Creating a Merit-Based Music Economy: Compulsory or Blanket Licensing for Interactive Subscription Services
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D. How the Traditional Players Could Stymie the Whole Thing Today

Just because we can technically build an interactive subscription service with a full catalog and comprehensive personalized auto-recommendations doesn't mean anyone will. Major labels and publishers would be likely to obstruct or distort such efforts, unless forced to allow it. Compulsory licensing would be a tool to force them to allow these services to operate in the ideal form for fans and artists. Without a compulsory license, the following tactics are available to major labels and publishers.

The Full Catalog At Risk

The majors could build their own subscription services, and refuse to allow artists into the catalog other than those signed to their own labels. Even if majors create more than one service, and cross-license their catalogs to each other, independent artists are not likely to be admitted, unless they submit to substantial control or ownership by the major labels. The grass roots market could be completely excluded from participation.

Control or exclusion could involve any number of tactics used with their own artists or with retail distribution. Basically, the same leverage they exert as gatekeepers to the traditional distribution system can be imposed upon the interactive service catalog. The Power Pillar of distribution is replaced.

Fluid Exposure At Risk

Even if major-operated services include a wide range of artists in their catalog, they could limit or skew personalized exposure to a set of their own artists. If so, inclusion in the majors' catalogs would be hardly more useful than having a solitary web site unconnected to any other service. They could charge exorbitant fees for access to unbiased auto-recommendations, or force artists to use other expensive mass media to promote themselves. Grass roots artists could be excluded from inexpensive, incremental audience exposure.

Could one independent artist provide an independent service, in response? Maybe so, but it would be less valuable to present one artist's work by itself than all artists together, because most fans do not limit themselves to a single artist. They want access to a whole set of artists in a single package -- full aggregation is a very important consumer value.

Currently, fans build up a personal catalog at home by purchasing CDs, and then play them on-demand, or through home jukebox systems. Jukeboxes, however, do not include music that the listener has not already explicitly acquired. Including new music is critical for independent-artist exposure, whether by broadcast radio or a personalized service.

Since the majors operate in the star system, they want to keep their market focused on just some of their artists, in order to boost their exposure and sales as much as possible. (In the case of a service, instead of sales it would be revenue-generating song-plays.) The diluting effect of expanding the catalog and exposing fans to the full range of artists would work directly against the financial incentives for stars, and thus the majors can be expected to avoid that choice.

Even though providing comprehensive auto-recommendations would be in the best interests of the fans, who pay the subscription fees, the majors would probably not extend these features broadly unless there were independent competitors that did so. The Power Pillar of promotion is replaced.

The Majors Take Their Ball and Go Home

For interactive subscription services not owned by or affiliated with the major labels, the majors and publishers still hold an absolute trump card: They can refuse to license their content to such services unless they agree to accept the limitations described above, recreating both Power Pillars in the unaffiliated services.

Non-compulsory licenses are not indefinite in duration; they must be renewed periodically. If the service begins to expand beyond the above limits, the majors can terminate or refuse to renew their licenses, thus removing big chunks of the competitors' catalogs, and damaging the total service value that the competitors can offer their subscribers. This is dramatic leverage that they can exercise periodically at will.

Subscriptions At Risk

The majors can also choose not to license their catalogs to interactive services that use a subscription revenue model, requiring such services to make money some other way, either with advertising, or other business models that generate alternative revenue.

Ideally, a music service may want to offer options ranging from free ad-supported service to ad-free subscriptions in a single business, and without a subscription option, the flexibility of that customer empowerment is not available.

Whenever you create a business where you have multiple customer bases (in the case of an ad-supported service, it would be both advertisers and music fans), whoever is paying the bills will get priority in any business conflicts. Advertisers don't care about a full catalog or personalized features of auto-recommendations; they only care about getting their message to a massive audience in an attractive branding environment. This reduces the incentive to serve individual fans with the best possible personalized programming across the widest catalog.

The Power Pillars are not a problem for advertisers. Advertising is a mass-media business strategy, and advertisers are perfectly comfortable with those constraints.

Unless the alternative business models were also personalized, sponsors' needs would not encourage the kind of system that breaks the Power Pillars. A music service could consider providing a personalized consumer product service as well, and user profiles from the two could be combined, for cross-referencing. But, implementing personalized marketing as an alternative to mass advertising is much more difficult, both technically and from a business standpoint. That would be a steep barrier in its own right.

Artist Revenue At Risk

Under non-compulsory licenses, as currently determined in the DMCA, there is no guarantee that artists would get a fair percentage of the revenues generated from fans using their music. (Artists do get a guaranteed percent of revenues under the DMCA compulsory for non-interactive webcasting. Direct payment of these royalties is still in doubt, though, as the RIAA's proposed collection agency has suggested that artist revenue be funneled through the labels to recoup advances.)

So even if all of these interactive service licenses were granted and sustained over time, with full catalogs and comprehensive auto-recommendations, artists signed to labels could be much less likely to actually receive the money generated from subscribers, and have it diverted to recouping label costs instead.

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