The World According To Rags

America: A Nation Of Entrepreneurs

I read Michael Malone's WSJ editorial about "The Next American Frontier" with interest.  He writes about the younger generation's rejection of traditional notions of job security and suitable jobs.  Instead, they are embracing entrepreneurship and also the idea of doing something socially meaningful.  Being on the cusp between Gen X & Gen Y, I can relate to both and his observations seem spot on.  The stats to back it up are particularly notable:

The most compelling statistic of all? Half of all new college graduates now believe that self-employment is more secure than a full-time job. Today, 80% of the colleges and universities in the U.S. now offer courses on entrepreneurship; 60% of Gen Y business owners consider themselves to be serial entrepreneurs, according to Inc. magazine. Tellingly, 18 to 24-year-olds are starting companies at a faster rate than 35 to 44-year-olds. And 70% of today's high schoolers intend to start their own companies, according to a Gallup poll.

Those are startling and encouraging numbers and would bode well for America's future. 

It also reminds me of India, another nation of entrepreneurs as descrbed by Nandan Nilekani in Imagining India, my current read, which I'm greatly enjoying.  But India has a lot of work to do from a policy/reform perspective to further enable its citizens to unleash their entrepreneurial instincts.

MTV Opens Up Rock Band

MTV'S Harmonix recently announced a new program for labels and bands to be able to upload tracks for addition to its popular Rock Band game and get paid for downloads.  This is a brilliant move.  They have clearly found it hard to scale in terms of adding tracks to their store, and so, instead of hiring more developers, they've essentially created an API so that developers can work with labels to submit tracks that would work for the game for inclusion into their store.  Quality control will be a key concern but they are running this as a separate store and each submission will be peer-reviewed as well.  Execution will clearly define the success of the program but, on paper, it makes a lot of sense.   

New Webcasting Rates (Continued)

The recently published webcasting royalty deal also had some dissenting voices such as Michael Robertson who titled his post "Sadly, Pandora Is Still Going Bankrupt".  Same goes for my former colleagues at Live365, who took me to task for commenting favorably on the rates (being accused of "going corporate" was probably the one that stung the most!).  But we had some good, constructive debate, which I'm going to resurface here:

• I went over my math again and it seems that COGS (soundex + bandwidth) comes closer to $15 - $16 per thousand streamed hours. Songwriting royalties would likely add 5% of revenues to the mix, which, at any rate, makes for a much healthier gross margin.  
• The economics and gross margins of a business typically reflect the value being created by the business and how commoditized it is or not.  So Wal-Mart & grocery stores are low-margin/high-volume businesses whereas services like legal or accounting are the opposite.  High-margin/high-volume businesses are rare but spectacular when they happen - think Google, Apple, MSFT, but typically it's their intellectual property that let them succeed.  I'm not convinced that internet radio should, on its own, be entitled to a high gross margin - essentially it is a distributor of commodity products, in this case the music. 

• At the end of the day, the fundamental question is how much is the content, the intellectual property, worth, and how much should a distributor pay for it.  For on-demand distribution, content owners tend to get 50-75% of revenues, sometimes less, sometimes more depending on the content.  Through this lens, 15-25% for non-on-demand distribution seems about right in terms of compensating the content owner.  Of course, satellite & terrestrial should pay these same rates.  To this my colleagues responded that 8% had been an established rate for satellite & cable music and also to view the historical rates that radio has paid in other parts of the world.  It's a fair point.
• I have become more sympathetic to content owners on the question of risk sharing.  The question the content owner asks herself is why she should be subsidizing companies that can't or won't monetize her content to the fullest extent, or even to an extent that lets them pay market rates for her product.  Instead, many of these licensees purposely don't fully monetize so as to build up an audience and then sell to a larger company, which is a fine strategy btw if you are an entrepreneur.  That said, I have publicly and privately railed against the licensing rigidity that the labels have had, which has effectively resulted in a high, regressive 'tax' that encourages tax avoidance.     

The certainty of new deal has already yielded benefits - apparently, Pandora just raiseda monster new round (maybe they're not going bankrupt after all, Michael). I'm not sure of the timing of it, but I would assume the investors knew about the deal even if it had been done prior to the new rates being announced.   

Finally, it's worth noting who negotiated the deal and that the deal wasn't meant to encompass every profile of webcaster.  There should be a separate deal for aggregators such as Live365, and, more broadly, there needs to be copyright reform to have the same rate-setting standards and thus parity across distribution mediums, including terrestrial radio.

ELEW & Band Rock Bush Hall

Eric Lewis or "ELEW" as he goes by is a master pianist with a jazz and classical background.  He and his band played two sets at Bush Hall last night and, well, they blew me away [hat top to Oren Michels for the heads-up].  I've never been to a gig quite like this.  All instrumental, ELEW and company re-interpret modern pop and rock tunes with their own virtuosic spin to it.  This is no soft jazz cover band doing banal renditions of standards.  They had an energy and virtuosity that rocked the hall.  He calls  it rockjazz.  I think my fave was their rendition of The Knife's Heartbeats. 

And woe betide the piano that draws ELEW for an assignment. As Paul Carr of the Guardian puts it: "You see, Lewis doesn't just play the piano.  Rather he owns - pwns - it.  Reaching inside the lid, he pulls and pounds at the strings, creating a magic eye pictures of sound - walls of noise that suddenly snap into focus...." all while contorting his face as if he's possessed.  It's no wonder that he's scoring horror movies. 

Neither words nor pictures can describe ELEW's performance.  Video comes closest though even that is a poor substtitute.  If you get the chance, see him live.  You won't regret it.

Affordable Webcasting Rates, Finally

A group of Webcasters and SoundExchange just announced an agreement for webcasting royalty rates through 2015 and retroactive to 2006.  These rates are much more favorable than the ones handed down by the Copyright Royalty Board (CRB) for a few reasons:

• There is now a percentage-of-revenue option for large webcasters.  There had been a percentage of revenue option for small webcasters but this went away after one grew past a certain threshold, resulting in weird (read unaffordable) scale economies.  Some may think that 25% of revenues is too high but it seems consistent along the spectrum ranging from the most control to the least: ecommerce downloads (~ 65-70%) and on-demand streaming (~ 50%).
• There is a percentage of expenses rate but this goes away once a webcaster gets past a certain size.  This will actually encourage webcasters to bootstrap early on, which may be a healthy thing to do anyway.
• The per-performance rates are nearly 50% of the CRB rates.  The rate for 2009 is $0.00093 or 9.3 hundredths of a cent.  For easy math, let's assume that there are 14 songs played in an hour, the royalty cost is 1.3 cents.  Multiplied by 1000, it comes to about $13 cost per thousand streamed hours.  Add in songwriter royalties and bandwidth, and let's call the cost, say $20 per thousand hours.  Seems like a lot but, if you can serve 4 audio ads and maybe 1 visual ad during that hour at an average effective CPM of $5, you get $25 revenue per thousand hours or a gross margin of 20%.  Not great but at least there is line of sight to creating a viable business. 
• This ought to be heartening for businesses looking for funding.  Until now there had been uncertainty concerning the royalty rates and, as most people know, investors *hate* uncertainty for such a material input in any business they are considering investing in.  

Congrats to the webcasters and their lawyers as well as to SoundExchange and its board for arriving at what seems to be a deal everyone can live with.