Spotify Windfall

As you may have seen in the news, Spotify recently floated on the NY stock exchange.

Merlin (the rights agency which represents independent labels ) received an equity stake in Spotify at launch and have now disposed of these shares on the open market. Proceeds from this sale have been distributed to Merlin members (including Kudos) in proportion to each member’s Spotify turnover.

You can read more about this here.

We will shortly receive track-level accounting from Merlin covering nearly a decades worth of Spotify usage data. These reports will enable us to allocate these proceeds to labels, as per our Fair Digital Deals Declaration.

Hats off to Merlin for seeking and securing parity with major labels in their original licensing negotiations with Spotify and also for committing themselves to providing the data necessary for distributors and labels to equitably distribute this windfall on to artists. I am quite sure that many of the major’s revised policies on sharing equity gains with Artists have been a direct result of moves by indie labels to provide more equitable and transparent accounting.

25 years of Kudos Records Ltd

Kudos Records is 25 years old today.

We are good at distributing, but bad at blowing our own trumpet. However, we felt 25 years was a milestone worth celebrating.
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The IFPI recently published their “State of the Industry” report for 2016.  We were curious to see how closely these industry-wide figures reflect the changes we’re seeing within our niche sector of the music marketplace so we’ve spent some time analysing our sales stats for comparison.

Below are a few trends we discovered which we thought you might find interesting.

Growth in Physical and Digital
We saw overall growth of our business of around 20%, marking our tenth year of uninterrupted growth (yay!). Encouragingly, while most of this growth was fed by digital revenue (+30%), we saw significant growth in physical sales as well (+8%). However, this massive growth in digital did cause an overall shift in the balance between digital and physical revenue, swinging from 50%:50% in 2015 to 55%:45% in 2016.   This is broadly in line with the industry’s split  of 57% digital v 43% physical.

Vinyl vs. CD
Vinyl / CD ratio (based on turnover) was  77:23 in favour of vinyl which represents no significant change from 2015.  However it is worth noting that this is not an accurate reflection of demand for these two formats.  Vinyl production remains problematic, with frustratingly slow turnaround times as demand continues to outstrip supply.  

Big Shifts in Digital: Streaming Becomes the No.1 Revenue Source
The growth in digital revenue was driven mainly by a dramatic 67% increase in revenue from streaming, with downloads declining by around 12.5%.   This rate of growth in streaming was (perhaps surprisingly) greater than the industry’s as a whole, where streaming was up 45.2%.   Downloads now make up 31% of Kudos’ digital sales, whereas streaming accounts for 58%.  This means streaming now represents 32% of our overall turnover.  Downloads and streaming were level-pegging in the previous year.

Video Services Significant, But No Real Growth.
In 2015 around 5% of Kudos’s digital revenue came from YouTube and other video-based services. This increased broadly in line with overall growth in 2016, so there was no significant change to the market share.

More Revenue from Overseas
One of the ways that streaming services have increased their market share has been to expand into new territories. In some cases generating revenue in territories where previously there was no digital market to speak of at all.  We see this trend reflected in our sales data which shows more growth from outside the British Isles (38%) than within it (16%) with overseas sales now making up 75% of digital revenue.

Growth across physical and digital.

  • Digital up 30%
  • Physical up 8%
  • Streaming up 67%
  • Streaming accounts for 58% of digital
  • Downloads 12.5% down
  • Video showing growth overall,  but steady in real terms
  • Digital growth coming largely from outside UK.

Much of the focus of the ongoing streaming debate has rightly moved away from “how much do these digital services pay?”, to “how much of this money actually finds its ways back to the artists?”.

It would seem (judging from the per stream rates reported by some artists) that there are still some record companies using contracts and accounting practices that were designed for the pre-digital age, with digital sales attracting the low royalty rates you would normally associate with physical products.

There is also the issue of fair distribution of *breakage income and **equity, where rights holders (record labels/distributors) receive income not directly related to specific recordings.

The ‘Fair Digital Deal Declaration’ is an initiative by WIN which aims to encourage transparency and fairness in this area. WIN is an umbrella body, whose membership includes local independent trade organisations such as AIM (UK), A2IM (US), AIR (Australia), VUT (Germany). You can read more about WIN here.

