berklee college of music music business journal business journal volume 7, issue 4 march 2012...

Music Business JournalVolume 7, Issue 4 www.thembj.org March 2012

Berklee College of Music

Inside This Issue

Mission Statement

The Music Business Journal, published at Berklee College of Music, is a student publication that serves as a forum for intel-lectual discussion and research into the var-ious aspects of the music business. The goal is to inform and educate aspiring music pro-fessionals, connect them with the industry, and raise the academic level and interest in-side and outside the Berklee Community.

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In July of last year, the Coca-Cola Company formalized a partnership with full service licensing company Music Dealers. The deal narrows the gap between artists and brands. It also opens up a new avenue for unsigned and emerging talent to break onto the global music stage.

Music Dealers

Music Dealers was founded in 2008 to help new talented artists worldwide gain equal access to professional opportunities in film, brands, TV, video games, and other me-dia outlets that require a license for the use of music. Music Dealers now controls one of the largest pre-cleared catalogs of emerging artists from around the world. In the first half of 2011, for instance, it completed over 600 licensing agreements in 24 countries and placed 1,500 songs from its catalogue in every major market.

Music Dealers has made licensing quick and convenient by going directly to art-ists who own their music—as well as engaging talent as work-for-hire. Eric Sheinkop, its CEO and Co-Founder, has nevertheless long wished to do more than trade in syncs and simplify the business. He is known for connecting artists and clients through brand partnerships, event pro-motions, and for creating a special proprietary platform subscribed by hundreds of bands and producers from around the world that wish to engage brands. In fact, Music Dealers appears to have streamlined both the back-end place-ment of music in brands and the front-end: its songs are also delivered ready for web, mobile, or other media applications.

A brand, of course, may not be look-ing for the next superstar or care much about building a valuable music catalog—these are concerns for record labels and publishers. In-stead, Music Dealers becomes the go-between that spots up-and-coming talent to serve the specific needs and modus operandi of consumer brands. However, Music Dealers is not replac-ing the traditional music business; its practice, rather, is based on an inherent market advan-tage. Newer and unsigned artists want exposure and seem to welcome any means to achieve that end, so a licensing or work-for-hire agreement with Music Dealers is, from their perspective, entirely justified.

Coca-Cola

At first sight, it may seem odd that Coca-Cola would consider an equity stake in a music licensing start-up. The beverage company, however, is hardly a novice when it comes to using music. In fact, it has a long history of leveraging the power of popular tunes as a way to engage its consumers. Back in the 1960’s Coca-Cola commissioned Ray Charles to write and perform all of its radio spots. The company’s best-known contribu-tion to pop music may be the 1971 song “I’d Like To Teach The World To Sing (In Perfect Harmony)”. The song was originally used as a jingle first, before it was reworded and became a pop hit. Coca-Cola used the Elvis Presley song “A Little Less Conversation” in one of its Japanese commercials. Other artists such as The Beatles, David Bowie, George Michael, Elton John, and Whitney Houston, who appeared in a Diet Coca-Cola commer-cial, have promoted the company throughout the years. More recently, Coca-Cola’s in-volvement in music has included sponsorship of the talent show “American Idol”.

Business of PodcastsPage 4

The Global Repertoire DatabasePage 5

Facebook’s Stock & MusicPage 6

Kim Dotcom0

Researching the GrammysPage 13

Music’s Fizzy LogicBy Aaron Gottlieb and Zosia Boczanowski

Table of Contents

Business Articles

Coca-Cola Backs Music Startup.............1Music Podcasts.......................................4Data Reduction.......................................5Money in Friendships.............................62011: A Brief.........................................12The Academy Awards...........................13

Law Section

Sound and Fury Online..........................7A Rogue Business Model.....................10Grooveshark..........................................11ReDigi...................................................11

InterviewChris Woods, TuneSat.............................8

MBJ Editorial

Mission Statement...................................1Editor’s Note...........................................2Upcoming Topics...................................16

Sponsorship

Berklee Media....................................... 15

Editor’s Note

Volume 7, Issue 4 Music Business Journal

Content owners today depend less on recorded music sales than ever. For them, licensing music for outside use, whether to traditional or emerging outlets, is becoming the lifeline of choice. In this edition of the MBJ we cover the topic in many contexts. We lead with a story that has flown under the radar. Coca-Cola, a top consumer brand, recently purchased an equity stake in the music licensing company Music Dealers, an independent music provider. The size of the investment and the strategic decision that Coca-Cola made to control its music in-house both suggest that the commoditization of music for branding is becoming urgent and that it needs to be simplified.

Other articles offer advice for content owners exploring new markets. William Minion’s discuss-es the untapped potential of podcasts. According to Luiz Augusto Buff, Facebook’s gaming platforms will lead to growth in the licensing of music and more exposure for artists, especially after the com-pany becomes cash rich with its upcoming IPO. Peter Alhadeff writes about the Global Repertoire Database, a European initiative to create an international registry of musical works that could in time make licensing much more efficient (this is our second piece in our series Toward Global Rights). Lastly, I had the pleasure of interviewing the co-founder of TuneSat, Chris Woods. Tune Sat tracks the usage of licensed works globally in both TV and Internet, and ensures that rights’ holders are properly compensated.

The legal hurdle remains high for new music businesses because the intellectual property rights for music are fractured and often unattainable. Ben Scudder reflects on the recent backlash by tech companies over PIPA and SOPA. Melanie Stevenson provides an update on the case against Groove-shark, and helps clarify its legal status. Emilie Bogrand discusses the shutdown of Mega Upload and the arrest of its colorful founder, Kim Dotcom. Finally, Mariana Migliore sheds light on the looming conflict between the majors and the online “used record” store ReDigi.

We thought we would end with two pieces that focus just on the music. The first takes a retrospec-tive look at 2011, and its author is Haven Belke. The second, a research paper written by Babson Col-lege professors Erick Noyes, Elaine Allen, and Salvatore Parise, studies the role of artistic mentorship in generating Grammy winners.

From all of us at the MBJ, we hope you enjoy this issue.

Aaron Gottlieb, Editor-in-Chief

Contributors Editor’s Note.................................................................................................................................................................. Aaron Gottlieb Business Articles................................................................................Peter Alhadeff, Elaine Allen, Haven Belke, Zosia Boczanowski Business Articles................................................Luiz Augusto Buff, Aaron Gottlieb, William Minion, Erick Noyes, Salvatore Parise Law Section............................................................................. Emilie Bogrand, Mariana Migliore, Ben Scudder, Melanie Stevenson Interview......................................................................................................................................................................... Aaron Gottlieb Staff............................................................................Aaron Bolli-Thompson, Megan Dervin-Ackerman, Megan Graney, Mical Klip

2 www.thembj.org March 2012

Management Editor-in-Chief................................................................................................................................................................Aaron Gottlieb Content Editor.........................................................................................................................................................Zosia Boczanowski Webmaster...........................................................................................................Itay Shahar Rahat, Ed Da Hyun Jeong, Haven Belke Faculty Advisor and Finance.....................................................................................................................................Dr. Peter Alhadeff Layout Editor..................................................................................................................................................................Lau Meng Wai

March 2012 www.thembj.org 3

Business Articles


Coca-Cola Music program. Music Dealers prepared a brief for Coca-Cola at short notice and immediately proceeded to crowd-source, from all over the world, twenty-two demos. It delivered them within a couple of days. Then, working together, Coke and Music Dealers se-lected and perfected “Can You Feel It” as the song that would be performed by British band “One Night Only” for the global ad campaign created for the “Coca-Cola Music” program.

The ad has since aired in 60 coun-tries, including a high profile airing during American Idol in the US. “You Say France & I Whistle,” the band that wrote the song, used the opportunity to start a new record label, book tours in Europe, and hire a PR firm. They have earned tons of media expo-sure in Sweden and internationally and have increased their bookings and revenue. They continue to receive writer royalties whenever the commercial runs.

Wesslander credits much of the band’s success to the deal between Coca-Co-la and Music Dealers. They knew they had good songs and used the Internet as a platform to get their music out there with MySpace, which was popular at the time, as well as play-ing live shows locally in Stockholm. They discovered Music Dealers, registered online, uploaded their music, and expected very little. The immediate response from Music Dealers was positive. Soon afterwards Music Dealers started providing the band with opportunities. ‘You Say France and I Whistle’ has had sever-al other songs placed in commercials of other

In 2010, the beverage giant an-nounced its “2020 Vision” aiming to target more than 3 billion servings per day and double revenue to $200 billion. For this, the company has to attract the teenage demo-graphic concentrated, for the most part, in the emerging markets. “Every six years there is a new population of teens in the world,” says Coca-Cola’s SVP, Shay Drohan, and the company is moving forward with its largest teen-targeted campaign ever.

