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IN SEARCH OF THE LOST CHORD

Will Music Industry Restructuring Hit the Right Note with Cable and Broadcast?

Part 2: The Effects on Cable and Broadcast

By Christopher M. Wright

 © 2004 Christopher M. Wright
All Rights Reserved

[This article was originally published in The Financial Manager, flagship publication of the Broadcast Cable Financial Management Association (January-February 2004)]

Slumping CD sales. Mass layoffs at big record labels. Rampant music piracy on the Internet. Subpoenas and lawsuits. A format shift to MP3 computer files. A return to singles for a buck. The distribution side of the business moving online.

The music industry is in turmoil, as described in Part 1 of this series . Next we examine the fallout on radio and television, with help from Susquehanna Radio [acquired by a media and private equity consortium in 2005], webcaster AccuRadio.com, independent record label Nettwerk Productions, and NBC. The article ends with some thoughts from BCFM board member Ron Gertz on what the music industry will have to do to prosper in the future.

Radio

BCFM member Rick McDonald, senior vice president of programming at Susquehanna Radio, sees the record labels cutting costs because of music piracy on the Internet. The cuts are showing up in new artist development and promotional budgets, McDonald says. Susquehanna is a radio station group owner with more than 30 properties across the country.

The labels seem to be more cautious in developing new acts, preferring instead to work with proven artists, McDonald says. He doesn't know if the total number of new releases is up or down but his experience with promotional people is reinforcing his perceptions - the promoters are bringing him fewer prospects and telling him there are fewer new artists available. This is having some effect on Top 40, urban and alternative stations that specialize in new music. "Labels won't make records if they can't make money at it," McDonald says.

Less promotional money is flowing from the labels to radio through independent promoters, McDonald says. He is quick to point out that such payments have always been negligible for most radio operators and some refuse to take the money at all to avoid the appearance that their playlists are being influenced as a result. Thus, he is unperturbed by recent reports that promotional money is in part leaving broadcast radio and diffusing instead to online music sites like Yahoo! and MSN.

Promotion money has not penetrated very far into the world of Internet radio, according to Kurt Hanson, publisher of RAIN: Radio And Internet Newsletter, a daily Web-based publication covering the field of Internet radio since 1999. Hanson also runs AccuRadio.com, an Internet-only streaming music service. The largest webcasters might be siphoning off some promotional money that would ordinarily end up with broadcast radio, Hanson says, but no cash has yet found its way to mid-size webcasters, as far as he is aware. "We're lucky to get promotional copies of CD's to play," he says. He is starting to see a pick-up in promotional activity, however, like getting a dozen autographed CD's to give away, and says this is "a step in the right direction."

Just how big a competitive threat is new media to broadcast radio? "Things have not been changed profoundly by satellite or Internet radio," Susquehanna's McDonald says. The competition might be barely noticeable now, he says, but this could change in the future. Satellite and Internet radio are still in their infancy, he points out. He notes that satellite receivers are being installed as standard equipment in new cars, putting satellite radio in the hands of people who might not seek it out on their own. There is no room for complacency, McDonald says. "Broadcasters have to be aware that the ability to be local is critical to their success against satellite radio which is not local," he says.

AccuRadio's Kurt Hanson agrees that Internet radio is not much of a threat to broadcasters currently. He cites an Arbitron telephone study showing that Internet radio attracts a cume of over 30 million listeners a month. He estimates that the audience is growing 50-100 percent a year. At its prime-time (mid-day), Internet radio has an aggregate audience of about 500,000 simultaneous listeners, he says. This is about 2 percent of the size of terrestrial radio and not enough to leave broadcasters quaking in their boots. "If radio is down 2 percent, it would barely be noticeable," Hanson says.

Moreover, Hanson believes that Internet radio has picked up new listeners - people who could not previously listen at work - leaving broadcasters virtually unaffected. "Internet radio is almost exclusively an adult, at-work phenomenon because of broadband connections," he says.

He agrees with Susquehanna's McDonald that Internet radio could become more of a competitive factor in the future. "If it grows at 50 to 100 percent a year, it will eventually have a noticeable effect in the competition for advertising dollars," Hanson says. Use of Internet radio may ramp up in the near future as Wi-Fi connectivity becomes ubiquitous, as people listen over their PDA's and cellphones, and as stereos in the home and car tie into the Internet through wireless connections. All of this will be here before the end of the decade, Hanson believes.

