“Viva La Vevo! A Re-Birth For The Music Business?

Editor’s note: The

views expressed inside this editorial aren’t necessarily the views of

AllHipHop.com or its employees.History has a way of using significant events that mean tragedy to some and triumph to others as markers by which time is measured and eras are distinguished. For example most of us know what ‘BC’ and ‘AD’ stand for, or the more politically correct ‘BCE.’ And a large but probably smaller number know that ‘AH’ stands for anno hegirae “in the year of the hijra”. The Hijra is the escape of Prophet Muhammad (PBUH) from a death plot, moving from the city of Mecca to the city of Medina.

Could December 8th be another significant date by which the music industry will mark the future calendar of its history – as triumph or tragedy?

Yeah, the Christian and Islamic reference are a bit much, but now I have your attention.

I don’t think 100 years from now we’ll be running around using ‘Bvevo’ and ‘Avevo’ to mark this transition period in the music business – which to some feels more like chaos. But I do think the potential impact of what is scheduled to take place next week is hard to overestimate.

On Dec. 8 Vevo, a music video service partnership between Vivendi Universal Music and Sony Music, and powered by Google’s YouTube is launched. It is the music industry’s effort to market their visual content similar to the way HULU markets shows. On that date all videos by artists under contract to these music labels will be available only on Vevo websites or sites that utilize Vevo players. The videos will be higher quality than those currently on YouTube. Artists, managers, and publicists in recent weeks have been encouraged to transfer all video streams from YouTube over to Vevo’s site. They’ve even been asked to hand over their YouTube log-in information so that Vevo can more quickly transfer the videos over to their site.

What does this all mean for the future of the music economy, the Internet, Artists, Fans and consumers?

Let’s take them one at a time.

The Music Economy. Vevo came about largely because of the determination of the major record labels – and there are only 4 left – Universal, Sony, EMI, and Warner – to get their hands on more income streams as music sales continue to decline since the demise of the CD. The labels are trying everything, from making 360 deals mandatory in contracts with new artists (to learn more about this see my October 28th Hip-Hoppreneur ™ commentary: ‘360 Deals and Dumb Artists’ ) which would give them a percentage of revenue previously off-limits: endorsements, merchandise income, and concert appearance fees; to becoming more aggressive in the licensing fees they charge website to play their music and videos. Vevo is an attempt by the industry to make money from something it never could: music videos that were previously only used for promotional purposes – given away to record stores or shown on video channels to make artists more visible and popular. In either case the goal was the same – to sell more records. With Vevo the goal is not to make money from selling records, but from charging advertisers dollars to associate themselves with the playing of videos. With YouTube’s nearly 400 million users and a YouTube channel that receives nearly 4 billion views, Universal Music Group (UMG) recognized that there is a considerable amount of money to be made through online advertising.

With Vevo it is changing its previous business model of making money from charging licensing fees to sites that were attracting viewers by playing its videos and sharing in the ad revenue. The record labels believe that YouTube is not skilled enough at attracting advertisers and Vevo is an effort to have the best of both worlds – YouTube’s traffic and technology, which will power Vevo, married with the record label’s ability to attract advertisers willing to pay higher rates to them. Antony Bruno of Billboard magazine explained it well earlier this year when he wrote, “UMG executive VP of the label’s eLabs division Rio Caraeff earlier this year told Billboard that advertisers pay an average of only $3-$8 for every thousand views [known as ‘CPM’s] that their ads receive. While that has resulted in “tens of millions” in revenue, UMG and other labels would like an ad rate on par with the CPMs that TV and movies command online—upwards of $25-$40.The idea behind the Vevo plan is to create a scarcity of advertising inventory for the purpose of driving up rates. To date, labels licensed their music videos to multiple online services, such as YouTube, Yahoo, MTV and others in return for a cut of the advertising revenue sold around these videos. With all these services competing for many of the same advertisers, simple supply-and-demand drove down advertising rates even as views rose. The hope is that Vevo will command these rates by creating a single point of negotiation for advertisers who wish to buy space on music videos. Both Vevo and YouTube will host the videos, and both companies will split the profits from the ads they sell around them.”

Yes, Vevo means more consolidation to an industry that many feel already has too much.

