Ad-funded music model under strain

The digital industry is warning music companies not to pin their hopes on advertising revenues to plug the shortfall from declining physical sales.

The calls follow a breakdown in negotiations between YouTube and music collection agency PRS for Music, which saw the video-sharing site start to pull down its entire catalogue of music.

An earlier row over licensing fees with Warner Music resulted in all the major label’s content being removed from YouTube in January.

A Warner Music spokesman said, “We simply can’t accept terms that fail to appropriately and fairly compensate recording artists, songwriters, labels and publishers for the value they provide.”

Google has attracted anger from the music industry after demanding being given the chance to build up sustainable advertising income before being hobbled by what it deems unrealistic fees.

Patrick Walker, head of partnerships for YouTube EMEA, said, “The more popular the videos become, the more money we generate through advertising, which we can then share with PRS and other partners. It has to be win-win; you can’t strangle it from the start.”

Rival content distributors have called for more reasonable revenue deals as they work to build this emerging market. In January 2008, internet radio station Pandora pulled out of the UK due to licensing costs.

Steve Purdham, CEO of ad-funded music service We7, said unrealistic expectations from music companies were holding the market back.

“YouTube has highlighted the economic difference between what advertisers are prepared to pay and what the music industry would like to accept,” he said. “We’re paying PRS but we don’t agree with its rates. We’re unsure if we can get the advertisers to pay the rates that will allow the business to be sustainable.”

Digby Lewis, creative director of video-sharing site Dailymotion, said, “In the current circumstances you have to wonder how sustainable ad-funded content is across all sectors.”

This highlights a greater need for understanding between the two worlds if online music is to prosper.

Dave Chase, head of music partnerships for media agency Mindshare, said there was a need to manage expectations. “There’s a disconnect between the two industries. Radio 1 pays up to £20 a minute for music, so when the industry has to accept pennies from YouTube it’s a bitter pill to swallow and hard to get the artists to accept.”

The issue becomes increasingly pressing as the music industry looks to advertising to fill a financial gap from falling physical sales, one which shows little sign of being bridged by digital download sales.

Dan Cryan, senior analyst at Screen Digest, said, “It doesn’t look like digital sales are going to make up the revenue gap, so it does look like we’re in the slow decline of music sales as a consumer-spend business.

“The monetisation models on Google are still distinctly patchy. The industry is looking much harder at the maximum revenues it can get from various online channels,” he added.

The problem arises as a growing clutch of new music providers attempt to take advantage of the growing market for ad-funded services, such as Swedish-owned music service Spotify and the long-awaited MySpace Music, which is still seeking sponsorship partners ahead of its launch.

Mark Drasutis, senior director of media products at Yahoo – whose Yahoo Music service attracts nearly 1.5m unique visitors a month – said businesses that rely on music for revenues would face challenges.

“It’s about helping the large consumer brands reach people through the range of music services we offer. If you just have music as a piece of your business you won’t get those large advertisers,” he said.

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