Writing for GigaOM, Michael Robertson the founder and former CEO of MP3.com has lifted the lid on the onerous financial arrangements that record companies impose on digital music subscription services. He argues that online music services such as Spotify, Rhapsody, MOG, Rdio and others are so much at the mercy of the deals that record companies impose on them that the likelihood of turning a profit for the supplier is extremely slim. Instead record companies reap just about any financial reward that is on the table, a fact that has hitherto gone unaddressed as these types of deals are often signed under non-disclosure arrangements.
Which ever method the digital music company chooses to distribute music, the record companies will ensure that they either get the largest pro-rata share per subscriber, per-play, or percentage of a company’s total revenue – which ever is higher. Labels will also get an equity stake in the service, and even have an arrangement in place that the best deal on the table offered to another label will also be guaranteed to be matched by the company.
This means that even if one company offers their music cheaply, they can then benefit if another company is signed on for a higher price – collusion in effect. Lifting prices is not even an option for the services as that will also simply hand more money to the labels as they are guaranteed the slice of the pie that offers the most profit.
Digital vendors are left with only two options on the table – they either pay the asking price, or they forgo music from a certain label in their catalog. Robertson also notes that with the sale of EMI to other music companies, that there will only be three large labels who control most of the world’s music.
Pandora manages to by-pass most of the fees as by functioning as a radio station, it is able to take advantage of a government supervised license that affords them the rare luxury of having to deal directly with the record labels.
All this amounts to a scenario for Robertson where subscriptions services will never be in a position to become very profitable enterprises. Ultimately, the consumer pays the price, literally or metaphorically as there are less avenues to source their music from, meaning that competition and also innovation is stifled.