Moreover, there are things that Internet radio can do that broadcast cannot, like displaying album covers and allowing listeners to pause or skip songs. "Consumers have always wanted better identification of what's playing and that's something Internet radio does very well," Hanson says. In addition, most webcasters will offer a legal click-to-buy option to convert streams to downloads within two years, he says. Currently, Hanson is an Amazon Associate and receives commissions of 5-6 percent on sales that come through his site. AccuRadio.com generates about $20,000-30,000 a month in Amazon sales. "The commissions cover a couple of intern salaries," Hanson says.

Competition may also arise from the greater variety on satellite and Internet radio. XM and Sirius both offer dozens of specialized music channels on their satellite services. Sites on the Internet like Live365.com offer comparable selection. AccuRadio, for example, offers 20 different channels of Broadway show music. You can choose by the decade or the composer ('Simply Sondheim'). "You end up with the music you like," AccuRadio's Hanson says of personalized music streams.

What about advertising rates? It'll be a long time before new outlets achieve advertising parity with broadcasters. Susquehanna can sell advertising in its Internet streams at only a fraction of what its over-the-air ads command, Rick McDonald says. This is despite the 24/7 availability and global reach of streaming. "Nobody is making a lot of money on advertising in streaming, but this may change in the future," he says. Internet and satellite radio have not depressed ad rates, he says, noting that the satellite services limit advertising and rely on subscription revenue. "Rates are more affected by the state of the economy than by new media competitors," he says.

AccuRadio's Hanson agrees that advertisers are not looking for a global reach and will not yet pay a premium CPM (cost per thousand) for streaming. Internet radio is only now getting large enough to be of interest to national advertisers, he says. Up to this point, national advertisers have not been willing to buy time on Internet radio at any price. As Internet radio attracts interest, the first development will be national advertisers buying Internet radio spots at prevailing network radio rates which are low compared to local rates, Hanson says. Something else to watch for: some local advertisers will pay a premium to advertise on Internet radio in order to collect email addresses or establish other electronic connections with potential customers in ways that broadcast radio cannot.

What happens if radio loses its historical role as hitmaker? If music stars are made elsewhere, will people stop listening to the radio and advertisers stop paying?

Radio is the most important driver of traffic into record stores at the moment, but television, the Internet and word-of-mouth are all capable of launching new stars. Artists complain that media consolidation and shorter playlists make it harder for new acts to get exposure on commercial radio. Music executives say that this difficulty makes online music sites competitive with radio when it comes to breaking new artists and albums.

Avril Lavigne, who was not well known until 2002, was showcased on AOL before radio. Her single 'Complicated' racked up 350,000 streams, convincing radio stations to put the song on their playlists and boosting sales when her album was released two months later. Staind generated 600,000 streams in the five days before releasing a new album which debuted at number one on the Billboard Chart.

The soundtrack from 'O Brother, Where Art Thou?' became the tenth best selling album in 2002 largely through word-of-mouth and Kelly Clarkson sold a million albums after winning the 'American Idol' contest on Fox TV.

Susquehanna's McDonald says that "radio was all over Kelly Clarkson which shows you that radio has not lost sight of the need to be in touch with what is happening in music." He is concerned, though, that "the Internet might challenge radio as the primary means of exposure for new music." This is not an immediate threat, he says, but could happen later on. The Internet is a bigger threat in his estimation than the occasional success of an 'American Idol' or other venue in making a new star. The time to worry, he says, would be when radio no longer provides what people are looking for.

AccuRadio's Kurt Hanson believes that broadcast radio has already lost the war. Young people discover new music through file-sharing on the Internet, CD-burning among friends, and MTV. Only one or two broadcast stations in a market are interested in attracting a teen audience, he says. Whole genres of music - like electronica, boy bands, and blondes - are not getting played in some markets. So AccuRadio plays Britney and Justin for people who would not otherwise get to hear them. The same is true on the adult end, as well. Broadcasters don't play Frank Sinatra, Ella Fitzgerald, Diana Krall and Norah Jones despite their popularity with adult audiences, Hanson says.

