The music scene is abuzz with talk of MySpace Music, an ad-supported joint venture between News Corporation and all four major labels that lets people listen to individual songs on demand and arrange them into playlists, for free.
One hot topic surrounding Thursday's launch, as we have suspected since April, is MySpace's refusal (or inability) to grant equity in the venture to independent record labels and unsigned bands who might want to add their music into this system, which sorely needs content from non-major labels if it is to become as comprehensive as its competition.
For insight into the negotiations surrounding indie label equity in MySpace Music, we asked The Orchard's CEO Greg Scholl why his consortium of independent labels joined MySpace Music without the sort of equity situation the major labels have, and that other independent music interests are demanding.
Wired.com: Why is The Orchard happy with its deal with MySpace despite it not including equity?
Greg Scholl, CEO, The Orchard: I would characterize our position as one of practicality and priorities, rather than some binary "happy" or "unhappy." First, we think because MySpace was able to get the majors to support an ad-based model that is actually economically viable, it represents an important opportunity – none too soon – finally to begin to cultivate this important revenue sector (which we believe is accretive to, and not cannibalistic to, places like iTunes, as we are convinced people go to social networking sites to buy things but instead, to interact, and if anything, it could lead to increased sales through wherever a customer buys their music today, be it iTunes or eMusic and the like). This is particularly true for independent music and the so-called "tail."
Second, MySpace is an important vehicle for artist promotion andaudience development, and in the near term, that is not going away. Soto a degree, we can either share in the revenue created from things ourclients are going to do anyway while we continue to work on the largerpartnership issues, or not.
Third, what is more important to us than so-called "equity," in thenear term, is using this launch as the opportunity to establish anaggressive, fair rate for our clients' share of ad revenue – which webelieve, similar to the way iTunes' pricing set the benchmark for the a la carte
market, will likely serve as the benchmark for the ad-based market.
MySpace Music and The Orchard are agreeing to continue discussion onthe equity issue, but not at the exclusion of our getting a deal inplace for the launch to enable us to negotiate a more aggressive ratefor our clients.
Fourth, "equity" is a red herring. What are the anti-dilutionprovisions associated with the stock? Where does the stock sit in thecap structure? And a thousand other questions. Having a minority"equity" position in a private company is, as anyone who has ever beeninvolved in venture investing knows, very difficult to value outside ofa lot of other complex factors – and, it's highly illiquid and likelyonly to have economic benefit pretty far into the future. For example,
if MySpace Music was to raise money, do labels appreciate that the"equity" being requested on their behalf will mean to maintain theirownership percentage (assuming they even have anti-dilution rights),
they will have to write a check and participate in the financing, butwith no idea about or control over when that equity will haveliquidity? And so forth.
So The Orchard’s focus with the MySpace executive team has been on aprofit sharing structure: focusing on at when the equity will havevalue (which, generally, would be in the event of a dividend, sale, orIPO), and at that point in time, committing to creating a pool of moneyto distribute to all independents, not just Orchard clients.
Finally, philosophically, we are not adherents to what might be calledthe "Bush/McCain" doctrine of foreign policy. Unless every otheravenue is exhausted, we don't agree that casting the people on theother side of the table in reductive, black and white terms and "goingto war" is as effective a means to an end as constructive engagementand education over time to the value we bring and the importance of ourconstituents. No that Chris DeWolfe is Ahmadinejad. It's just ananalogy.
Wired.com: What elements remain unsatisfactory about the MySpace licensing situation from The Orchard's point of view?
Scholl: Obviously, the service would be more valuable and morecompelling if those important independents that have held out were apart of it. In the meantime, we do believe it presents some uniquemarketing opportunities for Orchard clients, but we would prefer theindependent sector as a whole be a part, because we think we will allmake more money that way. This underpins the arguments we will continueto present to MySpace Music management [in the] hope that they andtheir major label partners might take a more enlightened view of thevalue of true economic alignment with the independent sector.
Wired.com: How long are people estimating it will take for MySpace Music to add The Orchard's catalog?
Scholl: We are in the queue and understand we're "next up."
Orchard clients will see their MySpace Music pages coming live over thenext weeks and probably months. We have 1.3 million songs: that is alot of music. And it's a brand new service that launched on anaggressive schedule, and is still settling the executive team and soforth. Everyone needs patience as we work as partners to smooth out thekinks and get the service running smoothly. We are impressed with theteam out there and their commitment to us and our clients and theindependent sector, equity or no, and if we weren't, we wouldn’t havedone this deal.
They are music people, they understand the value of independent music,
and the proof will be in the pudding – what kind of marketing supportdo we get, and how will MySpace Music generate revenue for our clientsand help our clients engage and build their audiences? Time will tell.
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