No wonder independent labels are up in arms about being paid zero royalties from Apple Music’s three-month free trial.
MBW has been passed analysis from industry experts which estimates the worth of this cost-free window, taking into account the sheer mass of people Apple want to attract.
The conclusion is that the trial is worth a whopping US $4.4bn in customer acquisition costs (CAC) to Apple.
Arguably, this means that record companies are collectively contributing this money to give Apple a vital advantage in the battle to accrue streaming customers.
As reported earlier, Apple is so far offering the indies no royalty compensation during this three-month period.
These labels (and their artists) will only be paid when the giveaway has completed, when they will broadly receive 58% of subscription money (with 12% going to publishers/songwriters).
This has led to the very real possibility that the catalogues of independent label titans such as Beggars Group (Adele, Jamie XX), Cooking Vinyl (The Prodigy, Billy Bragg) and Domino (Arctic Monkeys, Franz Ferdinand) not being licensed in time for Apple Music’s launch on June 30.
Our insider says: “The three-month free trial is Apple’s customer acquisition cost (CAC) that they are asking us to pay.
“Labels’ donation to their CAC is 3 months X 58% of 9.99 X the number of people they expect to take the trial run.
“They are hoping to end up with 100 million subscribers so if they can convert at 40% they need 250 million trials. That’s $4.345 billion that labels will be contributing.
“Labels will be contributing $4.4345bn in customer acquisition cost to apple’s free trial. All this to increase Apple’s dominance in the phone business.”
“All this to grow Apple’s market cap and equity value, to increase their dominance in the phone and computer business and to drive additional future profits from media subscriptions.
“It is my suspicion that the majors are surely getting some percentage of that dollar amount up front or at some point – just as they do from Spotify, where they were also granted equity. Of course, that amount will not be shared with distributed labels or artists.
“I would not be surprised if [the majors] used 100% of that number – rather than their true [global] market share of 65% – to negotiate their bonus payment.”
Apple is aiming to license the independents direct, but has a battle on its hands. Suspicion is rife amongst the independent community that Apple has offered the major labels some kind of monetary guarantee to soften the blow of the three-month trial period.
Digital services like Apple Music usually negotiate with the majority of leading indies through worldwide commercial representative Merlin, but Apple has chosen to strike direct deals with labels.
“there is a question as to the wisdom of signing this agreement before streaming remuneration is granted.”
Charles Caldas, Merlin
Regardless, Merlin has sent some advice to its members during these negotiations – which has now been anonymously passed to MBW.
Addressing the royalty-free three month trial, Merlin’s Charles Caldas, CEO, told indies: “This raises an obvious concern as to impact on our members’ revenues.
“Royalty free trials usually relate to services and relationships which are new to the consumer. However, we have to assume that Apple will use this trial to upsell its existing consumers to subscription so that any fan wishing to purchase a download in the coming three months will be upsold a subscription.
“That seems likely to us to undermine the download market for that three month period (July to September) – not to mention the effect it could have on other streaming services.
“Furthermore, given it appears these trials will be royalty free, lost iTunes download sales during this period will not be replaced by streaming revenues from the new service.
“If that were the case, then in our view it would seem to make little sense in such circumstances for any of our members’ artists to release an album this summer, because any labels that signed up to the terms of the agreement we have seen would to a highly significant extent be releasing music into a free market.
“Taking all of this into account, we anticipate that any member concerned about the value of their music will carefully consider the impact of such a three month free trial on their business.”
When, exactly, that three-month trial takes place is another matter: there is confusion in the market over whether this will be a fixed three months from June 30 – October 30, or if each individual subscriber has a different start date.
“Put simply, if Apple is to use this trial to migrate its consumers away from downloads to subscription streaming, but on a royalty free basis until seemingly October at least, there would be a question as to the wisdom of signing this agreement before streaming remuneration is guaranteed (October 2015?),” said Caldas.
“Merlin has already been approached by a partner service asking about discounts to match terms agreed with Apple.”
Charles Caldas, Merlin
“If Apple is requesting royalty free three month trials as a permanent feature of the service, then there will additionally be a longer term economic impact as not just Apple, but other services may ask for similar terms. Merlin has never entered into a deal that includes a royalty free trial of this length and (not least for the reasons above) we find it highly unlikely that the majors would have done so in this instance.”
Caldas also raises concerns over the impact Apple’s three-month free trial and its family offer – which asks $15 a month for up to six users – will have on the wider digital market.
“Merlin has already been approached by a partner service asking about discounts and subsidies to match terms agreed with Apple,” he commented. “We would expect further requests of this nature in the coming days.
“Therefore, unless there is appropriate compensation within the agreement with Apple for these aspects of the service, it seems to us that these provisions threaten to reduce rates across the market.
“This would also extend for example to the artist upload area where from Merlin’s perspective, appropriate payment ought to be made for use of our members’ content.”Music Business Worldwide