The day will come when Internet radio will make hits and drive music sales, not for mainstream artists but for niche genres, Hanson says. It has already given a boost to the career of Norah Jones. Hanson notes the example of Michael Bublé , a 23-year old singer working in a Frank Sinatra-Bobby Darin vein, who gets Internet radio play. "Internet radio can break an act like that in the not-too-distant future."

Television

Music stars are turning up all over TV these days. James Taylor ran his own ads and went on Charlie Rose to plug his "October Road" album which debuted in Billboard's Top 10 and sold a million copies in the first two months. Bruce Springsteen has made a number of TV appearances because, unlike a decade ago, he is no longer the 'Boss' on radio. Sheryl Crow has been on a reality show and stars are performing live on network morning news shows.

Labels and artists are also discovering that appearing in TV commercials is a great way to market new music. Moby and Dirty Vegas became more popular after their songs were used in commercials. In addition to his numerous appearances on daytime and late-night TV, Sting did an ad campaign for Jaguar which was ten times larger than his label's promotional budget for his new album. At 52, Sting can't get on MTV but the Jaguar campaign is credited with taking sales of his album from under a million copies to more than four million.

"The Sting commercial was really cool," Maria Alonte, a creative licensing executive at Nettwerk Productions, says. Nettwerk has BT, Neil Finn, and Ron Sexsmith on its independent label and manages Coldplay, Barenaked Ladies, Dido and Sarah McLachlan. It is also the publisher for up and coming acts like Delerium and Mystery Machine. Alonte's work spans all three divisions.

TV commercials have really propelled the careers of some emerging artists, Alonte says. The Mitsubishi commercials - one of which featured Nettwerk's own Barenaked Ladies - jumpstarted the careers of Telepopmusik and Dirty Vegas. There are stickers on their CD's, 'As seen in the Mitsubishi commercial....' "There's a cool niche of music, slightly electronic but singer-songwriter based, that would not get on the radio but that people are getting exposed to through commercials," Alonte says.

Nettwerk just licensed a Kinky song ('Mas') to a Nissan commercial. "Kinky is in a space where traditional Mexican meets electronic meets rock meets funk," Alonte says. "If not for licensing, how else to get national recognition for an act that would not otherwise be heard on mainstream radio? Finally, there's somewhere else for artists to start their careers."

Alonte believes that music licensing is becoming more important. With the decline in CD sales, labels are trying to find other ways to make money. "The music industry is realizing that it can't just rely on CD sales anymore but has to try other things," she says. She points to film licensing as another revenue stream receiving renewed emphasis and not just for hit songs. She is seeing more music stars producing themes or soundtracks for movies on a work-for-hire basis than before. With consolidation in radio making it harder for new acts to get exposure, licensing deals in other media are now of greater consequence. "Film and TV licensing should be more prominent in people's minds because it's growing in importance as a means of getting artists greater recognition," she says.

Alicen Catron Schneider, director of music supervision at NBC, agrees that licensing has become much more important. "Licensing was a step-child formerly, but the labels have noticed that their film and TV departments make money," Schneider says. "A commercial can bring in $500,000 to a million dollars for one song and the labels are saying, 'this is pretty cool.'"

"The label people are here constantly now," Schneider says, noting that Warner, Rhino and other record labels are right across the street from her office.

The licensing fees are not the only attraction, Schneider says. "It's because TV's audience is so vast. You can't beat having 15 or 20 million viewers. The record labels can't buy that kind of promotion."

The practice of putting hit songs in TV shows was epitomized if not pioneered by 'Miami Vice' in the 1980's. Nettwerk's Alonte is seeing a lot more hit songs on TV now than in the 'Miami Vice' era. There was a dip in the last couple of seasons because of reality shows but the licensing of hit songs has picked up again with the return of drama and fiction shows to this season's lineup, she says.

As part of the new emphasis on using TV to promote artists, the labels are elevating their film and TV departments in stature and giving them greater opportunity to break new artists, NBC's Schneider says. "There are a lot more people now at record labels pushing to get their artists on TV shows - both their music and as actors." She cites NBC's 'American Dreams' as an example with contemporary artists portraying the great artists of the 1960's. Kelly Clarkson played Brenda Lee in the season première. Alicia Keys, Third Eye Blind and Monica will also make appearances. "We give them a choice of who they want to play and the response has been great," Schneider says. "The labels are very interested in getting their artists on that show."