The Internet. Vevo continues the shrewd business strategy, or big boy gangsterism (depending upon who you talk to) of the major labels muscling their way in on technological platforms and networks (MySpace, Napster, Imeem) by threatening to sue them or actually taking legal action, then ‘forcing’ or ‘inviting’ these platforms or networks to ‘settle,’ or ‘partner’ with the label through licensing arrangements, joint ventures. This obviously makes many cringe. But what all of these episodes expose is the continuing challenge of Internet Entrepreneurs to monetize (make money) their web traffic. Facebook and Twitter continue to struggle with this and Vevo emerged in part because the enormously popular YouTube while making progress, continues to struggle to make more than it loses. Many believe YouTube was ‘forced’ into the Vevo ‘partnership’ because it simply could not afford to pay the licensing fees the record labels were charging. Some say high licensing fees will eventually be a factor in forcing MTV and AOL to join Vevo. A top Wall Street analyst, Credit Suisse’s Spencer Wang created shock waves earlier this year with analysis he published (another reason why I beg music moguls, artists and even activists to read financial and investment materials as much as industry and celebrity gossip blogs) that brought some harsh realism to the dreamy view most of us have of YouTube. Barron’s Magazine’s ‘Tech Trader Daily’ blogger Eric Savitz broke it down well when he wrote on April 3, 2009:

“Here’s the thing: the site [YouTube] by Wang’s estimates continues to lose an enormous amount of money. He calculates that YouTube in 2009 can generate $240.9 million in revenue, through a combination of home page ads, in-video overlay ads, banner ads, sponsored videos and sponsored links. That would about a 20% increase from the $200 million in revenues he estimates YouTube generated in 2008. But he also estimates that the costs of running the site – bandwidth, content acquisition and licensing and other costs – this year will be about $711.3 million. Ergo, he estimates the site this year will lose a whopping $470.6 million.

Wang says that while the losses appear staggering, there is some hope; the key, he says, will be to increase the percentage of videos monetized. There certainly is room for improvement: he calculates that the site is now generating an average 0.4 cents per video watched, or $2.23 per unique visitor per month

What is becoming clear is that while these entrepreneurs are successful at creating the technological platforms and networks that people use to socialize, dialogue and share, they are not so good at creating the content that the people want to socialize around, dialogue about, and share with each other.

Until the Internetpreneurs figure this out and become content producers there will always be a need for, or dependency on the major corporations who still seem to have a monopoly on generating what people what to see and hear the most.

The smaller-size American music industry entrepreneurs and activists concerned about the growing dominance of certain companies would do well to compliment their blogging and rallying with more content creation (including signing established artists), lobbying (to influence the politicians that make laws that favor their larger competitors), and by internationalizing their playbook (the real growth opportunities are overseas, just ask Warner Music whose revenue just dropped 9.4% with overall music sales down 15% in the America, but rising 16% internationally).

They also could use an important business lesson about how value is created where information is concerned. Years ago I discussed this with my friend, economist Reuven Brenner, the REPAP chair in economics at McGill University’s Faculty of Management (http://people.mcgill.ca/reuven.brenner/). He explained to me that there are 5 ways to classify information: by location; category, alphabet, time and hierarchy [the world of Hip-Hop big on acronyms like KRS-One (Knowledge Reigns Supreme Over Nearly Every One) and Wu-Tang (Witty Unpredictable Talent And Natural Game) can remember these five elements as LOCATH]. Location, Time and Alphabet are “mechanical” so to speak and as an entrepreneur you really can’t add value there. Category and Hierarchy are more open to human innovation. The big value an entrepreneur or business can add by innovating or building something unique is through Hiearchy and the way we are able to help people choose or prioritize.

In my mind, the value that Vevo adds is that it categorizes and places in hierarchies for the masses something that was previously unavailable to them in high-quality and organized fashion: music videos. This is one of the reasons why a subscription music service like Rhapsody is valuable because of how it categorizes/places in hierarchy, music across genres and eras in unique ways. But subscription services like Napster and Rhapsody probably will not survive the tidal wave coming next decade from Europe in the form of a popular free service called Spotify – which surpasses their ability to categorize and place music in hierarchies with an incredible search engine.

Because music videos have never been available to the public in an organized fashion (even music industry professionals have never been satisfied by how they receive music videos through servicing companies) and because Vevo promises to organize them in unique ways, it does offer something unique.

If it does so while maintaining the sense of community produced at YouTube it will hit a real home run.

