David Balfour believes that the music industry must accept and embrace the idea that advertising revenues are a crucial element of our future success

07 July 2014 - Editorial

The stand-off between YouTube and independent rightsholders continues, with fresh media reports this week apparently seeking to spin or cloud the debate. One piece in DeathandTaxes – apparently seeded by YouTube itself, sought to cast doubt on the size and importance of the coalition of indies which are in dispute with it over its proposed new contract. Renowned Google critic Chris Castle quickly picked holes in several of Google's claims in his own MusicTechPolicy blog however. We're left with an impression that the tech giant is not moving in the direction of the disgruntled indies but instead seeking to seeking to underplay the size and importance of the battle it faces, whilst at the same time trying to portray those labels as marginalised and outvoted by their peers.

It's notable that in recent weeks certain 'independent' companies (we use the quote marks as we have doubts about whether massively-invested multinationals can ever truly describe themselves as independent) have gone on record to justify their decision to sign the YouTube deal. This in turn has added pressure on the complainants, though we doubt it has done much to reduce their determination to seek a better deal from Google. As we wait to hear from the European Commission in particular, as to whether it sees any evidence of market abuse, the stand-off continues. Neither side seems ready to soften its stance politically speaking, though we hope of course that constructive negotiation will win the day and lead to a point of hope in the future YouTube model, rather than fear of it.

An aspect of the YouTube dispute which we find especially interesting is the fact that it is emblematic of the deep underlying wider tensions between copyright holders and big tech. The priorities of the two sectors sometimes seem utterly opposed: tech wants to generate value around various uses of 'content', often free, whilst rightsholders want to protect the inherent underlying value in that actual content – fighting tooth and nail to prevent it becoming something which is simply given away to generate opportunities to sell advertising. 

On a recent trip to Silicon Valley, we visited a number of the most interesting growing digital music companies, giving us the opportunity to view these familiar tensions from another angle and perhaps gain a fresher understanding of the opportunities and uncomfortable choices that the music industry faces in the coming months and years. One thing that stood out above all else was how important the advertising-based model of music monetisation has already become and how its importance to the future health of our businesses will only grow.

YouTube has of course led the way in using music content to generate advertising revenues. Leaving the current dispute to one side for a minute, most rightsholders would have said lately that they're pretty happy with the revenues which appeared from YouTube in recent years – a platform which was previously delivering little value has grown to be a really important revenue provider. YouTube is far from being the only emerging business where advertising revenues will form the central driver of revenue for music rightsholders. We know of at least one other impending US launch where a large music tech brand will use advertising, first and foremost, to create value for itself and rightsholders.

There's something inherently uncomfortable for 'traditional' rightsholders in these new models. Our business has historically revolved around a sales model where a pretty defined value per unit was achievable and easily understood. With physical and download sales fast declining however, a new usage-based model is rapidly taking over and likely to dominate in future. Our industry has already struggled with the shift to services such as Spotify – or at least struggled in learning to understand and communicate to artists and labels that there is true underlying value in those new models. These common recent debates will perhaps come to seem simple however as we increasingly face advertising-based services which often feel more or less free to users. These services promise huge scale and potentially massive revenues, yet there is often also a feeling that the actual music is being undervalued in the wider context and in the priorities of the companies which run them. But is it? YouTube, as one example, clearly knows well the huge importance of music to its community and platform. So perhaps the tensions lies not in a lack of respect for the music itself, but in the wide divergence in how we seek to place and sustain the monetary value in that music within the music industry, and how those in the tech industry view the role of music within their services.

We feel that music companies must now accept that advertising revenues will form a central and decisive pillar which sustains the music industry in coming years. It's vital to that we embrace or at least try to understand the model. That doesn't mean we should accept ever-declining rates in deals, or give away unlimited usage rights in return for few guarantees from services. Nor should we give up on selling music. Nevertheless, we need to accept a segmented market and work actively on each layer of it. We also have to be open to the immense potential scale of these services. The smartest music companies will understand that our industry and fanbase is now irretrievably engaged in this advertising-funded space – not only do we need to accept it but to become experts too: learning how to maximise advertising potential around our music and drive the value which can later be returned to artists as high as possible, rather than seeking to hold back the tide of change in music use.

Whilst we're accepting of the inevitable changes, we're still wary of some of agendas the players engaged, especially on the tech side. There's a complex judgement to be made about the relationship between scale and value. What's especially difficult to stomach is a feeling that many of the companies who apparently seek to drive down the value of music are themselves highly speculative, finance-led and far from proving that they have any kind of sustainable business model. It's very hard to accept that we should lessen the proven value of our model to underpin the agenda of companies which have yet to prove that they can deliver any real value of their own. This troublesome relationship between finance and underlying value increasingly becomes a factor within many music companies too. Just as the advertising space is fundamentally changing our industry, venture capitalists are forcing a new economy where perceived value sometimes seems to be given more credence than proven historical value.

Working to define where true value exists in the future models is a fascinating and inherently risky game. We take some comfort however from the fact that the future music industry seems to involve so many different models of monetised music use. How many labels are complaining about Spotify's potential impact in 2014? If we can support the growth of an industry where each distinct model can exist within its own space, crucially without undermining the value to consumers and rightsholders of the other models, we're potentially moving not towards the abyss, but towards a golden age both for music use and monetisation.

This afternoon (Thursday), the FT reported YouTube is allowing more time to negotiate a solution with labels, although it still intends to block them if they cannot reach agreement.