China, India, Indonesia, Nigeria, Pakistan, and the U.S. will contain half of the teen population by 2020, and that is where Coca-Cola wants to be (as well as ninety other growing markets). Emmanuel Seuge, number 16 on Billboard’s “Power 100” list and head of Global Sports and Entertainment Marketing for Coca-Cola, says that music is a part of everyday life and acts as an amazing vehicle for the brand to connect emotionally. “As the world of communication becomes so cluttered,” he adds, “relevancy is key: it’s about the right message at the right time and music allows us to do that.”

Leveraging and using music to am-plify Coca-Cola’s biggest sale platforms, i.e the FIFA World Cup and the Olympics, al-lows the beverage company to connect well with younger consumers. Most recently, and in the same vein, Maroon 5 did a 24-hour stu-dio session for Coca-Cola in which the band worked on a song from scratch on the theme of ‘happiness’.

Clearly, today music can be pa-tronized in many ways. Coca-Cola invested about $200 million in Music Dealers, likely the largest ever example of a consumer brand buying into a music service company. If Mu-sic Dealers had been a new startup, it would have raised twenty times less with venture financing than it got from Coca-Cola. Music Dealers did very well. But to keep its cam-paign moving, Coca Cola needed to acquire music legally, more efficiently, and interna-tionally. Partnering exclusively with Music Dealers gave them that ability. Case Study

Eric Sheinkop, Emmanuel Seuge, and Peter Wesslander, the latter the drummer for the Swedish band ‘You Say France and I Whistle’, recently sat down at MIDEM 2012 to discuss their experience working together. A year earlier, Coca-Cola was looking for a song with strong teen appeal for its global

companies such as Gap, Orbit/Wrigley,zand McDonalds.

Conclusion

The agreement between the two companies includes a commitment on Coca-Cola’s part to only use the services of Music Dealers when finding music to license from trending artists. In return, Coca-Cola now holds a minority stake in the Chicago-based company. Most significantly, the deal high-lights a new model of sourcing and licens-ing music for globally branded advertising campaigns. Coca-Cola now benefits from Music Dealers’ industry knowledge and ac-cess, while Music Dealers and their network of artists will continue to benefit from the scale and marketing abilities of the Coca-Cola Company. Coca-Cola oversees 500 brands (fifteen of which are worth more than $1 billion) and currently runs advertisements and distributes to over 200 countries world-wide. “Our values are perfectly aligned…we aim to promote independent artists and share their music with fans around the world,” said Music Dealers’ Sheinkop in the press release on the deal. “Coca-Cola is a great partner who offers solid support to our artists. When artists record a track for Coke, they (Coca-Cola) put significant marketing leverage be-hind it. The song gets more exposure world-wide than even big artists get from a record label. This arrangement has literally helped artists launch their careers.”

Music’s Fizzy Logic (cont.)(From Page 1)


Business Articles


Podcasts: The Cinderella TradeBy William Minion

B l o g w o r l d ’ s annual New Me-dia Expo, billed as “The First and Only Industry-wide Conference, Tradeshow and Media Event for All New Media”, is comprised of blog-gers, tech heads, broadcasters and

new media content creators who seek to fos-ter and expand upon new models of informa-tion exchange and dissemination.i The expo’s attendees run the gamut from monstrous me-dia conglomerates like AOL-Time Warner, Google, and NBC to bludgeoning basement operations such as Causecast, an up and com-ing company dedicated to the empowerment of non-profit organizations through internet media. One such attendee, Edison Research, a media think tank, used the expo as a forum to showcase its latest study, “The State of Podcasting.”ii

A podcast, for those unfamiliar with the term, refers to digital content, whether audio or video, that can be downloaded and permanently stored on a media player or com-puter. This definition sounds identical to that of any old mp3 or video file. Podcasts differ in their function, not their form. Podcasts act as radio on-demand. Users must subscribe to a podcast series via an RSS feed. After doing so, new podcasts from that series will be automat-ically downloaded onto their computer. One then either listens to it on the spot or transfers it to a portable device to carry.

Furthermore, virtually anyone can create a podcast with minimal capital or equipment. Thus, the world of podcasting can range anywhere from “this week’s hottest dance tracks” to “Joe Smith’s favorite Elton John bootleg recordings from the 80s.” In es-sence, a podcast creates a radio production that can be time shifted,. The product, how-ever, has only a niche market. Nevertheless, podcasting has seen considerable growth over the past decade.

A Valuable Market

In recent years, several media re-search groups conducted studies on the con-sumption of podcasts. eMarketer and the aforementioned Edison Research group co-

ordinated two of the most prominent studies. According to Edison’s research, the number of Americans who simply recognize the term podcast reached 45 percent in 2010.iii Further-more, by 2010, 23 percent, or roughly one in five Americans, indicated that they had lis-tened to at least one audio podcast in the past year.iv Edison considers a media outlet to be mainstream once consumer usage has reached 25 percent.v When this study was published in 2010 podcast consumption was not quite mainstream and although their comprehen-sive study for podcast usage is not completely up to date, other digital research groups have made projections. eMarketer, a company that conducts studies on digital marketing and In-ternet market trends, determined that by 2013 37.6 million American Internet users will be regular podcast subscribers.vi

The data is conclusive; podcast consumption is steadily increasing and will continue to do so. What’s strange is that re-cord labels, especially the big four, have been slow to exploit the podcast market. A quick glance through the biggest podcast database in the world, the iTunes store, illustrates just how absent record labels are from the world of podcasting. What’s even more intriguing is that the majors continue to ignore the podcast-ing success of smaller more niche-oriented labels. The use of podcasts is mainly found today among labels of electronic dance mu-sic. Record labels such as Anjunabeats, run by the trance trio Above and Beyond, or Ar-mada Music, run by Armin Van Buuren, both attract record-breaking audiences with their podcasts. In fact, Above and Beyond’s pod-cast, Trance Around the World, draws nearly 30 million listeners worldwide every week.vii

A Promise Unfulfilled

Additionally, the podcast audience is itself an asset. One of Edison Research’s most valuable statistical findings established that podcast consumers are also three times more likely to be content creators themselves. viii In other words, podcast listeners are also blog-gers, tweeters, Facebook community mem-bers and all around savvy social networkers. If they enjoy the content they hear on a podcast, chances are they will spread the word.

One can only speculate as to why the mainstream, already established labels don’t join in on the podcasting revolution. It can’t be because they see no monetary value

in producing their own podcasts. Aside from the potential buzz they would create by play-ing unreleased music, podcast advertising revenue increased a whopping 31 percent in the second quarter of 2010 alone.ix Similar-ly, a separate study conducted by eMarketer found that 74 percent of new media users had a more positive impression of the company from which they were able to access new me-dia content.x Therefore, a record label that ac-tively podcasts would serve to better position itself in the eyes of its customers as opposed to a record label that does not.

The statistical evidence previously discussed should turn the heads of any record company in need of more progressive market-ing strategies. Yet, as usual, the major players remain, by and large, aloof. But podcasts can still hold up in a cluttered digital world, as demonstrated in the electronic dance market. New media developers will be taking notice. It is about time that the music business did so too.

Sources

i) BlogWorld & New Media Expo 2012 - NEW YORK — Learn How to Blog, Podcast and Use Social Media Better at World’s Largest New Media & Social Media Conference, Tradeshow & Media Event. Web. 12 Feb. 2012. <http://www.blogworldexpo.com/2012-nyc/>.ii) Webster, Tom. “The Current State Of Podcasting 2010 « Edison Research.” Edison Research. 9 Dec. 2010. Web. 11 Feb. 2012. <http://www.edisonresearch.com/home/ar-chives/2010/12/the_current_state_of_podcasting_2010.php>.iii) Ibid.iv) Webster, Tom. “The Current State of Podcasting.” Lec-ture. BlogWorld Expo. Las Vegas.Vimeo. 17 Nov. 2010. Web. 12 Feb. 2012. <http://vimeo.com/16936611>.v) Ibid.vi) “Podcasting Goes Mainstream - EMarketer.” Market Re-search & Statistics: Internet Marketing, Advertising & De-mographics - EMarketer. 9 Mar. 2009. Web. 11 Feb. 2012. <http://www.emarketer.com/Article.aspx?id=1006937>.vii) “To Infinity and Beyond.” DJ Mag. Web. 11 Feb. 2012. <http://www.djmag.com/news/detail/2698>.viii) Webster, Tom. “The Current State of Podcasting.” Lec-ture.ix) Lewin, James. “Podcasters See 31% Ad Revenue In-crease » Podcasting News.”Podcasting News » Features the Latest Podcast News, along with Reviews, Hardware and Software Info, and a Podcast Directory. 12 July 2010. Web. 11 Feb. 2012.<http://www.podcastingnews.com/content/2010/07/podcast-ers-see-31-ad-revenue-increase/>.x) “74% of Users Have Positive Impression of Companies Who Use New Media « Jobs in Pods Blog.” Jobs in Pods Blog. EMarketer, 30 Oct. 2009. Web. 11 Feb. 2012. <http://jobsinpods.wordpress.com/2009/10/30/74-of-users-have-positive-impression-of-companies-who-use-new-media/>.