The concept is really pretty simple; labels signing up to the declaration agree to account fairly and transparently to artists for digital income.

You can read the full declaration here.

The Declaration and Kudos
For a label to sign up to this declaration, they need to know that their distributor is equally committed to the same level of transparency and ‘fairness’. Kudos has always provided our labels with complete and transparent accounting. Distribution statements on our label portal contain, wherever possible, detail at transaction level and are completely itemised, displaying income source, genuine exchange rates, and distribution discounts. We are also fully committed to distributing any breakage or equity income we receive.

So, we have taken the liberty of revising the WIN version for our own use to make it more applicable to our distribution business model.


To sign up as a label, download the form here. Print, sign, scan and email to Signatories will be added to a directory which WIN plans to maintain, and will then be issued with a ‘Fair Digital Deal’ badge which they can display on their website.

The Fair Digital Deal Declaration makes a really positive statement. We would like to see it develop into a recognised ‘kitemark’ which could guide artists and managers to make a more informed choice when considering labels. This, in turn, should encourage the wider marketplace to adopt fairer and more transparent accounting practices, which has got to be a good thing.

*Breakage can cover a number situations, but the most common is where a mobile phone service provider pays a digital music service a fixed fee per customer. Some of these customers may never use the music service, but a share of this fee is still distributed to rights holders.

**Equity share is where a service gives rights holders shares (or options on shares) in the digital service as part of the supply agreement. When the service goes public through an IPO or is sold, the rights holder would receive their share of that disposal value.

As you may have read in the news recently, there is a bit of a dispute brewing between the indie music sector and YouTube over its planned subscription music service. Apparently, YouTube plan to launch a subscription service, where, in exchange for a monthly fee, consumers can watch YouTube music videos without ads and cache YouTube content for offline consumption. Much of the functionality will be similar to services that already exist (Spotify / Beats / RDIO / Google All Access), however, it has been reported that the subscription charge will be significantly below the current market rate. It has also been reported that the terms being offered to indie labels are significantly inferior to the terms being offered to the majors.

You can read more about the background to this story here, here and here.


Kudos is a member of Merlin which negotiates various deals on our behalf. The advantage to this approach is that we may benefit from the collective negotiating position of Merlin, which represents companies across the indie sector including labels like Beggars Banquet and Domino.

We at Kudos have been very pro-active at engaging with the YouTube platform. We have developed systems to deliver all of your music to YouTube as pack shot videos, and have monetised your music’s use in User Generated Content (UGC) via Google’s Content ID program. We have also undergone extensive training and are a “YouTube Certified” company. Our efforts have been rewarded and we have seen our YouTube income increase dramatically. It is however worth keeping this in perspective. It still represents a relatively small, single digit percentage of our overall digital business.

We do understand that many of you will be concerned that your content may be made unavailable on this tremendously important platform. We would like to make clear that we have received no such threat directly.

We would ask you to take the long view. There are two issues here; firstly there is the fairness of the deal itself, but there is also how this deal might impact on the existing digital music ecosystem. There is a massive difference between ‘disrupting’ a business model through innovation, and ‘undercutting’ a model through abuse of market share. We believe (based on what has been reported) that YouTube is doing the latter, and that it is important that the independent community stand united on this.

It has been reported that many content suppliers have already signed up for YouTube’s new service including the majors and a few of our digital distribution competitors. You have to wonder, did they strike a deal that was in their artist or distributed label’s best interest, or were there incentives (advances, breakage) which benefited only their bottom line? For our part, we would like to assure our labels that any tangible benefit we receive from any deal concluded with YouTube will be fully distributed.

We will, of course, keep you posted on any developments.

In our recent Record Store Day post, we commented that if we really want to support music retail, we need an all round re-appraisal of pricing and discounts. Sadly, the music industry has an inherent inability to optimise prices.

The current retail landscape
The recorded music market is currently running with two consumption models. We have an ownership model (CDs and a la carte downloads) and an access model (streaming).

