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Digital music: Go legal, get screwed

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The Big Four record labels want us to think that the sound recording business is a reformed character these days. Recently, we've heard ritualistic self-flagellations from a succession of top executives. There was Ed Bronfman at Warner's, prostrating himself in front of Apple. In a similar vein, Universal's chief Doug Morris admitted UMG had been clueless, and got it all wrong. EMI's new asset-stripping chief Guy Hands issues almost weekly memos telling the company to reform or die. While over at Sony BMG, staff have been told they must, er... blog their way back into music lover's hearts.

For years, the Big Five (now Four) have preferred to litigate rather than license their catalogues, but we were told that was no longer the case.

"We have to license... and think like the publishers," said UMG's digital chief Larry Kenswil back in January, setting the tone for the year.

(Publishers and indie labels were quick to seize the opportunity of digital, and licensed the original Napster.)

But the paradox remains: if you go legit, you will get punished by the corner of the music business with the most to lose. If you make out like bandits, and blithely publish copyright material, then you'll get your reward right here on Earth. Just contrast YouTube's $1.6bn purchase by Google with Pandora's struggles to maintain viability by paying sound recording royalties.

According to Michael Robertson, the major labels have now set a new kind of trap. They're licensing all right - only they're licensing on terms that screw new businesses. In his latest Michael's Minute, Robertson alleges that startup Imeem has settled a lawsuit with UMG on terms that ensure it will never make money.

Imeem started out as something of a joke - a noddy web-based IM client that looked like prime fodder for the scorching wit of Uncov. Then Imeem discovered that IM was really quite a good way of sharing music, and its user base exploded overnight. In May, it got sued by Warners.

"A financial analysis of a royalties plus operational costs reveals that Imeem cannot ever turn a profit with this financial structure," Robertson writes. "Setting aside the large prepayments, online advertising revenues will not even cover the one penny-per-play song, much less the operational costs of running a net company, such as servers, personnel and bandwidth."

Imeem didn't have the money to continue a legal defense, he says, and the only option is to continue to bleed red ink until someone buys the company:

"Candidly, Imeem personnel will say that their hope is to sell Imeem to a large conglomerate that desires the substantial traffic Imeem currently receives and is willing to overlook the underlying economics. While this 'YouTube' strategy may experience fleeting initial success, it's no way to build a long-term viable company, and it is most certainly not a blueprint for a healthy partnership between labels and digital music companies."

(That says a lot about the fickle and short-sighted view of Silly Valley's venture capitalists. Back in the dotcom days, WebVan was able to throw out a billion dollars building a national distribution chain of physical warehouses. Today an Imeem can't find $20m to fight a lawsuit. But that's a discussion for another day...)

Doubtless this will be seized upon by freeloaders who insist it's their moral duty not to pay for music. These "activists" are never around to support lawsuits when songwriters want a fairer share of royalties from the Major Labels - they're probably too busy reading Boing Boing.

Nor is any business obliged to sign its own death warrant - there are more honourable exit strategies.

But let's just say it's a pity that in order to maintain control, the major labels insist on shooting themselves in the foot.

As the chief of the indie label alliance AIM, Alison Wenham, said earlier this year:

"You can fight piracy valiantly on the beaches and in the trenches, but you can't win it. The average file sharer has as much chance of being caught as they have of being hit by a meteorite. We need to monetize the usage of our music - whether or not we delivered it in the first place." ®

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