Business Articles


Waiting for GRDBy Peter Alhadeff

This is the second in a series of ar-ticles tracking ongoing efforts worldwide to develop a single registry of songs. In our De-cember cover piece, Toward Global Rights, we suggested that there is growing recogni-tion that music trades with friction. Even if a music provider has the will and patience to negotiate the complicated maze of permits re-quired for using and selling a musical work, often clearances cannot be guaranteed for lack of unified information about ownership. Data duplication, and the resulting errors, creates inefficiencies as well that adversely affect publishers and the creative community.

We detailed some attempts to solve this problem on a global scale, and detailed movement in WIPO’s International Music Registry (IMR). IMR’s scoping report is due next month and we shall comment on it in due course. A parallel initiative, supported by the European Commission, is the Global Reper-toire Database (GRD). (Although IMR and GRD representatives tend to describe both projects as being mutually reinforcing, so far they appear to be independently run and either could succeed first.)

A couple of weeks ago, at MIDEM 2012 in Cannes, France, GRD’s presence was stronger than IMR’s. GRD produced a well-attended panel in association with ICMP, the International Confederation of Music Publish-ers. Present too, and supporting GRD, was CISAC, the umbrella organization represent-ing global authors’ performance rights. Like IMR, GRD will release its own scoping study shortly.

A Value Proposition

The economic case for the GRD rests on the value of international publishing revenues, which are about $8 billion annually. One-tenth of that goes into maintaining the infrastructure for collections, but rights hold-ers and licensees incur considerable additional expenses in processing royalties in the areas of database management, royalty distribution, and dispute resolution. The GRD believes that a one-time investment in a global database of $16-32 million is a small amount to pay compared to the $800 billion routinely spent on collections today. It argues, additionally, that the production of authoritative data about musical works would ensure transparent rights clearance processes—both locally and world-wide—and therefore drive more business to

every stakeholder in the music supply chain (“GRD Working Group Recommendations”, Dec. 2010, 6 & 14).

WIPO’s IMR would likely use these arguments verbatim. But in order to fund its own project, it would probably need the support of a critical mass of countries in the United Nations, on which WIPO is financially dependent. Not so the GRD group, which is proposing a more Euro-centric startup to be-gin with. Therefore, the chances are good that GRD can move ahead with funding sooner, either by tapping its stakeholders or by relying on commercial financing.

Grass-Roots Work Needed

The politics, though, are complex. This is frontier work that encompasses practi-cally anyone that records, performs, or deliv-ers music anywhere. Rights holders, including songwriters, publishers, record companies, and performers have the highest stakes. So do national author societies because the col-lection of global performance and mechanical rights rests on their shoulders (the same can be said of the producer and performance so-cieties, mostly European, that collect perfor-mance rights). Moreover, if a registry gets off the ground, a single repository point would greatly simplify the identification of rights for music downloads, video streams, and other broadcasted material so music service providers have an incentive to join the talks. Finally, the sheer variety of interests at stake touches on supranational organizations like the European Union, intent on harmonizing copyright law and trading practices in Britain and the Continent, and the World Intellectual Property Organization, historically a pioneer in the field international patent and copyright management in both emerging and rich econo-mies.

B2B database builders and data management consultants are expected to reach out to all of the parties above. GRD formed its first working group in 2009 with representatives from (i) EMI Publishing and Universal Publishing; (ii) collection societies PRS for Music (Britain), SACEM (France), and STIM (Sweden); (iii) music service pro-viders iTunes, Google, and Omnifone; and (iv) multinational member associations CI-SAC, ICMP, and ECSA (European Com-poser & Songwriter Alliance). Its first order of business was to invite bidders to propose

a technological solution. The winner was International Copyright Enterprises (ICE), a company wholly owned and funded by, respectively, British and Swedish societies PRS and STIM. Another British accounting firm, Deloitte, was put in charge of oversee-ing the project and producing the scoping report. In fact, French and German partici-pation in GRD is so far somewhat diluted (although Monsieur Michel Allain, Director of Organization and Information Systems at SACEM did sit with the GRD panel at MI-DEM).

Another issue is the agreement over works’ registration and data process-ing among publishers. Although a global database might make it easier, say, to hear Slovakian music in New Zealand (because the Slovakian rights could be promptly found, identified and, likely, traded), pub-lishers in Slovakia would have to agree to register their works in a centrally traded repository over which they may feel they have less control than they enjoyed under the local collecting body. Fear of the new can be very real, and there will be no prec-edent to allay suspicion about a scheme that could be perceived as Orwellian and in the hand of the big publishers.

Getting the Ball Rolling

It is clear that the GRD project, like its IMR counterpart, is ambitious and that it will have to rely on lengthy nego-tiations and compromises across the board. This will take time, a luxury the GRD may not have. Sami Valkonen, head of inter-national music licensing for Android at Google, which supports GRD’s efforts, sounded a warning alarm at MIDEM 2012. If the scoping report is delayed, he said, the whole venture might stall. There is no indication that this will happen, but action needs to follow soon as proceedings started in 2008 and there is yet no formal document mapping the way forward.

Business Articles



Facebook’s IPO and the Music Industry

Less than ten years ago, Harvard stu-dent Mark Zuckerberg developed Facebook. Since then, many books, an Oscar winning movie, and, of course, the Internet have cov-ered its remarkable story. A new turning point was announced at the beginning of February, when Facebook declared its intention to cease being a private company by filing papers for a public offering with the Securities and Ex-change Commission (SEC).

Facebook’s IPO, i.e, its initial public offering, is expected to raise $5 billion or more. Diagnostic company data, released for the first time, indicates gross revenues of $3.7 billion in 2011, with net profits of $1billion. This mar-gin of about one-to-three is impressive. Close to nine-tenths of all receipts are in advertising; third-party companies using its social platform make up the remainder with commissions on sales of products and services.

The company’s trade value is esti-mated at $75 to $100 billion, and the projec-tion is much, much, higher than the average multiple of twelve times net profits (Facebook would exceed the average by a factor of seven or more). Behind these bullish perceptions lie the rapid spread of Internet connectivity and the growth of mobile phone usage, especially in emerging countries.

Facebook reported that it has 845 million users and adds 451 every minute. It expects to reach the one billion mark in Au-gust, after its first public offering. That means that one in every seven people in the world will be connected via the website. More than four-fifths of the Americans connected to the Internet are also users of the website, and last year slightly more than half of the advertising revenue was generated just in the US. After the stock flotation, the company is said to have plans to expand globally creating more possi-bilities to grow ad revenue in prominent mar-kets such as India and Brazil. Another big chal-lenge for Facebook is to penetrate the Chinese market, where the website is currently blocked by the government.

Mr. Zuckerberg will still control most of the voting rights at Facebook. How-ever, his decisions are now accountable to stockholders, whose concerns are more finan-cial. Because of this, Mr. Zuckerberg decided to write directly to potential investors and ex-plain clearly his social mission and vision. He wrote that Facebook was created “to make the

world more open and connected.” Zuckerberg acknowledged the necessity of profits, but, he added, “we don’t build services to make mon-ey; we make money to build better services.”

Facebook’s API

By encouraging and providing the tools for people to share anything from week-end pictures to articles recently read, Facebook has changed user behavior on the Internet. Ev-ery user, for instance, acquires an identity that other people and companies can interact with. In many cases, Facebook has removed the bar-rier between music artists and their fans by connecting them directly through the platform. It has also created a powerful recommendation tool, allowing users to share what they like so that others can appreciate, and engage, their artist of choice.

For example, the Facebook Appli-cation Programming Interface (API) allows other websites to communicate with Facebook and use its tools. It allows for a more person-alized social experience, for instance, by em-bedding its ubiquitous Like button. Moreover, Facebook’s sign-in process eases sites’ regis-trations. Even MySpace, once a pre-eminent music network, is trying to reemerge as a so-phisticated recommendation engine and music discovery tool that runs through Facebook.

Facebook’s presence is felt too as consumers trend towards streaming services. The freemium model allows listeners to access a vast catalog of songs and play them either for free, with some advertisements, or for a monthly fee that allows access to some ben-efits. Spotify, Rhapsody, MOG, and RDio are the main services here and all of them are us-ing the Facebook API to permit access for us-ers, connect them to their friends, and observe their listening habits. Without Facebook, the impact and reach of these services would prob-ably be much diminished.

