CMU Trends Retail

Trends: Five things to take from the entertainment retailers’ new manifesto (A Free Read)

By | Published on Sunday 15 March 2015

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Record Shops

Last month the Entertainment Retailers Association staged an event in central London to launch its first ever manifesto before an audience of decision makers from across the movie, games and, especially, the music industry.

ERA Chairman Raoul Chatterjee was very clear that – while this is the season for political manifestos – this document was very much aimed at those in the room, the many and varied stakeholders whose content ERA’s members package, deliver and sell.

The event was built on the positive message “let’s collaborate more”, though with the slightly less positive implication that the retailers too often feel left out of the conversation on the rapidly evolving home entertainment market, despite them controlling most of the consumer relationships.

The manifesto itself sets out five key messages, listed over the page, though here are the five main things we took from the report.

THE STREAMING SERVICES SEE THEMSELVES AS RETAILERS
This wasn’t in fact news, because most of the key players in streaming music have been members of ERA for sometime, but I think it’s fair to say most of the music industry executives in the room don’t usually think of Spotify and Deezer as counterparts of Tesco and HMV.

And yet this manifesto was very much speaking for streaming platforms, download stores and high street retailers as one. Indeed, the panel I moderated as part of the ERA launch event had reps from HMV, Tesco and the independent retail space sitting alongside Spotify and, with feet in both the digital and physical camps, Amazon.

There is a logic to the streaming services allying with the traditional retailers, even if the latter may ultimately see the former as a massive threat to their long-term business. Streaming services, download stores and record shops all basically play the same role, in that they are the bridge between content makers and content consumers.

It’s clever of ERA to bring the streaming services into the fold, because it ensures that the trade group stays relevant as the slow shift from physical to digital, and then download to stream, continues to unfold. While the digital service providers get an already established infrastructure to represent their interests; and an influence over the chart which, in the UK, has long been a joint venture between the retailers and the labels.

Which is all possibly stating the obvious, but thinking of the streaming services as retailers can change perceptions when it comes to the issue of how streaming revenues are split.

You sense that many in the music community see the streaming companies as a new kind of beast: tech start-ups building billion dollar businesses on the back of “our music”, ready to cash-in with the inevitable IPOs while taking a third of all revenues along the way.

That isn’t necessarily a totally inaccurate view of the situation, but if you think of the DSPs as the new retailers, then the cut they take of both advertising and subscription income is simply the slice of the money that always went to the retail partner. So rather than taking money away from the artists and labels, and the songwriters and publishers, the DSP’s cut is income that would have never reached the music rights community in the first place.

THE RETAILERS WANT IN ON THE COPYRIGHT DEBATE
Of the five specific points raised by the ERA manifesto, the most space was dedicated to the one dealing with licensing. Though the group’s thoughts on the music licensing domain could possibly be expressed as follows: “We want in on the copyright debate”. This is a result of the digital services sitting inside the retail fraternity.

In the CD domain, music retailers never had to trouble themselves much about copyright matters. Obviously they stood to lose as much as anyone if piracy got out of control, but the labels always led on any lobbying and litigation on that issue, perhaps with a letter of support from the people who actually took recorded music to the public.

The record companies exploited their own sound recording copyrights when they pressed CDs, and then paid the publishers a royalty for the exploitation of their song copyrights, usually through the MCPS collective licensing system. By the time the CDs reached record shops all copyright matters had been dealt with.

But in digital it’s the retailer exploiting the copyrights, and they need licenses from both the labels and the publishers to do so. Which makes the new retail sector very opinionated indeed about the intricacies of music licensing and copyright law.

It’s on the publishing side – where some publishers license direct while others do so through the collecting societies, and where the split remains between the licensing of mechanical and performing rights, even though streaming services need to exploit both – where ERA seems most vocal at the moment.

On a more general level, the retailers were calling on the music rights owners to involve them more in copyright debates. Because if they don’t, next time the music industry is looking to reform copyright law in its favour, the labels and publihers might find the retail industry lobbying against them.

THE RETAILERS ARE BIG INVESTORS IN THE DIGITAL FUTURE
I mentioned above the not uncommon viewpoint in the music community that the streaming services are simply tech companies building market share so to maximise their asking price when they come to sell, most likely via an IPO (a flotation on a stock exchange) which will provide founders and early investors with their big pay day. Ministry Of Sound boss Lohan Presencer expressed this very opinion while laying into Deezer and Rdio during a recent and somewhat lively panel debate on streaming music.

