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Mobile Operators Relationship With Music Content Owners And Its Affect On The Music Value Chain

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Over the last year TMV have heard consistent rumors of mobile operators taking a year and sometimes even longer to pay their music content partners the money they are rightfully owed. I have heard this from both decent sized independent labels as well as major labels. It appears this is not just a European phenomenon either – I have heard numerous accounts from industry executives in Australia, Asia, Europe and the United States.

Obviously, TMV will not reveal companies complaining about late payment or operators concerned in an effort to preserve the details, which were provided in confidence. Instead TMV will examine the reasons why this has been occurring and also its effect on the music business value chain. At the end we will suggest some ideas that we believe that the industry should undertake to address this very serious issue with the mobile operator music content owner relationship.

Let’s begin where TMV believe the opportunity for mobile operators to pay content owners late began. Essentially, music content owners realized late in the game that they could not fight technology and win. After the onslaught of Napster and other P2P up-starts, when mobile came along and said Hey, we can make decent money using your music for ring tones the recorded music business rolled over an did not sufficiently in TMVs view leverage the value of their music catalogues.

These deals negotiated in the early days of mobile set a BAD precedent which has made it increasingly difficult for music content owners to re-negotiate better terms for their content catalogues. I have heard some executives state that mobile operators “do not give a shit” about music and that the label takes their deal or it’s the highway.

TMV counters that this is obviously bluff, as operators require an association with music and music content to brand themselves as sexy and entertaining, because underneath all they do is sell voice minutes, text and more recently mobile broadband. How do you make that sexy and interesting to your customers?

Music is one of the key themes that have resonated on a global level in terms of mobile operators associating themselves with music across three key areas;
a). Digital music sales proposition (over 90% of western operators have them)
b). Sponsorship of music events and venues (i.e. 02 in the UK market)
c). Use current pop music in there audiovisual advertising campaigns.

Subsequently, it is TMVs firm belief that mobile operators stating they do not care about music is all bluff. Statistically, music outsells any other content form on mobile (except porn) on a rough ratio of 6:1. That is some decent leverage power we have yet to witness the music industry utilize to date.

Moving on, the effects of late payment on content owners is threefold:

1). Causes cash flow problems for aggregators and labels
2). Late reporting of royalties and payment to artists
3). Late reporting of royalties and payment to collections societies and therefore
publishers and writers

Furthermore, the mobile operators make interest on the money whilst they hold out on payment, in effect interest content holders should actually be making. I have heard one executive from one major label view all of the above as no problem. They stated to me in a phone call that if the operator pays late his label charged the carrier the statutory rate of interest which is currently 8% above the base rate of interest and so in essence the label makes more with late payment.

However, in terms of independent labels most are told they have to go through aggregators of the operator’s choice. For example, in the UK any independent label wanting to get its content into Orange’s music proposition have to go through the Pocket Group despite the fact said label may already have a deal with a different aggregator. The end effect is that the content owner has its margins cut and in TMVs view is also a restriction of trade that should be looked into by the UK’s competition authorities.

If apple/iTunes let’s all its content owners deal with it on an individual level why can’t mobile operators do the same? They will no doubt cite costs, however in TMVs view that is a non-starter as operators also generally demand a 50% cut of retail price and so in actual fact make more on every digital music track sale than iTunes does. Not to mention the data charges that create “bill shock” for music fans.

Obviously in terms of aggregators if they are paid late, they pay their content partners late and this obviously leads to artists who in actually fact create and write the music getting paid late. Is this justifiable? Not in TMVs view. Why has it been allowed to get to its current state? Pretty much because the music industry overall has not had the bollocks to leverage the real value of its music to these mobile operators.

There are many solutions, available to independent and major labels alike. TMV’s favorite is a hosted server solution where content owners do not ever hand over their raw digital asset to any mobile operators. Instead, they interface with each operator’s portal and when a purchase request comes through it is delivered from the content owners’ own server and back through whichever operator’s portal the request came from.

The benefits of the aforementioned system are that it ensures transparent reporting and leaves content owners in control. Added benefits to the operator include the fact it means they do not have to have such a high human resource outlay as process for interfacing and delivery can be automated. If anything, it streamlines work-flow for both content owners and mobile operators. The primary benefit though is the ability of content owners to “flick the switch” and turn off a mobile operator’s content feed if they do not pay on time.

When one hears of an operator owing one major label over £20 million alone in the UK and stringing out the payment for more than a year it is clear labels do need to begin the process of changing, they the way they deliver their content to mobile operators so content owners not mobile operators are in control. If broadcasters and other media have been insisting operators accept content delivery this way for more than two years what is stopping the music business? – Especially considering these are content formats sell significantly less than music via the mobile channel….

 

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