Artists. As Reuven Brenner explained in a 2005 op-ed, “The Thieving Ants and The Serenading Grasshoppers – Toward A Legal Solution For Downloading Music and Movies”(http://www.blackelectorate.com/articles.asp?ID=1363), “The more entrepreneurial artists will change their “business models,” using their talent as loss leader, and leveraging it toward clothing (Puff Diddy, J. Lo), jewelry and perfume lines, children books (Madonna), amusement parks (Dolly Parton). Others will work harder and perform live more often (Celine Dion). New technology always brings about commercial opportunities, though it requires occasionally drastic restructuring and much resistance

As was the case with Napster (see how nearly 10 years ago I recommended how artists should mobilize to benefit from it before it was too late, ‘How Hip-Hop Artists Could Marry the Internet’ at: http://www.blackelectorate.com/articles.asp?ID=78), Vevo arrives with most artists and their managers asleep at the wheel. In Hip-Hop with the exception of a few artists including 50 Cent (Thisis50.com), Joe Budden (JoeBuddenTV.com) and Soulja Boy (http://www.youtube.com/user/SouljaBoy) few artists seem to grasp the amount of money that is awaiting them online through video content and community.

It is not clear yet how many artists will really profit under Vevo’s ad sharing arrangements. Again, with the usual artist mentality (geared only toward making music) and clueless managers it is likely that only the strong will survive. Those with good relations with their labels and the ability to move the masses of their fans to action, will generate the kind of traffic that will pay off. For generating 100 million hits for her video at YouTube, ‘Girlfriend,’ Avril Lavigne’s management claims she earned $2 million. Personally I doubt this. And if it happened once, I don’t believe it will happen again because of the variety of ways that people can artificially inflate traffic and viewer statistics that YouTube will hip the labels to. The record labels mastered how to jerk artists on their royalty payments, and this tradition will surely continue with ad revenue. The Lox may have to update their classic ‘Rape’n You Records’ skit.

Fans and Consumers. As already mentioned, Vevo promises to be a convenient innovation on the way most of us have been able to watch music videos or enjoy live interviews and performances. But if the site doesn’t reproduce the freestyle feel of YouTube; or its ads are distracting and interfere with viewing pleasure, and if it doesn’t succeed in bringing EMI and Warner on board, it will fall short of its potential.

In that sense it is a double-edged sword. The more powerful Vevo is the more likely it is to bring in more revenue for a struggling industry which could lead to more artists being signed. But it also risks the potential of turning off fans. By moving the music business model away from selling and more toward advertising, there is a good chance that certain kinds of artists will be considered too controversial for advertisers’ tastes and sponsors will put their dollars only behind those artists that are less threatening and which support the kind of image they are looking for. This means that even if more artists are signed, they may only be of a certain type (in terms of look, politics, lyrical content).

In addition, Vevo will allow record labels and advertisers to profile those enjoying the service and this may lead to some interesting controversies regarding where advertising dollars go guided by race, class, sex, and creed (religion, political ideology) and continued Internet privacy issues.

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In conclusion, it will be interesting to see how Vevo balances the reality that people have been conditioned and accustomed – for a full decade now – to getting music for free, with its own tradition of selling and the temptation to charge for things in a recession.

I expect that it won’t be long before we see Vevo offering music videos

for free but charging for concert pay-per-views and even resurrecting

potentially lucrative fan club and online community arrangements for

its artists, like that which Prince established with his NPG Music Club but failed to maintain.

If so, the labels – through Vevo – may be picking a fight with Live Nation (which just announced it will make video and audio from concerts available in Apple’s iTunes store), perhaps intentionally so.

This could get real interesting.

Prince’s community charged just under $8 per month and $100 for its annual membership but complaints about how the site was managed and the way it provided benefits resulted in Prince lowering the membership fees dramatically. A friend of mine – a big Prince fan – told me she became an NPG member because of the privileged access it gave her to concert tickets, merchandise discounts, and exclusive music.

I expect that Vevo will open the door for labels to do what entrepreneurial-minded and independent artists like Prince couldn’t, and what Live Nation is already doing, without a Vevo in its life.

The result could be class divisions in music like we now see in sports where the most interested fan can’t always afford live entertainment tickets (funneled into subscription services like cable and satellite TV) while the wealthy fan and corporate sponsor gets exclusive access.

Are sports fans better or worse off because of this?

Instead of selling music, Vevo may open the door to the industry selling only access and events, for better and worse.

The historic significance of December 8, 2009 is still not clear, but I’m convinced it will be a day that will be remembered for quite some time.

Cedric Muhammad is a business consultant, political strategist, and monetary economist. He is author of the book, The Entrepreneurial Secret (http://theEsecret.com/). His talk show, ‘The Cedric Muhammad and Black Coffee Program’ can be viewed every Wednesday from 12 to 5 PM EST (USA) at: http://www.cedricmuhammad.com/media/. He can be contacted via e-mail at: cedric(at)cmcap.com

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