Tuesday, September 4, 2007

GooTube as a role model

A friend of mine tipped me off to a new music streaming site, Deezer.com. It’s a relaunch of Blogmusik.net, a streaming site that was shut down by the record labels earlier this year for copyright infringement.

Deezer has an interesting business model: unlimited free streaming songs, paid for by ads and song click-throughs. Other webcast sites also try to do this, but (at least in the US) impose specific restrictions, like you can’t stream an entire album consecutively (so someone could just record it and download it) — companies like Live365 and Shoutcast.

The Paris-based Deezer has a license from the French music licensing agency SACEM – Société des Auteurs, Compositeurs et Editeurs de Musique. The press accounts don’t explain that SACEM only collects one type of royalty — as the name implies, the author/composer royalty (similar to ASCAP in the US).

However, Deezer has yet get a license for the performance of that music — paying the performers (e.g. a rock group). Those rights are usually held by the performers’ label, and thus requires negotiating (as would iTunes or any other service) with the label. Already, one of the major labels — Universal Music — has said non! to the plan. Oddly (given the usual French nationalism) Universal is the only French-owned major record label — having been sold by its Canadian owner Edgar Bronfman to French water company Vivendi.

So why is Deezer going ahead without a license from the record labels? Cofounder Jonathan Benassaya invoked the GooTube business model as his defense:

Asked if Deezer.com should have waited until the agreements were in place to launch the service, Benassaya countered that YouTube launched its service before it signed deals with content owners to distribute their video. He also said that Deezer.com has been operating since April and that only now has Universal raised its objection.
The Computerworld article also notes that Deezer is competing with Neuf (a Universal-licensed download service) which I’ll guess is the big reason that Universal is making a stink.

On this side of the pond, the Deezer launch must be galling (Gaul-ing?) to US Internet radio industry, which (unlike terrestrial radio stations) for the past five years has been paying performance royalties on all music streaming. The US Internet radio performance royalties (that Deezer is ignoring) are far more expensive than the composition royalties — the latest label demands are for 10-35% of total revenues, or potentially 6X that of the composition royalties. The new rates — set by a US copyright tribunal — would be retroactive to January 2006.

The stations (including many local NPR stations) lost all legal appeals, and have been negotiating past the July 15 expiration of their old license in hopes of getting a better deal from the labels. (Their next hope is that Congress will step in on their side — as promised if no deal was reached by Labor Day). Meanwhile, the record labels have asked for as much as 10% of revenues from financially struggling satellite radio companies.

The problem for the distribution of entertainment is that royalty rates are neither set by the market nor by government regulation. For the composition royalties, ASCAP and BMI come in and tell broadcasters how much more they should pay, and then a Library of Congress panel decides what is fair. The same process was used to set the last two rounds of Webcast performance royalties. The pricing of music downloads seems to be set by a small number of labels telling download companies (like Apple) what they will have to pay. Compared to this, the retail price of DVDs (where there is competition for user dollars) seems like perfect market competition.

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