This mix is great for the consumer as it provides a real choice;

  • Some consumers need the comfort of ownership
  • Some like a tangible product to sit on their shelves
  • Some more casual music buyers can’t justify £120 a year for a streaming subscription
  • Others like having access to a complete jukebox to listen to any time

This mix is also great for labels and musicians;

  • CDs and downloads provide a relatively quick “front loaded” return to help recover the initial costs of recording, manufacturing and marketing
  • Streaming provides a steadier income for a longer time window and across a wider catalogue

CDs, vinyl and a la carte digital retail are also accessible business models. Setting up a streaming service requires massive infrastructure, whereas setting up a record shop selling physical vinyl, CDs and a la carte downloads can be achieved without requiring massive start up capital.

While we believe that subscription streaming is a completely viable business model in its own right, we also firmly believe that the best of all worlds is a diverse mixture of consumption models.

However, if we wish to maintain this mix, we urgently need to reconsider the price of CDs and digital album bundles.

The problem we face is that the prevailing price structures we adopt for these ownership formats are unable to react to changes in the overall consumer marketplace.

We have an elastic product crippled by inert pricing.

A little price history.

CD pricing
When CDs first started appearing in stores, the initial wholesale price, or “published price to dealer” (ppd) of a new release was around £7.30. The logic, it would seem, was that a CD should retail for about twice the price of a vinyl album, which at that time was £5.99 (for a very keenly priced new release). So, £12.00 less vat at 15% (the rate at the time), less a 30% profit for the retailer left you with a £7.30 ppd. So, the introduction of the CD effectively doubled the price of our core product.

Fast forward 25+ years and the ppd of a top line major label new release CD remains stubbornly at around the £7.30-£8.20 mark. During this time the cost of manufacturing CDs has dropped to a fraction of what they were in the mid to late 80s.

Enter the Supermarkets
In the late 80s, supermarkets decided to get into the chart CD business. Unlike record companies, supermarkets know ALL about pricing to scale. Record companies were told that the highest retail price to attract impulse purchases of CDs was £7.99 or less. However, rather than reviewing the ppd of CDs, record companies gave supermarkets massive discounts, creating enormous price disparity in the marketplace. You were (and still are) left with a situation where independent record stores can save money by buying their chart CD stock from their local Tescos rather than purchasing direct from a record company or distributor. Price in general, and this disparity in particular, was a significant contributor to the near death of high street music retail.

This denial strategy of increasing discounts (rather than reducing the ppd) is doubly insane when you consider that publishing royalties are based on ppd. Record companies seem prepared to suffer inflated publishing royalties rather than acknowledge any market shift in prices.

Download pricing
In the digital “ownership” a la carte world, prices are just as stubbornly static. iTunes launched its service over ten years ago, setting albums at £7.99 and single tracks at 79p, and despite almost all early commentators expecting this price to drop, it has, in fact crept up to 99p and £9.99+.

The original £7.99 top line download album price was chosen by record companies as they felt it needed to be low enough to seem attractive, but not so low so as to cannibalize physical CD turnover. It was not set to extract the greatest value from the market, but to preserve a legacy format, which was itself overpriced.The difference between this inflated album price and the individual track price (which Apple insisted had to be 79p) made the album bundle a poor value proposition, encouraging customers to cherry pick tracks. A quick analysis of our own download stats shows that 2/3rds of the digital album a la carte customer base choose to cherry pick album tracks, buying an average of 1.7 tracks per album bundle, instead of purchasing the full album.

The price conundrum
To the consumer it makes sense for music to have some consistency in pricing. To them, CDs are CDs, downloads are downloads.

However, for ownership models in particular, the situation is very complex. Any CD or digital album releases will be owned by one of thousands of different record companies, all of which are free to set their own wholesale price. Prices for a specific album release might fluctuate a little as one company seeks a competitive advantage over another, but there is simply no market incentive or legal mechanism for the industry to try and grow the OVERALL music market by reducing album prices across the board. While many independent labels and distributors have tried to redress the balance by reducing ppds and increasing discounts to independent retailers in recent years, we really need an overall realignment of pricing if we want to really influence consumer behaviour.

Is a price correction even possible?
First of all, any economic help offered ownership formats must favour the consumer. Disadvantaging one model by withholding or “windowing” content in order to shepherd consumers to a “favoured” model is no way to grow an overall market, and does nothing more than irritate our best customers and encourage piracy.

