Re: Just work with independent artists
My proposed solutions:

1. Be an interactive music site (then you don't have to deal with SoundExchange).
2. Only use music from artists/labels which don't ask for a royalty. If the major labels want to drive a hard bargain, don't use their music.

I figure that if the startups already know they have certain operating expenses in the form of payments to major labels and still proceed with that business plan and can't make a go of it, then that's too bad for them. And hooray for startups who base their plans on unsigned artists eager for the exposure. Help out the little guys. If the major labels go under because they don't play ball with the startups, is that really a big loss in the greater scheme of things? And if the startups can't make a go of it without the major labels, maybe they are still too tied to the music of the past.

A Short Explanation of SoundExchange and Why It is Important -- Music Business Heretic: "Why is SoundExchange so Powerful and where does it get its authority? SoundExchange is designated by the Libraian of Congress as the sole organization authorized to collect royalties paid by services who make non-interactive digital transmissions of Sound Recordings. The statutory authority for SoundExchange comes from the following two Federal Acts (The Digital Performance In Sound Recording Act of 1995 and the Digital Millennium Copyright Act of 1998) (essentially these two acts combined to grant a performance right for Sound Recordings)."
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darryl, 27 Aug 2010 @ 5:47pm

Re: Re: What Innovation?
RD you wonder why I did not reply to you,,, Ok..

For your information, I expect you have nothing worth saying for me to comment on, I say what I say, if you dont like it, you say what you like. But I dont have to read it, agree with it, or respond to it.

So try not to be TOO upset the next time I ignore you, you'll live longer :)
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Suzanne Lainson (profile), 27 Aug 2010 @ 6:41pm

Lack of cashflow
Even without fees to the labels, many of the music startups were and are going to fail. Most of them are hoping for ad money, subscriptions, or both. And neither revenue streams are going to generate a lot of money.

There really isn't a good music business model out there right now. Sites that get money from the musicians are probably going to do better than any site that attempts to collect money from listeners.

Do I like the "pay a monthly fee and have access to every recording in the history of music" idea? Yes. But even if that all of those tracks are available for free, there might still be some hurdles to overcome:

1. Will consumers pay?
2. Who would collect the money and what would be the delivery system?
3. If all music is available to every startup for free, then competitive pressure will likely drive out most startups anyway. Each would compete with each other to offer the same services for lower and lower prices until we'd be back to a scenario where consumers can have the music for free and there's no money going to the startups.
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Suzanne Lainson (profile), 27 Aug 2010 @ 6:49pm

Re: Lack of cashflow
Because cashflow is going to be a problem and there isn't a clear cut profitable music business model right now, I think there's a feeling that it will become a battle between Apple and Google because each has industry connections and deep enough pockets to keep tweaking the system until something works.

I didn't think YouTube was going to make it, and if Google hadn't bought it, I'm not sure it would have. But Google could afford to prop it up until it became the dominant force in music (yes, I think it is more important than iTunes).
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Suzanne Lainson (profile), 27 Aug 2010 @ 7:30pm

Let's jump ahead
Let's say that we reach a point where there are no fees and all recorded music is available to everyone for free. There's really no money to be made in delivering it because it will be a commodity and people will price shop: Should I buy that hard drive with every song ever recorded (the price to be determined by the storage device)? Should I have access to the cloud where all recorded music is stored (price to be determined by the access)?

You can see where I am going. The music itself will be so ubiquitous that it will be like the alphabet.

So any startup based on delivering music in exchange for subscriptions or advertising will likely be outdated quickly.

Where will the innovation come from? Most likely from those startups that provide companies like Apple and Google a way to exploit the music in some sort of marketable fashion. It could be in combining music with medicine to reduce the cost of health care. Or combining music with energy technology to somehow improve energy cost effectiveness.

Getting major label music for free won't be enough to help startups survive. And if that is what is preventing them from making it, they probably aren't visionary enough anyway.
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Trumpetboy (profile), 28 Aug 2010 @ 10:32am

Re: Peak of stupidity !!..
READ THE ARTICLE. RETARD!!
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\r (profile), 28 Aug 2010 @ 12:47pm

Re: What Innovation?
When the rule of law becomes retarded and no longer serves the common good it will be circumvented endlessly.

Live or die.

A death grip on copyright IMHO is not in the interests of the common. Trickling mind numbing music, closing catalogs, defining and controlling who, what, when and where will die. You will not be, nor are you, happy and you never will have been right.

You are the "system" and as such must face defeat eventually. So please keep trolling in the pseudo anonymous role that has been defined for you - for it too shall pass and while it exists it serves to remind us that there is reason, there is a motive.

A law made to define parameters is good. Abuse of law to control is bad. Large abusive entertainment copyright holders piss me off. Innovate! You #u@king pukes, you make me sick.
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