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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.

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To sign up as a label, download the form here. Print, sign, scan and email to emmy@musicindie.com. 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.

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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.

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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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Kudos are YouTube Certified

The YouTube platform is probably the most complex of all our income streams. In order to ensure we are capable of giving labels the most informed advice on YouTube strategy, three of us from Kudos undertook in depth YouTube training at Google’s UK HQ. Having passed an exam at the end of this training, Kudos is now a “YouTube Certified” company.

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You can find out more about the YouTube certified program here. 

YouTube has made the transition from being a discovery platform, where people check out new music, to a consumption platform in its own right. For a couple of years now we have been monetising UGC content (music on videos uploaded by 3rd parties) for our digitally distributed labels using Google’s Content ID  technology. Kudos now has active claims on over 89,000 UGC videos on behalf of distributed labels. These videos have been viewed 286 million times (1,250,000,000 minutes of youtube viewing!). YouTube analytics are always a little mind blowing!

Last February we launched our AVCD service for YouTube, enabling labels to deliver their whole catalogue (if they wish) direct to their own YouTube channel as pack-shot videos. We have now delivered over 8,000 fully tagged and premiumly monetised videos to 150+ label and artist channels.As you may have read, YouTube plans to launch an ad free subscription service in the new year. In order to take full advantage of this, we would encourage any label who is yet to partner their channel and deliver pack-shot videos to do so ASAP so it’s all ready at launch. In general, one of the core strategies to ensuring you receive the best possible return from YouTube is to try and move views from user uploaded pack-shot music videos to those on your own partnered channel.

As with any rapidly growing sector, quite a few “carpet baggers” have arrived in the “YouTube Content ID” space, trawling popular YouTube channels, touting for business. Most claim to be “the largest”, “the cheapest”. It’s worth pointing out that we charge the same fee for YouTube as we do for any other digital income stream, and that we are best placed to help you develop an overall YouTube strategy for both your own channel and your UGC claims. Content ID monetisation (which these companies really focus on) is the low hanging fruit. Optimisation requires looking at the bigger picture. Speak to your Kudos label manager for more information.

Apple has become one of the world’s largest companies by focusing on user experience. They design hardware and software that looks as good as it functions. Visual aesthetic has always been a massive part of its USP.

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So how does this ethos apply to iTunes? Look closely at any music product pages in the iTunes store library and notice the consistency. Everything from the use of capitalisation on an album title, to how a featured artist or remixer is listed, to the standard of artwork and audio are all subject to the strictest quality control, aimed at ensuring the best possible user experience.

As part of this QC process, Apple grades all aggregators (suppliers). Every month we receive a report from Apple on the standard of our deliveries.

The more our deliveries meet Apple’s exacting standards;

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The fewer releases are subject to quality control interrogation

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The quicker our releases appear on the iTunes store

Over the past 18 months we have been busy refining our label management systems. Each release is now individually proofed by an experienced label manager. If a release doesn’t reach our technical QC standards, it is sent back to the label for revision. This system of proofing and revising continues until we arrive at a release that is fit for delivery and release.

As a result, Kudos is proud to announce that we are among the first iTunes aggregators to achieve a quality control score high enough to bypass pre-store quality control entirely.

We are committed to ensuring our distributed releases are of the highest quality, not just in terms of the music itself but also how they are presented . We believe this attention to detail helps our labels’ releases distinguish themselves in a crowded digital marketplace.

iTunes Pre-order enhancements

In other Itunes related news, Apple have enhanced some or the promotional tools available during the preorder period.

Instant Gratification
Labels can now designate up to 50% of the tracks on a presale release as “Instant Gratification” tracks. These track(s) are available for download immediately when a customer places a pre-order, with the rest of the album delivered on the release date.

Pre-Order only tracks.
Labels can designate a track as “pre-order only”. As you might have guessed, pre-order only tracks are bonus tracks which are only available to customers who pre-order the album. Note that pre-order only tracks must be the last tracks on the album.

Pre-order price incentives.
Labels can now offer a special discount during the pre-order period.

To take advantage of any of theses, please speak to your Kudos label manager before you set up your release.

One of the most significant changes in the digital marketplace we have witnessed over the last 12 months is how YouTube has moved from being perceived as an irritation to a becoming a significant revenue stream.  Following Merlin’s successful negotiations we have been able to really engage with this service for the benefit of our labels.

We are now stepping this engagement up a gear.

 

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YouTube is currently one of our fastest growing digital revenue streams.  Up to now this income has been predominantly UGC (“User Generated Content”) matched income, where we have monetised the 3rd party usage of our distributed labels’ repertoire using Google’s “Content ID” technology which scours the service for videos which contain matching audio.  At the same time we have also been working with our labels to optimize the monetisation on their individual YouTube channels.

We have now launched a service that enables our participating labels to deliver automatically generated videos for any (or indeed every) track in their catalogue straight to their nominated YouTube channel(s) with a few mouse clicks.  These Kudos generated “videos” (the audio track accompanied by sleeve or label artwork) are fully tagged and optimised both for search and cross promotion/upsell.  They are also treated by YouTube as “official” videos and potentially attract Premium Advertising when compared to an equivalent UGC video.

 

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YouTube is, by far, the most popular streaming service in the world and is the 2nd most popular search engine in its own right.  It has a 25% user penetration across Europe (double that for under 25s). It is the 3rd most popular music discovery tool (after radio and personal referral).  In 2010, over 30% of all YouTube views were music (a figure that I can only assume has risen).  Our AVCD Service, coupled with our label manager’s guidance on best practice will help ensure our distributed labels extract maximum return from this important service.

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Random Testimonial

  • ~ Dom Servini, Wah Wah 45s

    Having been with Kudos since the birth of our label a dozen years ago, I can safely say that we wouldn’t still be here today if it wasn’t for the support, belief and trust we’ve received from Kudos Records. They’re always on the end of a phone or e-mail with advice when needed, and [read more]

  • Read testimonials in full »