For record companies to get together and discuss pricing proposals would break competition law, so any possible solution needs to be driven by retail. For CD releases we ideally need some mechanism which can dramatically reduce wholesale ppds, and at the same time reel in discounts. Perhaps a price branding exercise where, to qualify, a new release’s ppd would need to be below £5.00, but where major retail, in return, agree to work with dramatically reduced discounts?

For a la carte downloads, the shift would really need to be driven by the current download market leader. If they can persuade record companies of the need for a correction, then the rest of the a la carte market would certainly follow suit.

Price and value are very emotive topics in our industry. Fears of a “rush to the bottom” and “eroding value” have prevented any proper consideration (let alone consensus) on pricing strategy. We constantly underestimate the mass market potential of music – if priced correctly. We now know from both our experience with piracy and subscription streaming that demand for music is elastic; when you drop the overall price, consumption soars. The question we need to ask is “what is the sweet spot?” Meanwhile, we have recently seen apps market revenue overtake music in the iTunes store. Our real competition comes not from each other, but from Candy Crush Saga and Flappy Birds.

NOTE: “Album sales” only refers to CD and digital bundles. I have excluded vinyl from this post. The cost of vinyl will continue to rise as long as supply is limited and demand is high.

Kudos’ physical release schedule will be pretty quiet for the next few weeks.

This isn’t a seasonal issue. The early spring sunshine isn’t keeping shoppers away from the high street. In fact, March and April have traditionally been very strong trading months.

The cause of this new release drought might surprise you; Record Store Day.

Right now, we have 20+ manufacturing jobs in production, all of which have come to a grinding halt while the pressing plants make hay by pressing up umpteen thousand Oasis LP re-issues, Abba 7”s and REM Box sets. We have even had one vinyl plant refuse any order of less than 500 units until after Record Store Day.

So, for the next six weeks, we are effectively locked out of the vinyl business.


Kudos have always been a strong supporter of Record Store Day. We have participated since its inception and have enjoyed some notable successes. However, it now feels like it has been appropriated by major labels and larger indies to the extent that smaller labels who push vinyl sales for the other 364 days of the year are effectively penalised.

This isn’t at all a criticism of the organisers or of the concept. Tom Lane at ERA and Natasha at Resident Records have put a lot of great work into co-ordinating what I’m sure will be a great day for record retail. But for us, at least, it’s at a considerable cost.

Personally I think a re-think is required. One idea would be for RSD vinyl releases to have a maximum press. This would ensure that RSD releases were truly ‘special’ and would take the pressure off limited vinyl manufacturing capacity. It would also help if pressing plants took a fairer approach to how they allocate pressing time. Unfortunately, the few vinyl plants that remain operate in a near monopoly environment, so voting with our feet isn’t an option.

Record Store Day is also no replacement for a more comprehensive appraisal of the plight of the independent record stores. While the oft-mentioned vinyl resurgence is all well and good, what independent retailers could really use is an all round reappraisal of CD pricing and discounts. If we could find a mechanism to globally lower dealer prices, while at the same time cutting the discounts we gave to the supermarkets, larger chains and multinational web retailers, we could make CDs an impulse buy while at the same time levelling the playing field and saving labels a fortune in mechanical royalty payments. (Our inability as an industry to optimise our pricing is a subject I will cover in a later post). For our part, Kudos have long been encouraging labels to reduce CD dealer prices, but, as a small, niche distributor, our influence on consumer behaviour is rather negligible.

Fortunately, as far as Record Store Day releases themselves go, our labels are all ahead of the game and none of our RSD releases are affected by the above bottleneck. We look forward to announcing some great releases from Error Broadcast, Jazzman, Lounge Records, First Word Records, Tramp Records, Omniverse Records and Wah Wah 45s.

We are kicking off 2014 with a rash of new label signings!

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Random Testimonial

  • ~ Aaron Schultz, Bastard Jazz

    Kudos is by far the most professional and easy-to-reach distributor I’ve ever worked with. I’d trust these guys with my children (if I had any). If that’s not enough, they really love and understand the music they’re distributing, and it shows![read more]

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