Music Marketing and Zynga

In fact, a new generation of artist managers is now taking advantage of Facebook in order to break new artists. Berklee Alumnus Nils Gums is the businessman behind Internet sensation Karmin, with Amy Heidemann and Nick Noonan (both are also from Berklee). After producing more than thirty music videos for their channel on YouTube, the duo hit it big with 54 million views on a cover of Grammy

winner Chris Brown’s “Look At Me Now.” The exponential force of Facebook’s Like and Share buttons was apparent. Karmin has since signed a deal with Epic Records and appeared on NBC’s Saturday Night Live. For that mat-ter, marketing tools like Reverb Nation, Top-spin, and BandCamp are based on the concept of the artist communicating directly with fans. That generally means going through Face-book.

A niche market that often falls be-low the radar of the music industry is gaming. Yet Zynga, the company behind FarmVille, CityVille and many other social games that run through the Facebook API, accounts for 12% of the entire Facebook revenue. Compos-ers and music publishers should take notice. Last year Zynga developed a special avatar for Enrique Iglesias to showcase exclusive music in their games, while Lady Gaga’s Born This Way single was first released exclusively for players of FarmVille. Games, in short, are be-coming an important platform for music dis-covery and artist promotion.

A New Standard

The biggest challenge for Facebook will be to meet investors’ expectations. More sources of revenue will be likely needed. Facebook could invest its surplus IPO cash in startup companies that advance Facebook’s platform—like Google has done with Google Ventures. The benefit to the startup is not just the money tendered but the mentoring op-portunity that founding entrepreneurs receive from Facebook. On the other hand, even a small pick of winners could bring Facebook untold market power gains. In the meantime, there might be added value from a more expert management of advertising data. It is likely that Facebook will enter the advertising market seeking an important new acquisition.

The future of Facebook looks prom-ising, and so do the benefits that the music in-dustry might reap indirectly from a successful IPO. However it is extremely important for Facebook to be aware of the risks of loosing its users – their most important asset. Since Facebook’s business model is based on min-ing data, issues surrounding privacy may rise as the company becomes more aggressive and pays more attention to its bottom line.

By Luiz Augusto Buff


Law Section


SOPA, PIPA, and Music

Recent debates over a pair of pro-posed Hollywood backed antipiracy bills have highlighted the public’s concern in allowing government control over major parts of the web. Many experts believe as well that the pro-posed laws would create unnecessary compli-cations.

The House bill is SOPA, the “Stop Online Piracy Act”, and the Senate bill is PIPA, the “Protect IP Act”. The fear is that the bills would effectively establish a censorship regime and set a bad precedent, stifling inno-vation and investment on the Internet. Public outrage resulted in an “Internet Blackout Day” on January 18, the largest online protest ever recorded. Though the bills have been shelved for being too broadly written, their concerns were legitimate and the debate is still brewing.

The Trade Organizations

Both bills affect musicians directly, so there has been much debate about them. Those in support of SOPA and PIPA include many major media companies that are com-mitted to the creation of copyrighted content, including the RIAA, MPAA, major music pub-lishers, NBC, and Viacom to name a few. San-dra Aistars, Executive Director of the Copy-right Alliance, spoke in a recent interview of her support for the bills. She says, “I represent thousands of artists across the United States who depend on the Internet to network, market, fund raise, connect with fans, to distribute their work, and basically to make a living. Their ability to do so is being compromised by rogue websites offshore distributing counterfeit goods and copyrighted goods for a profit with

no return to the creators.”

Aistars’ s view is also a grass-root position. A2IM, a trade organiza-tion of indepen-dent musicians and labels run by Rich Bengloff, is also in support SOPA and PIPA: “Our members are small and medium sized in-dependent busi-nesses that invest in the creation of music and whose

very existence is being threatened by the avail-ability of illegal content online.” It might sur-prise to hear that there is an alignment between musicians and their trade organizations with some of the major media companies. But small companies that deal with indie talent have just as much to lose as the majors. They too need all the revenue they can to get from delivering intellectual property to consumers.

The Technology Companies

While the concern for piracy is legit-imate, the flip side of the coin is the question of whether or not regulating piracy should be in the hands of the government. The feeling is that the bills seem to be aimed at an honor-able cause, but have underlying implications that could be ominous. Among the critics is co-founder of Wikipedia, Jimmy Wales. “The bills”, he says, “are very clearly about censor-ship; the Senate version of the bill has provi-sions to implement DNS blocking of oversees websites, and provisions to prevent someone like Google from linking to sites like the Pirate Bay-…[it] is outrageous and just not accept-able under the First Amendment.”

The divide between technology companies and entertainment companies is growing. SOPA supporters see technology companies as enablers of piracy. But under the current drafts of the bills, the government would have the ability to shut down a site for suspicion of copyright without a trial, hearing, or any other constraint. This instills fear into businesses with online investments, including venture capitalists. The arm of the law would

void search engine results, stop the delivery of ads, and intrude on payment services for sites under investigation.

General Business Considerations

Moreover, under the House version of the bill, private companies would be able to sue Internet service providers if they found that they were hosting content that infringed on their copyrights. This provision goes be-yond the Digital Millennium Copyright Act, removing the ability for sites to act on good faith and take down infringing content upon notification.

With the music business becom-ing driven more and more by “do-it-yourself” minded companies and artists, online business restrictions like these could stifle creativity and innovation. Technology companies are also small tech startups, and many new music companies fall into this category. In addition, music is part of a cultural heritage that is best shared and disseminated, not privatized or shackled with excess regulations. Finally, new artists need to be exposed, an interest that is in conflict with that of established songwriters and performers that depend on copyrights for their livelihood. Those same artists, however, may become known and aspire later to the terms of the SOPA and PIPA bills. Such diver-gent interests need to be carefully considered in the next iteration of the legislation.

Sources

1) http://www.youtube.com/watch?v=mgWDnstRzgg

2)http://articles.baltimoresun.com/2012-01-18/entertain-ment/bal-sopa-pipa-bills-pit-music-business-against-tech-in-dustry-20120118_1_wye-oak-independent-musicians-credit-card-companies

3) http://www.nytimes.com/2012/01/02/business/media/the-danger-of-an-attack-on-piracy-online.html?_r=1

4)http://www.tuftsdaily.com/debates-over-megaupload-shutdown-rage-across-college-campuses-nation-1.2697018#.Tzh5nUxWp5F

5)http://www.forbes.com/sites/johngaudiosi/2012/01/16/obama-says-so-long-sopa-killing-controversial-internet-pira-cy-legislation/

By Ben Scudder



Interview

MBJ: How did you approach financiers to help grow the company?

CW: We started off with some angel investors; they were friends and family who really liked the idea of what we wanted to do. From them, we had a little bit of seed money to start the business. We began to make inroads through associations and introductions. We built a financial model and a business plan that we would present to high net-worth individuals and venture capitalists. It took a lot of time. There were a lot of presentations and a lot of “No’s”, but eventually we got to a “Yes”. We

were trying to convince them of what we al-ready knew. The performance royalty business is huge. Globally, there’s over $9 billion be-ing collected in performance royalties per year. There’s a lot of money out there, and through research of our own, we had discovered that 80% of the music being used in TV goes unre-ported. That means that all this money is being misallocated based on inaccurate, incomplete, or non-existent manual cue sheet reporting. The 80% is just for TV alone; online, it’s much worse. That’s just for performance royalties. Then you get into all of the revenue that should be going to the labels and the publishers from content that is not even getting licensed in the first place. There’s a lot of money at stake. In a time when the music business is in a bit of a flux due to decline in sales and all sorts of other issues, it is imperative that content owners get paid for the use of their content--be they labels, publishers, or independent artists.

Spotting Revenue: TuneSat’s Chris Woods

MBJ: How does fingerprinting turn into a business?

CW: With “fingerprint” technology we can identify any version of a song. It doesn’t matter if it was distributed over 30 years ago, or will be distributed 30 years from now, as long as you have a fingerprint of the original recording in the database, you’re covered. We acquired our own fingerprint algorithm in 2006. We set up TuneSat, got funding for the company, and set up a monitoring facility in New York City where we started monitor-ing 110 national network broadcasters. We tested for a year and got the kinks worked out and all of the applications written. Then, in 2009 we launched our business to the public, which is basically a subscription-based ser-vice that any content owner can sign up for. They supply us with their master recordings; we fingerprint the music and create an ac-count for them. The content owner can then log-in and see their songs’ performance data in real time as to when and where their music has been used on television. We back up our findings with MP3 recordings of every detec-tion as proof of usage. Content owners really like this because they had never had the abil-ity to know of their music being played be-fore, or where it’s being played, or how often it’s being played – especially not to this level of accuracy and efficiency.

The key to the algorithm, especially in TV with a lot music being buried under dialogue, is its ability to still be able to identify the au-dio and get full duration information.

MBJ: How do your clients use the infor-mation that you provide?

CW: Our clients really use this information for three things.

