Why YouTube’s PRS spat is just one battle in the coming online music war

Google’s opposition to proposed new UK music rates may look like just public posturing, as private negotiations continue. But it’s only one instance of what may become an increasingly fractious tug ‘o war between online services and the music business in the next few months.

Almost uniquely, YouTube’s 2007 blanket deal with PRS For Music was inked outside of the “joint online license” framework (JOL), through which the royalty society mandates most digital services. But, just as YouTube’s special deal has ended, so, too, the JOL, which was also implemented in 2007, is due to expire June 30. PRS wouldn’t say what will happen after that date – but, behind the scenes, many more services than YouTube alone have been lobbying hard for a new deal.

“Everybody is; the rates don’t allow you to create an economic model that makes sense,” said We7 chief executive Steve Purdham, whose site pays 0.22 pence per track transferred under PRS’ online license. Forrester music analyst Mark Mulligan said: “PRS, right across the board, are upping their fees, like those charged to Oldham Athletic for goal celebrations. This had to happen sooner or later as the labels are going to be applying pressure to PRS.

But when the YouTube deal is finally sorted, that won’t be the end of it, they’ll be revising the contracts again, this is not the endgame.” Here’s why:

Kings of Leon. Photograph: John Packer | Blank Slate/Flickr/Some rights reserved

No one’s making enough to pay for music: Music licensing is a complex landscape that confuses even many whose livelihoods depend on it. In short, PRS’ online license asks services to pay whichever is greater – either up to 8% of their gross revenue, a per-track fee of between 0.05 pence and 0.22 pence or a per-subscriber fee of between £0.20 and £0.60 a month, depending on the particular service. The license was mandated by the UK Copyright Tribunal in 2007 after being agreed to by PRS, the BPI, Yahoo, AOL, RealNetworks, Napster, Sony, iTunes, MusicNet and the mobile networks.

That would be fine for the many new online services that have launched and reached massive traffic since the license was created – except (and here’s the real story), most of them are finding it hard to earn the money PRS wants for these so-called “minimas”. “Fundamentally, Google (NSDQ: GOOG) is not making enough money off YouTube,” Mulligan said. “Video advertising is nascent at best and YouTube is way behind the curve on that.” In other words, the license was inked before YouTube and others took off, before they’ve had a chance to find a workable business model, and before many of the original signatories went and changed their music initiatives.

Purdham: “If it was just 8% of revenue, that wouldn’t be a problem, but the minimas kick in to scale. We’ve gotten to 500,000 users in just over 90 days and average visit time is 30 minutes – when you scale it up to the number of plays that YouTube and we have, the numbers become very significant. You’re talking about roughly a penny a stream for on-demand streaming. The question is, how do you make your money? Can you match that cost of playing to the revenue your business can make?”

To support that penny a stream, Purdham said We7 would need to sell ads consistently at £10 per thousand impressions, but it’s currently making between £1 and £12. Assuming Spotify, which has claimed 250,000 UK subscribers, is paying PRS’ on-demand streaming rate of £0.60 per subscriber per month, it could be billed £150,000 per month by PRS – but the per-track fees work out much higher. That’s why Purdham and others are trying targeted techniques to earn higher rates, but that, too, is in its infancy.

Have the cake or grow the pie? There’s no consensus: PRS has already acknowledged the growing importance of online income, which grew by 40% between the first six months of 2007 and 2008. Indeed, some 14m YouTube plays accounted for a whole 40% of the total transactions PRS processed between July and September. But, whilst PRS aims to collect a fair share for artists and others, some say the agency should see the bigger picture. Purdham: “It’s not about whether it’s a penny or 0.22 of a penny or whatever – it’s about the overall value of what this world could be. You’re not talking about tens or hundreds of listeners, you’re talking about perhaps billions of listeners.”

Pandora last year quit the UK, citing excessive fees, and Last.fm, in GooTube’s wake this week, has also called for a fixed online fee like the one radio stations enjoy. Mulligan: “PRS maybe feel now that they’ve overplayed their hand a bit – no one anticipated Google doing what they did. Google have managed to spin the situation to leave the PRS looking like the out-dated, money-grabbing behemoth, whereas Google is looking like the consumer champion.”

But, with the picture unclear on whether the JOL will be revised after June (“There’s nothing I’ve seen that proposes a change to it,” Purdham said), online services must carry on trying to make more money, strike a special deal as Google did or stop using music altogether. PRS, by the same token, must decide whether to reduce its rate in order to grow the overall pie, or to stick to its principles that artists deserve payouts at a constant rate.

Artists are squaring off against services and labels: In the background, those artists, through Featured Artists Coalition (FAC), and small indies, through the Merlin collective, are uniting against deals they see being done between the big online platforms and the majors, from which services already have to secure a parallel set of rights in addition to PRS. With YouTube reportedly ready to form a music video site with Universal, MySpace Music having been created as a joint venture with the majors and Nokia (NYSE: NOK) having guaranteed labels private payouts for Comes With Music downloads, the people who create the music, fearing being left out, are raising their hand for a greater influence in contracts. Where these deals have been successful, Warner Music Group (NYSE: WMG) has denied YouTube its songs – just another temporary bargaining tactic.

The licensing framework is in flux: As if that power struggle wasn’t enough, the ground is shifting beneath everyone’s feet. Already, some of the major music publishers have been withdrawing their repertoire from societies, in favour of doing those direct deals with online services, Mulligan said. Next up, although the European Commission wants to simplify the complex process of getting pan-European music licenses, its decision last year to open the practice to competition, allowing services to pay royalties to a collector in any part of the EU and not just in their home nation, is likely to mean further confusion. These reforms offer “new potential but also potential delays”, Purdham said: “It used to be fairly simple, but unfortunately the PRS no longer represents all the publishers anymore.”

Instead, PRS faces competition from France’s SACEM, Germany’s GEMA, Holland’s Buma and even societies the publishers themselves are establishing That’s good news for any music service shopping for prices, as they try to license songs for online play – but a worry for individual royalty collectors as they try to maintain principles of fair compensation for artists. It’s still confusing – that’s why services are going direct to publishers. And more change is likely, with the UK government having proposed a “Rights Agency” to oversee copyright relations.

Google could shape the future: Sure, YouTube’s public protest may just be part of the PRS negotiations – but its defiance could help shape the coming, wider relationships between online services, labels and royalty societies. Mulligan: “It’s a bargaining tactic, and it’s Google playing off against the labels as well. They’ve pulled major-label content and blamed it on the PRS, who have only just come out of a torturous tribunal experience with the labels. Google know very well there are festering wounds there that they’ve dug in to.” A positive outcome is likely – but don’t expect the eventual configuration of this business to be simple, or without losers.

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