Now, of course, there is an element of truth in all that, though the flipside of the argument is that while some investors and entrepreneurs may well make billions from “our music”, they will spend billions more along the way nurturing the services and platforms that could become the primary generators of income for the owners of recorded music down the line. And for every service that succeeds, many more will fail, potentially costing their backers millions.

Which is to say, while the labels and publishers may be taking risks by licensing new and innovative digital services – mainly the risk that an existing service will take a hit when a new less lucrative services goes live (plenty of label execs believe freemium streaming did just that to iTunes downloads) – it is the digital service providers who are actually pumping millions, if not billions, into building a new infrastructure, ultimately for the benefit of all music makers.

Plus, the ERA report was keen to stress, the shift to digital has resulted in a shift of logistical effort from the labels to the retailers. In the CD game, the record industry did the copying, the manufacturing, and much of the delivery too. In the digital age, the label uploads its masters and the DSP handles ingestion, processing and delivery. And while that doesn’t require factories and warehouses and lorries, it does involve the building, developing and maintaining of significant digital infrastructure, which the DSPs have mainly paid for.

The labels too have had to invest in platforms to manage their end of digital delivery, not to mention all the data that comes back in the other direction to inform royalty payments and marketing strategy, so it’s not only the retailers investing in the digital future. Though even many label chiefs will quietly concede that the new retailers are doing much more of the work than the retail partners of old did.

THE STREAMING SERVICES’ MARGINS ARE AS LOW AS THEY CAN GO
We all know the ‘digital pie’ debate is getting much louder in the music community now that streaming is becoming such a significant revenue stream.

Artists have been pushing for a bigger cut of the action for a while now, and in recent months the songwriters have joined the party, claiming that their current share of streaming income is simply unsustainable. And the music publishers too are seeking more from the new digital platforms.

But the question is, if the artists, songwriters and publishers all want a bigger share of streaming income, where is that coming from? And as that question demands an ever more pressing answer, you feel one of the key messages coming out of the ERA report, albeit phrased in the politest possible way, was “you ain’t getting any more off us”.

Which brings us back to DSPs as retailers point. We know that streaming services pay out, on average, about 70% of their revenues to the music rights owners. And the digital firms would like everyone to know that in the context of the wider retail sector, a 30% slice of the money is already pretty low, and it’s as low as it can go.

Noting that some have suggested that the music industry should be pushing for 80% of revenue, the ERA manifesto cites an unnamed digital service executive who basically says that such a move would put the streaming companies out of business. “Someone should explain that 80% of nothing is… nothing”, the anonymous exec concludes.

Of course, if the artists, songwriters and publishers want more streaming income, and the DSPs won’t budge on their 30%, that can only mean the other stakeholders going after some of the label’s share, the record companies generally getting more of the digital money than anyone else.

Though the labels insist that, as the primary risk takers in new talent and lead marketers of new content, they can’t afford to take a cut either, usually adding that if everyone would just wait until streaming music comes of age, then their respective cuts will translate into payments more in line with expectations.

Either way, when it comes to working out how the 70% should be divided between music industry stakeholders, this is the one debate that the retailers are happy to sit out.

THE NEED FOR MORE DIVERSITY IN DIGITAL
A final interesting point raised by the ERA manifesto is that, as we have shifted from physical to digital, and now from download to streaming, the music retail market has become much less diverse.

Which is to say, while there are plenty of streaming services out there, they are all offering a very similar service (same catalogue, same functionality, same price points), and crucially they are all aiming to operate at a massive scale, with tens of millions of users right across the globe.

That might be primarily driven by the ambitions of the people launching these companies, but it’s also because of the way streaming services are currently licensed by the record companies, which would make it more or less impossible to ever make a profit without achieving massive scale.

So where are the independent record shops of the streaming age going to come from? Niche services for niche audiences, servicing customers who will pay a premium for a particular experience, or a specific kind of curation or customer service.

It was hard enough for indie retailers to break into the download business, not least because of the major labels’ initial love affair with DRM technology, which pretty much handed Apple the entire download business (because only iTunes sold iPod-compatible DRMed digital files). But setting up a niche streaming service is all but impossible while entering the market requires paying massive advances and offering other kickbacks to labels.

In the US, where personalised radio services can operate under compulsory licences provided by SoundExchange, you have seen some smaller niche players launch. And that certainly makes things more interesting.

Though in Europe, and in the fully on-demand space where SoundExchange licenses do not apply, could we ever see the streaming service equivalent of a quality independent record store? Arguably not without a change in the licensing approach of the labels, though it seems unlikely that will happen until at least the streaming sector matures.



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