The first is to address the accounting of per-formance royalties. All of the performance rights societies around the world make their distributions based on manual cue sheets that they receive from their licensees, the broad-casters – CBS, Fox, etc. The problem with this is that it’s a manual process and millions of needle-drops are used each year in televi-sion--a lot of stuff falls between the cracks. This results in a huge misallocation of per-formance royalties. With this information in hand, we’re able to run an application that compares our own data against a client’s roy-alty statement for the corresponding period and give them proof that we detected perfor-

Chris Woods is the cofounder and COO of TuneSat. Since launching in 2009, TuneSat has helped rights holders collect mil-lions of dollars that would otherwise have been lost or undiscovered without the essential de-tection data that the company provides.

MBJ: How did TuneSat come to be?

CW: I graduated from Berklee in a major, Music Synthesis, that incorporated a lot of the digital recording technologies. I was really in-terested in the engineering aspect of commer-cial music and in Pro Tools. When I moved to New York City, I started a jingle studio. Doing that, I met my current business partner at Tune-Sat, Scott Schreer, and he had a long history of writing music for television. He had written the NFL on Fox theme and a lot of other music for sports brands that we hear on television. At the time he was working with “watermarking” technology to identify music used on television to help content owners get paid properly, which I thought was a really cool concept.

MBJ: Can you explain what “watermark-ing” an audio file is?

CW: Watermarking is code that’s embedded into a master recording, but a listening device could only identify versions of a song with wa-termarking in it. This had been around since the late 1990’s to early 2000’s. We started working with various “fingerprinting” technol-ogies because we saw that as the best method going forward.

MBJ: You seem to have found a niche in the market.

CW: The product that we’re offering was a long time in the making. The point of starting this company was to address the problem of the huge misallocation of performance royal-ties due to manual reporting processes. As a composer myself, not composing pop music, but having music on television, getting paid properly was a problem because of faulty man-ual cue sheets. If the guy with the stop watch in one hand and a pencil in the other isn’t pay-ing attention, doesn’t know what the song is, or isn’t even doing a cue sheet at all, you don’t get paid. As a composer, you rely on that revenue stream, you rely on licensing and performance royalties to sustain a living. We saw that taking this technology and using it on applicable me-diums would be beneficial to composers, art-ists, and copyright owners to know where their music was being used so they could get paid.

By Aaron Gottlieb

(Continued on Page 9)

Interview



mances that were not accounted for. They can take our data to the PRO and get paid on their performance properly.

Secondly, a lot of content that gets broadcasted – more than we ever anticipated – is done so without a synchronization license or a master use license, which is a big deal. It’s copyright infringement. The penalties are quite high, and so our clients can also use our data to ensure that songs that do get used are properly licensed. If it happens that they’re not licensed, they can use our data to pursue those claims.

The third reason our clients find a lot of value in the data is because of all the business intel-ligence. They know which songs are getting used the most, which titles are getting the most traction, and can track new releases. This data serves as a marketing and business-tracking tool. As of 2011, we’re now able to track thir-teen countries: US, UK, Germany, France, Italy, Netherlands, Spain, Austria, Switzerland, Swe-den, Norway, Denmark, and Finland.

MBJ: Do you need licenses to be able to tune into all of these networks?

CW: No, we’re able to obtain the satellite feeds just like any normal consumer would, and we’re listening to those broadcasts with the purpose of identifying copyrighted music on behalf our cli-ents, the content owners, like the Universals of the world and the Orchards of the world. Even composers like myself are able to know where in the world their music is being played so that they can be paid properly.

MBJ: How exactly does it work?

CW: Our system is listening to harmonic con-tent as well as transient properties. Think of how music looks on a spectrograph. It’s kind of like that when you can visualize the sonic properties of audio. The algorithms are doing the same and picking up on key properties that are unique to the audio file, and then storing that as an acoustic fingerprint--which is kind of like the DNA of the recording itself. After that, it’s constantly looking for matches with whatever is in the fingerprint database.

MBJ: Let’s say that McCoy Tyner covers a Beatles tune. Is the system capable of recog-nizing it as a Beatles tune?

CW: Covers are a different case. The way most fingerprinting systems work, and ours specifi-cally is by having a master recording. It’s not like we can have one copyright in the system, or one master recording of a copyrighted work, and identify all of the other recordings out there. The audio for the cover has its own unique prop-erties, so we would need the master recording of

the cover to present proof of it’s usage.

MBJ: Would you ever consider licensing your technology to other companies?

CW: Sure. We do it today. We have licenses in Europe as well as licenses in South Amer-ica. The main purpose of TuneSat’s business model is subscription based, but we’ll license the technology to other companies with various needs. It could be for consumer-based mobile devices like phones and iPads. We’ll license our technology to broadcasters themselves to help improve efficiency in the music reporting process.

NBC Sports, here in New York over at 30 Rock, was an early adopter of the technology. We’ve had TuneSat’s technology used for the Olympics and countless sporting events since Beijing. We’re constantly listening for the mu-sic that those programs use, creating cue sheets then are then filed by the broadcasters with the local societies to facilitate accurate perfor-mance royalty distributions.

MBJ: It’s my understanding that your cli-entele base is quite broad. You have small clients, but then you also have publishers that oversee massive catalogs. At what point does somebody need a service like TuneSat?

CW: It’s valuable to anybody who has mu-sic being played on TV within the countries that we monitor. We just started monitoring internet plays, but as it pertains to TV, if you write for television, or if you’re an artist and you have a lot of your music being used and actively licensed, then it’s a worthwhile service to consider using.

The way we structured the business model is that it works for the small guy just as easily as it works for Universal or Warner in that anybody can sign up for an account. The smallest tier that we have is $10 per month for ten tracks. That’s basically an album that you can track for just 10 bucks a month. That’s pretty cheap for a service that provides 24/7 monitoring.

The new service is an Internet monitoring ser-vice. Basically the way that works is we’re crawling millions of websites in about 26 coun-tries and looking at any publically available IP address that is hosting multimedia files, wheth-er it’s a business, a blog, or a user generated website like YouTube. Once we find multime-dia files, we’ll record them, pass them through the system, and then populate our clients’ ac-counts with the URL of where the music was identified. That opens the business a bit wider to a larger client base. Now you don’t have to have music on TV, but you can have music on the Internet. The Internet is so expansive. You

don’t know where your music is, you don’t know who’s using it, or who is blogging about it, but we’ll be able to identify where it’s at and how it’s being used.

MBJ: Do you think that the composer or artist who gives their music away for free to fans is entitled to royalties for synchroniza-tion?

CW: I think so. The fact that it’s put out in the public does not make it public property. That person is still the owner of that music. You’d have to register the music and you’d still have to be a member of a performance rights soci-ety. Instead of that, there’s always the option of licensing it directly to the commissioning party. That happens a lot with certain broad-casters who demand those rights. It happens with brands that use music for various cam-paigns.

MBJ: Finally, what is your take on the pos-sibility of a global registry of metadata?

CW: I think it would be great if it happened, and I think that there are a lot of entities at-tempting their own flavor of it. Maybe that’s part of the problem in that too many people are trying to do things in a way that’s proprietary, whether it’s GRD or DDEX or any of these other standards that are being developed. It seems that the labels have figured it out some-what with ISRC codes (International Standard Recording Code), which are more easily trace-able. I learned through doing this that when it comes to a publisher, though, it’s really a mess. I think sometimes that publishers aren’t even aware of all of the copyrights that they own. They’ll buy a catalog just for the top copy-rights that can make them the most money and that’s all that they’re concerned about. It could take years before the less lucrative copyrights are registered. It’s definitely messy. Then you have to take into account that fact that interna-tional copyrights for the same song may have different terms.

I think it would be great to have a central re-pository of who owns what, though. It’s just a very daunting task and I’m not sure who will be able to do it properly. I think that we could be a part of the solution in that we have the ability to identify audio files and we can help people clean metadata. Part of what we’re doing now is to fingerprint about 13 million popular mu-sic audio files. For us, this will enable us to expand outside of TuneSat’s core subscription model. But it will also help us match an audio fingerprint to the larger database of ownership metadata, which could be useful for everyone.

(From Page 8)



Law Section

Living in the Fast Lane:

In Hollywood, they call him Dr. Evil. According to the U.S. Department of Justice, his company has stolen over half a billion dol-lars from copyright owners of music, movies, software, audiobooks and other media. He lived lavishly in the most expensive private home in New Zealand and drove eighteen luxury cars with license plates labeled “MAFIA” and “GUILTY”. On January 19th, the New Zea-land police arrested Kim Dotcom, founder of Megaupload.com, and several of the company’s top executives. In their press release, the F.B.I. described the operation as “among the largest criminal copyright cases ever brought by the United States.” (The five counts of indictment brought against the file-sharing service are tell-ing: Conspiracy To Commit Racketeering, Con-spiracy To Commit Copyright Infringement, Conspiracy To Commit Money Laundering and two counts of Criminal Copyright Infringe-ment).