Fees. Promotion. Exposure. Can this be the same music industry that spearheaded the back-to-the-land counterculture in the 1960's? All you need is love? Maybe not. "In the past, the top artists didn't want their music used in TV and film, especially TV," NBC's Schneider says. "They were afraid that their fans would think that they had sold out. Now we're finding that those guys not only want their stuff used, but they're willing to write new material for us as well. Some have even become music supervisors for film themselves."

Nettwerk's Alonte sees the same big shift in attitude. With CD sales down, artists are searching for alternatives and trying things they would never consider before. Where some artists used to worry about selling out, "others are thinking that TV licensing is not such a bad thing," Alonte says. "Some still won't license to any commercial or TV show, period, but now for most artists, TV licensing is not getting construed as a negative."

The question arises, with CD sales taking a plunge, whether the music industry is trying to make up lost revenue on the backs of broadcast and cable by raising licensing fees. Perceptions differ.

Record labels are not trying to push up prices, Nettwerk's Alonte says. "No one will talk about a set fee structure but everyone knows what is fair," she says. Unless you have to have a platinum artist, ordinary fees are the order of the day. For emerging artists, Alonte will even accept a lower fee in exchange for a promotional spot at the end of the show. The WB network lists the artists and displays their album covers. "That way, viewers actually know what they heard and can go out and buy the CD in a store or the single on iTunes [Apple's online music store]." For Alonte, that kind of exposure is invaluable and justifies a lower licensing fee, but she notes that other labels might just want the cash.

NBC's Schneider has a different view. "I can't speak for the labels, but from the TV side I do see fees going up," she counters. "Every season, they nudge them up a little more. It's frustrating because my budget doesn't go up. I'm having to push back more, now."

"The high prices of songs are making it increasingly difficult to be able to include as many songs as we would like," Schneider says. She keeps trying, though, because "we're huge music fans who understand what a great song can add to a project," she says.

Some labels try to charge based on what they have gotten for an artist in the past, Schneider says. "This is neither realistic nor acceptable since budgets vary from project to project and, in some cases, the last person who licensed the song didn't understand how to negotiate or didn't know what the going rate was for such a use."

Schneider says she can't afford the prices quoted on syndication options. She spent last summer stripping music out of old shows and replacing it with baby bands, library selections, and original scores so the shows could be released on DVD. "It takes away from the integrity of the program," she says.

Licensing deals have thus far been à la carte, by the song. One may reasonably speculate, given the labels' increased interest in TV and film licensing, that deals establishing ongoing relationships are next. A label would make its artists and back catalog available to a network, perhaps on an exclusive basis, and receive a volume discount in return. One industry source who did not wish to be identified told The Financial Manager that some labels have been looking for such a deal in the last few months and that discussions are taking place.

Schneider says there are plenty of changes afoot in the music industry even without new types of licensing deals. "There's so much confusion now as to who owns what, who you go to, and who has what catalog," she says. "There've been so many acquisitions. I usually end up dealing with the same people, but now they work for somebody else." She also says that the major labels are consolidating the back-office functions of their subsidiary labels, contributing to the game of musical chairs.

In Search of the Lost Money

Ron Gertz, BCFM board member and CEO of Music Reports, Inc., believes that the music industry will have to lessen its dependence on the sale of products and devise new services in order to prosper in the future. Music Reports provides music licensing and royalty services to TV, radio, and webcasting clients.

Personalized music streams. Click-to-buy radio. A rush to film and TV licensing. Rock stars in commercials. Big-name artists writing film music to spec.

These might be among the first services being explored by a music industry struggling to reinvent itself, but they won't be the last. If the lost money is to be found, music industry executives will have to become just as creative as the stars that light their labels.
 

Part 1: Turmoil in the Music Industry

The information presented in this article in no way constitutes a recommendation to buy or sell securities.

© 2004 Christopher M. Wright
All Rights Reserved - This material may not be republished, rebroadcast, rewritten, redistributed, resold, or manipulated in any form.

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