MP3Tunes exec: industry demands quash digital music service profitability

When Michael Robertson talks digital music, it’s hard not to take off the headphones and pay attention. The MP3Tunes CEO and boss wrote an eye-opening editorial for Gigaom this week, calling out record companies for hard-nosed tactics that make business difficult for online music services such as Spotify and Rdio.

Robertson opened his criticism of the music industry’s strict business practices with a whimsical, if on-the-nose analogy:

Imagine a new hot-dog selling venture. Let’s also say there’s only one supplier to purchase hot dogs from. Instead of simply charging a fixed price for hot dogs, that supplier demands the HIGHER of the following: $1 per hot dog sold OR $2 for every customer served OR 50 percent of all revenues for anything sold in the store. In addition, the supplier requires a two-year minimum order of 300 hot dogs per day, payable all in advance. If fewer hot dogs are sold, there is no refund. If more than 300 hot dogs are sold each day, payments to the supplier are generated by calculating $2 per customer or 50 percent of total revenues, so an additional payment is due to the supplier. After the first two years, the supplier can unilaterally adjust any of the pricing terms and the shop can never switch suppliers.

Such a set-up renders the fictional wiener seller’s hopes for profitability a pipe dream, said Robertson, who believes modern digital music services like Spotify are being throttled by some strict industry demands.

Spotify launched in the U.S. this summer. The originally Europe-exclusive streaming music service offers both paid and ad-supported free options for music lovers. Just prior to its American invasion, the company’s estimated worth was $1 billion.

“Labels de facto set retail price, which limits the ability of the music service to develop ancillary revenue streams that aren’t siphoned off by the labels,” he explained, adding that “not only do labels get to set the price on the service, they also get partial ownership of the company.”

In addition to their say in pricing structure, Robertson revealed that record companies also request that digital music services provide detailed figures relating to everything from play counts to market share statistics. Gargantuan yet necessary starting costs also “stifle innovation.”

Another standard practice called “most favored nation” purports to set a level playing field for competing record companies, though Robertson calls it “collusion.”

“[Most favored nation] greatly constricts the ability to work out unique contractual terms and further limits business models,” he wrote. “It’s also why it’s easy to get one label (typically EMI) because they’ll provide low-cost terms knowing that others will demand higher rates, which EMI will then garner the benefit from.”

So, how did Robertson acquire all this supposedly top-secret information on behind-closed-doors business practices? The music veteran refused to disclose his sources. He also doesn’t expect any sweeping changes to this model coming any time soon, rationalizing that start-ups which don’t kowtow to record label provisions are essentially shooting themselves in the foot.

“If a music service rejects terms offered by a label, then that service’s offering will have an enormous hole in their catalog of 25 percent or more of popular songs,” said Robertson. “In the business world, a monopoly leads to lopsided economics, and the subscription digital music business is a poignant illustration of that.” (via Gigaom)