Megaupload.com was estimated at one point to have been the thirteenth most fre-quently visited website on the Internet, brag-ging that it accounted for four percent of all online traffic. Disguised as a service to help us-ers transfer large files, the deactivated website offered free downloads of popular media. It sold advertisement space and premium subscriptions but did not pay rights holders. According to the indictment, Megaupload.com generated $25 million in advertising and $150 million in subscription fees over five years. The money laundering accusations were for the company’s backhanded financial incentive plans designed to pay users who uploaded content that was in high demand.

Dotcom’s arrest was the culmina-tion of a two year international investigation conducted by authorities in the United States (where some of the company’s servers were lo-cated), New Zealand (Dotcom’s country of resi-dence), Hong Kong (where the company was based), Canada (another country that hosted servers for Megaupload.com), Germany (one of Dotcom’s countries of citizenship), the United Kingdom, Australia and the Philippines.

This is not the first legal scandal for Kim Dotcom, who was born Kim Schmitz. In 2002, he was arrested in Germany for insider trading and embezzlement. This time, in Janu-ary 2012, two helicopters ambushed Dotcom’s mansion where the police were forced to cut

their way through to a panic room where Dot-com hid with a gun by his side.

Dotcom has his defenders. The bust triggered online acts of retaliation by a group of hacktivists named Anonymous. The group attacked major websites including those of the U.S. Department of Justice, the U.S. Copy-right Office, Universal Music Group, The Re-cording Industry Association of America and the Motion Picture Association of America. Anonymous believes that the U.S. govern-ment’s seizure of the Megaupload.com domain name is “a violation of freedom of speech,” “internet censorship,” and that the government is “stepping outside of their jurisdiction.”

Under Cover of Daylight

Why Kim Dotcom had to have serv-ers in this country and make himself an easy target for the Department of Justice is not clear, because intellectual property protection is getting harder to circumvent. Perhaps he hoped that his legitimate activities would give him cover. In fact, along with Megaupload-related domain names, U.S. authorities also seized $50 million in assets and froze the com-pany’s bank accounts. This is now prevent-ing Megaupload from paying its server hosts, which currently store content in digital lock-ers. Users, including the ones who use the site legitimately as a storage cloud, could lose per-sonal documents such as family photos, school reports, and other.

Some of these users are threatening to sue the F.B.I. if their files are erased. The Associated Press reported that U.S. prosecu-tors issued a letter on January 30th stating that two of the Megaupload servers, Carpathia Hosting Inc. and Cogent Communications Group Inc., could begin erasing files four days later.

The planned purging was delayed to the following day and the two hosting compa-nies agreed not to erase data for at least two weeks. The website’s users are not alone in wanting to protect the content. Megaupload attorneys need this data as evidence to prove the company’s legitimacy. On the side of the prosecution, the F.B.I. already has emails from Megaupload employees proving they knew about the pirated media and also discussed strategies to prevent a government shutdown of the site.

By Emilie Bogrand

Celebration Gone Awry

In December 2011, Megaupload released a promotional video on Youtube boasting about its one billion users and fifty million daily visitors. The video was ap-parently organized with the help of Swizz Beatz, who was in serious talks to become the company’s CEO. The four-minute video features appearances from music celebri-ties including Kanye West, Jamie Foxx, The Black Eyed Peas, Diddy and many others. “When I gotta send files across the globe, I use Megaupload,” raps Will.i.am..

Universal Music forced Youtube to remove the video, which cost $3 million to make and has been viewed over thirteen mil-lion times. The takedown lasted five days and ended on December 9th. Megaupload then sued Universal Music, accusing the label of abusing copyright laws and soiling Megaupload’s reputation. Universal Music responded by declaring Megaupload a pirate site in a defense court filing. The two com-panies will now swap sides in court as Kim Dotcom faces the possibility of twenty years in prison.

Reflection

In the end, and as was shown, a na-tional and international effort helped thwart an abuse of intellectual property. In part, and taking a broader view, this must have come about because manufacturing is no longer the main driver of current economic growth in the developed world. An economy based on ideas, and their trade, is becoming in-creasingly important to all of us.

It is good to remember that an in-ternational system of patents was created to promote inventions at the turn of the XIXth Century, when inventors stopped attending World Fairs for fear that their innovations were being replicated without remuneration. It was important to distinguish then, as it is now, between the legal and illegal transac-tions of those ideas to advance productivity worldwide. By the same token, it may not be a bad thing for musicians that the DOJ and the rest of the world took Kim Dotcom and Megaupload down.

Megaupload’s Kim Dotcom

Law Section


By Melanie Stevenson

to be eligible under the provision because the service enables users to upload and stream music through their site; Grooveshark itself only provides the server.

Universal’s basis for the suit is, in-cidentally, (i) whether the anonymous com-ment posted on Digital Music News can be traced back to its source and implicate Grooveshark; and (ii) whether there are business records at Escape Media Group that show uploads by its own company employ-ees.

On the first question, Digital Music News was served a subpoena by Escape Me-dia to reveal the source of the article where the anonymous comment implicated the group. Paul Resnikoff, chief editor of Digital Music News, argued that he was protected by the law and was not obligated to disclose his sources. He added, defiantly, that “[such a protection] is the cornerstone of a free press and open society that we all enjoy in the United States, and the result for us has been a body of knowledge that is unrivaled and growing every day… we count many execu-tives from Escape Media Group as devoted readers”. (For Resnikoff’s full response see http://www.digitalmusicnews.com/permalink/2012/120119deargrooveshark)

The answer to the second question will depend on the evidence presented to the court. Still, the arm of the law seems to be reaching out to make yet again the case for intellectual property theft. At the very least, this is bound to stunt Grooveshark’s growth.

Grooveshark has been in the news lately. Many of the major music companies have filed suit. Proceedings against Groove-shark started in November 2011, with Uni-versal Music demanding compensation for tracks that were not cleared. A month later, Sony Music Entertainment and the Warner Music Group followed. By January 2012, EMI Music Publishing was alleging breach of contract and failure to pay agreed royal-ties. In the federal case, Grooveshark execu-tives are being accused of personally upload-ing copyrighted material to their site.

Yet early in the Fall, and before the above allegations were made, the Music Business Journal treated Grooveshark as a legitimate business in a comparison with Spotify and Rhapsody. We now know better, and would like to apologize for this over-sight; see “Spotify: Not Out of the Woods Yet”, MBJ, October, 2011; 8-9.

Here is a brief update. The legal case against Grooveshark was given momen-tum when one of its employees was anony-mously quoted on Digital Music News sug-gesting that the company understood it was flouting the law. The site allows streams and uploads of music and offers two differ-ent premium-subscription paid memberships with various perks (such as no advertise-ments and customizable features). It is likely profitable, with about 35 million users. Ironi-cally, the company that owns Grooveshark is named the Escape Media Group.

Back-end B2B deals in the US are thus on hold for the moment, although progress has been made with some indepen-dent labels. Nevertheless, the arm of the big four labels extends overseas, so the future of Grooveshark is also in question there. In January, GEMA, a German authors’ and per-forming rights organization protecting more than a million copyright owners worldwide, shut down Grooveshark’s operations after an impasse over a refusal to pay high licensing costs (Spotify and Rhapsody have not yet entered the German market because of such high costs).

Grooveshark’s main defense seems to be the Safe Harbor Provision, which ba-sically states that the company is not liable for the content uploaded by users onto their site. On paper, their business model appears

Grooveshark: A Clarification Recycling MusicBy Mariana Migliore

The concept of going green assumes a change in behavior. For the past few decades, we have become more and more educated about saving energy, choosing products from socially responsible companies, and recycling waste. The music industry is not an island and a Boston startup, ReDigi, has recently pro-posed a new idea: recycling pre-owned digi-tal music. The company has become a magnet of media attention since it was launched early last June, joining a space occupied by Spotify, MegaUpload, and Google Music.

ReDigi

ReDigi works as a used digital re-cord store. The prospective user has to make an account using his or her Facebook user-name in order to download the Beta ReDigi application and accept its terms of use. Once downloaded, the application scans the com-puter’s hard-drive looking for “eligible” mp3 files. What ReDigi defines as eligible is mu-sic that has been legally acquired. During the scanning process the Redigi Media Manager uses a forensic verification engine that identi-fies which songs are available for the user to resell.

Selling a song from a user library means that, once sold, it will no longer be available for access. ReDigi erases the track from the computer and all sync devices when the “Send to ReDigi” button is pressed. Once uploaded, the song is offered in ReDigi’s mar-ket for 59 cents, and the user gets 10 cents when a sale is completed. In fact, ReDigi has its own currency. There are ReDigi Credits and ReDigi Coupons. ReDigi Credits are equal to real money. In order to get credit, the user has to add money into a hosted account or earn it by selling songs. ReDigi coupons are the same as any supermarket’s discount coupons. Every time a song is uploaded for sale, a coupon is earned for discounts on future purchases. The Controversy

The company calls itself “The World’s One and Only Verified, Pre-Owned Storage and On-line Marketplace for Digital Music.” Nevertheless, this does not mean that the rest of the world agrees. Recently, RIAA and Capitol Records have sued ReDigi for copyright infringement.

March 2012 www.thembj.org 11(Continued on Page 16)


Business Articles


A Year in Review

2011 was a year of hit records, powerful female artists, the discovery of electronic dance music within the US, and more genre crossovers into the main stream, especially rap/hip-hop. Live mu-sic did better than in 2010 and the majors continued their cost-cutting measures, with the demise of EMI in December marking perhaps the end of an era.

Diversity and Renewal

There was diversity and renewal in the charts as measured by Adele (Top Artist), Lil Wayne (Top Artists-Male), Wiz Khalifa (Top New Artist), Taylor Swift (Top Country Artists), Shakira (Top Latin Artist), Mumford & Sons (Top Rock Artist), and Katy Perry (Top Club Artist). But the year was undoubtedly Adele’s. Since the release of her second album, 21, she soared into the spot-light. 21 spent nearly forty straight weeks in the top five spots of the Billboard 200 Chart, which set the record for the most number in the top five spots for an initial release. The track “Someone Like You” was number one for fourteen weeks in a row, and she led the Top Artists, Top Billboard 200, and Hot 100 Songs charts. A female artist has never ac-complished this before.

Another marker of the significance of female artists this year is that for the first time in Billboard’s history four female artists have dominated the Top Artists chart: Adele, Rihanna, Katy Perry, and Lady Gaga.

Electronic dance music has been huge in Europe for many years now. But 2011 brought electronic dance music to the United States with a vengeance. Annual festivals and raves became more popular and new artists emerged. Skrillex won three Grammys this year (Best Dance Recording, Best Dance/Electronica Album, and Best Remixed Re-cording.), and Deadmau5 performed at the Recording Academy Awards next to the Foo Fighters. Other artists that have put out popu-lar albums in the genre were LMFAO, Daft Punk, Lady Gaga, and David Guetta.

Live Music

Touring seems to have made a comeback in 2011. After poor attendances in 2010, managers, promoters, venues, and booking agents adjusted their strategy. Ticket

By Haven Belke

sales improved, artists were matched with the appropriate venues, and concert attendance increased (artists performed less in order to improve their returns).

The biggest tour of the year was U2’s 360° Tour (the Circle tour was the high-est grossing ever, bringing in, since 2009, $265 million). Taylor Swift played in major arenas across the United States and then took Speak Now abroad (her receipts for that tour in the US alone were over $100 million). Oth-er successful tours were by Kenny Chesney, Katy Perry, Lady Gaga, and Usher.

General Business

In other business news, Citigroup sold EMI to Universal and Sony. Universal bought EMI Music for $1.9 billion, while Sony bought EMI Publishing for $2.2 billion. The spilt and merger of these companies cre-ated a shift in the music industry and top ex-ecutives switched companies, with artists and song catalogs being placed under new man-agement. The remaining three labels, i.e. Uni-versal, Sony-BMG, and Warner, will likely benefit from EMI’s loss.

This was an important year for Cash Money Records. Because the label is a sub-sidiary of Universal Music, it has helped that major do well. Its catalog of rap/hip-hop art-ists was all over the Billboard Charts in 2011. Lil Wayne, Nicki Minaj, Drake, Weezy, Wiz Khalifa, and many more rap/hip-hop artists have crossed over between genres. Many of their albums and singles placed at the top or extremely high on a variety of charts. Tha Carter IV, Pink Friday, and Take Care are a few of its most popular albums. Cash Money Records is producing some of the newest, raw,

undiscovered, and most talented acts of the year and the genre is becoming more universal. It wouldn’t be surprising if Cash Money Records makes an even bigger statement on next year’s charts.

The Grammies

As always, the Grammys are a magi-cal night for artists and their audiences. Bruce Springsteen, Paul McCartney, the Foo Fighters, Adele, Katy Perry, Taylor Swift, Nicki Minaj, The Civil Wars, and many more artists went on stage to an all time record TV viewing audience (large-ly, it seems, because of Whitney Hous-

ton’s untimely death). All, in their own right, amazed their fans, but it was the sheer number of performers and the variety of genres that made this year’s Grammys memorable.

The somber tone added to the pro-ceedings, and Jennifer Hudson’s emotional rendition of “I Will Always Love You” will long be remembered. Overall, this year there were not many awards presented live, as the night mostly focused on the performances. Adele swept the Awards by winning six: Re-cord of the Year, Album of the Year, Song of the Year, Best Pop Solo Performance, Best Pop Vocal Album, and Best Short Form Music Video. Other Grammies for Best New Art-ist went to Bon Iver, Best Rock Performance to the Foo Fighters, Best Country Duo to the Civil Wars, Best Country Song to Taylor Swift’s “Mean”, Best Country Album Lady Antebellum’s “Own the Night” and Best Dance Album to Skrillex for “Scary Monsters and Nice Sprites”.

It is worthwhile to note that the total number of categories shrunk this year from over one hundred to about eighty, in a contro-versial attempt, yet to be fully digested in the industry, to prevent the Awards from being di-luted over time. Rhythm and Blues, Latin Mu-sic, and Native America Music seem to have suffered the most. A full list of the awards, and the changes in question, can be found on the Grammy site.



Business Articles

(Continued on Page 14

The Muse of the Grammys

In a creative industry, what pattern of artistic influences increases the likelihood that an artist will produce innovative prod-ucts? This research examines all major art-ists in popular music between 1951 and 2008, their unique historic network of artistic influ-ences, and their innovation achievements in the Popular Music Industry. The research ap-plies network analysis to the social structure of the industry to see: do artists who create innovative products occupy unique structural positions in the complete network of artistic influences?

Artistic influences are the set of recognized social predecessors in a Creative Industry who are credited for prior achieve-ments in a Creative Industry. The creative in-fluences of artists in a Creative Industry can and do vary widely, but they are particularly interesting because artists openly recognize and celebrate their influences—the raw ma-terial from which they attempt to fashion industry-changing innovations. For example, The Beatles report they were strongly influ-enced by Buddy Holly and Roy Orbison who, respectively, were influenced by Elvis Pres-ley, The Clovers, Hank Williams, and Hank Ballard. Influence networks of this type, for each artist, can be assembled and traced back to before the creation of recognized innova-tion achievements in the industry to determine what patterns of influences are most produc-tive for fashioning innovative products. We examine each artist’s structural pattern of artistic influences as idiosyncratic resources from which they may develop new music.

The popular music industry is of interest for research in entrepreneurship be-cause it is a rich environment to explore the evolution of an industry, because musical in-novations can be tracked, and because social networks are an important element in how in-novations are assembled and diffused. Each artist is embedded in, and therefore occupies a unique position in, the historical/longitudi-nal network of musical influences. As such, one can study artists as a type of entrepreneur that looks to bring change to an industry by exploring and exploiting new combinations of resources.

Our dependent variable is number of Grammy Awards won, the industry’s stan-dard of an artist’s innovativeness. Grammy Awards are not bestowed based on an artist’s

By Erick Noyes, Elaine Allen, and Salvatore Parise

album sales or chart performance. Rather, the Grammy Foundation states that Grammy Awards are “the only peer-presented award to honor artistic achievement, technical profi-ciency, and overall excellence in the recording industry”. We find that musicians with struc-tural holes (disconnects) in their influences network—those who are brokers between oth-erwise disconnected artists—are most likely to create innovative products as measured by Grammy-winning.

Artistic Ties and Popular Music

Entrepreneurs and entrepreneurial firms in Creative Industries—such as music, film, publishing, software and design—com-monly develop innovations and generate new wealth by exploiting resources in their profes-sional and personal networks.

Relatedly, if one looks to the Popular Music Industry, artists responsible for major innovations have often combined new tech-nologies, new group members and fused dif-ferent musical styles to fashion new musical experiences (e.g., The Beatles, David Bowie, Pink Floyd, Stevie Wonder, and Herbie Han-cock). More broadly, in Creative Industries, loose personal and professional affiliations are a treasure chest for locating critical talent, for sourcing funding for risky new ventures and for assembling teams to commercialize and industry-shaping innovation.

Social contacts, or one’s position in a social network, may enable or constrain access to critical resources needed for basic operation, growth and innovation. Critical re-

sources obtained though social contacts may include financial resources, such as funds needed to develop a technical innovation, or social capital, such as important social con-tacts needed to assemble or distribute an in-novation. From this perspective, social ties—and particularly resources obtainable in the external environment—are what shape the survival and innovation capacity of certain in-dustry players. A chief point in this theoretical perspective is that one’s position in a social network may enable or constrain strategic ac-tions by an industry entrepreneur.

Networks should have advantages in recognizing entrepreneurial opportunities and fashioning innovations because they sit at the nexus of unique information. Specifically, those artists who are connected to other net-work actors—where those network actors are otherwise unconnected—can exploit unique information flows and perceive entrepreneur-ial opportunities that only partially present themselves to others (who, by contrast, have inferior access to unique information by vir-tue of their network positions). In specific terms, a structural hole is an absence of ties (or hole) between network peers from the per-spective of a focal actor. Structural holes may occur within networks at all levels of analysis, but here we explicitly consider the individual level of analysis. A growing body of networks research suggests that brokerage across struc-tural holes is favorable for initiating innova-tions. Therefore, examining musicians in the music industry, we posit:

Hypothesis 1: The structural pattern of artis-tic influences for innovators will be different than non-innovators.

Hypothesis 2: Artists with structural holes in their influence networks will be more likely to create innovative products.

The context we are studying is par-ticularly interesting because structural holes do not occur within a close, small group of in-dustry participants. Moreover, the underlying social ties we examine are not direct in nature. Few artists maintain relationships with all of their direct and indirect artistic influences. Rather, we analyze the impact of different structural positions of direct and indirect in-fluences on an artist’s likelihood of creating innovative products.



Business Articles

Grammys (cont.)The Grammy Awards

The Grammy Awards are presented annually for outstanding achievements in the music industry. Since the awards were estab-lished in the 1950’s, nearly 8,000 Grammy awards have been bestowed. We chose this measure of an artist’s ability to create inno-vative products because it is measurable; be-cause it is the industry’s standard for artistic innovation; and because, as noted, Grammy Awards are bestowed unrelated to the finan-cial or chart performance of an artist.

Data

The data come from allmusic.com, whose database is the platform for both Amer-ica Online’s and Yahoo! Music’s e-commerce website. The archive provides data including each artist’s name, discographies, and most importantly, lists of artistic influences. In to-tal, there are 14,000+ “influenced by” ties for nearly one thousand artists. This data allows for a seamless and complete network picture of all major artists in the industry and their ar-tistic influences over the past six decades. Fig-ure 2 provides a network visualization show-ing the artistic influences among the most influential musicians in the industry (those cited most as artistic influences to all the other musicians in the industry).

For this study, we built the com-plete network of artistic influences and mea-sured the network positions associated with each artist. Based on each artist’s structural position in the network, we calculated each artist’s structural holes in addition to other common structural network variables includ-ing the number of times a musician occupies the shortest average path between other musi-cians based on their position in the network and the number of musicians citing an artist as an influence. Because the following controls could also influence the number of Grammies won, we included in our model: the number of decades an artist produced music as well as the number of years they were deemed active, whether the artist is a solo artist or a group, the total number of albums created, the total number of Top 10 albums created, the number of labels signed onto, and the total number of genres played. We also examined whether or not artists created in new markets in the first year of their existence (market pioneers vs. non-pioneers), arguably a separate potential measure of artistic innovation.

Analysis

Initially, relationships between vari-ables were examined by whether the artist won a Grammy award and whether the artist was a pioneer of a new market. Market pioneers (those creating music into new markets during their first year of existence) have almost six times the mean number of Top 10 albums (7.9 for market pioneers vs. 1.6 for others) and al-most double the overall mean number of albums (24.8 vs. 14.9, respectively). For artists with at least one Grammy award, the results are more modest with five times the mean number of Top 10 albums (5.0 vs. .9) and almost 30% more al-bums overall (19.7 vs. 14.0).

Not surprisingly, the number of de-cades an artist produces music, the number of albums produced by an artist, the number of other musicians influenced by the artist, and pioneering a new market have a strong positive relationship to the number of Grammy’s won. Interestingly, solo artists win more Grammies than group artists. Somewhat surprising is that having multiple record labels and performing in multiple styles have a negative impact on the number of Grammy awards won.

Consistent with Hypothesis 1, those winning the most Grammy awards are peripher-ally not centrally, located in the complete net-work of influences. Consistent with Hypothesis 2, artists with more structural holes, or low net-work constraint, win more Grammy awards.

Collectively, the findings about the negative association with centrality and the pos-itive association with structural holes suggest brokerage among artistic influences is a better predictor of Grammy winning than occupying a central position in the influences network. This is true even considering the span across six de-cades of direct and indirect artistic influences. In particular, structural disconnects across artis-tic influences increases the probability of win-ning multiple Grammies.

Implications and Value

This research draws attention to the unique social nature of innovative product cre-ation. Despite the widespread stereotype of the socially isolated, tortured artist, our findings suggest that innovators likely fuse together sev-eral different creative influences versus fashion-ing innovations from an absence of influences.

As with our other research on new market pio-neering in the music industry, these findings de-emphasize the importance of one’s individ-ual talent versus one’s idiosyncratic pattern of artistic influences in creating innovation.

One’s position in a network should impact one’s ability to create innovative prod-ucts, particularly if one has superior access to resources that other’s do not. Here, access is meant in a creative or inspirational sense where all musicians have artistic influences, but only some have certain structural patterns among their influences and occupy certain unique structural positions in the complete network of influences. Being influenced by structurally-separated artists, appears to be an especially efficient way to access the disparate resources from which to fashion innovative music.

This research may suggest that mu-sic recording companies, such as BMG, Sony Music or Universal, might examine their ag-gregate artist portfolio positions in influence networks to maximize the probability of creat-ing innovative products in the future. Such an inquiry might suggest which music-recording companies are strongly, or weakly, positioned for future industry evolution.

Future research examining networks in Creative Industries should examine how artist positions in networks impact commer-cial success, which often differs dramatically from what is regarded as innovation. While there are artists in creative industries that are regarded for creating commercially-successful innovations, a common outcome is innovation without commercial success or commercial success without innovation. Clearly, research on creative industries needs to examine both market and financial outcomes in relation to these questions. This research presents the opportunity to disentangle the importance of individual talent—which is so commonly viewed as a primary driver of innovation—and the importance of idiosyncratic influences on innovation.

The three authors are professors at Babson College, MA. For a full version of the paper see Noyes, Erik; Allen, Elaine; and Parise, Salvatore (2010) “Artistic Influences And Innovation In The Popular Music Industry,” Frontiers of Entrepreneurship Research, Vol. 30: Iss. 15,Article 3. Available at: http://digi-talknowledge.babson.edu/fer/vol30/iss15/3

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At first sight, if ReDigi functions as a used record store, it should be protected by the “first sale doctrine”. Section 109 (a) of the Copyright Act states that “the owner of a par-ticular copy or phonorecord … or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” However, even if the law stipulates that reselling an “owner’s par-ticular copy” is allowed, it does not make a distinction of how to handle a copy of a copy. This is pounced upon by the RIAA, which maintains that “[ReDigi’s] software duplicates the user’s copy of the track, places a water-mark on that copy, stores it on ReDigi servers and purportedly deletes the original file from the user’s hard drive or mobile device. Then ReDigi offers sale of the copy to other users of its service.”

If that’s the case, shouldn’t ReDigi pay a mechanical license for making a copy of the track to sell it? The answer is tricky. ReDi-

gi is paying the users who sell tracks to them. If those tracks have been legally acquired, mechanical royalties have already been paid. Also, ReDigi takes away all of the user’s cop-ies and replaces them with their own. But Re-Digi cannot prevent users from keeping the tracks if they want to, by copying them to a different source first.

Capitol Records is targeting ReDigi too, claiming that the company is also violat-ing the right of copyright owners to distribute, reproduce and perform their music. The giant search engine Google recently tried to enter into the fray, arguing that it was in the best in-terests of the cloud computing industry (worth about $40 billion) that the Court hear the case at length and not reach a premature decision; for Google, some file transfers in the cloud still need legal clarification. The judge dis-agreed, though, and told Google that it would proceed with Capital Records vs ReDigi as it saw fit.

Moving Forward

ReDigi’s business claims to be on the artist’s side by paying copyright royalties. Its business plan, though, has weaknesses. In addition to the presumption that a user will give away a digital copy of a file without sav-ing it elsewhere, patrons are unlikely to take kindly to software that scans their hard-drives.

The law is still catching up with the rapid changes in the digital music market, and ReDigi’s story is familiar. Change brings fear, uncertainty, and new challenges. ReDigi’s pro-ponents will underline the value of returned copyright monies and savings for recorded music listeners. Still, for ReDigi to find a way forward with mp3 sharing users, there will have to be more buy in for the idea of recycled music. There is no precedent for monetizing that and the record labels will want to make sure that this new business model is not built on their backs.

Recycling Music (cont.)(From Page 11)

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