Apple iCloud Review: Don't Cut Your Cords Just Yet
Apple iCloud Review: Don't Cut Your Cords Just Yet

One of the issues behind Google's decision to launch its Music Beta Cloud service without the necessary licenses has also been felt in negotiations between the majors and Apple over the latter's forthcoming cloud offering, sources told Billboard.

The Google negotiations derailed for a number of reasons, sources said, but one of them occurred when Universal Music Group and Sony Music Entertainment demanded a higher cut of the locker revenue than the business model proposed by the search engine could accommodate.

Google was willing to give the music-rights holders 70% of the revenue derived from its cloud service, with it retaining 30%, sources told Billboard. But Google had agreed to pay music publishers a 12% all-in portion of the revenues for performance, mechanical and ephemeral licenses, which means that the master rights owner of the recorded music side of the majors would get 58% of the revenue. Meanwhile, sources said that Google proposed to pay independents less than majors, initially offering the indie record label sector a 53% slice of the revenue. Some indie executives said Google may have started with that offer, but they are fighting for a larger cut. (Reps for Google declined to comment on the situation.)

But depending on how you look at it, the Universal and Sony demands on the split could be seen as a way to pry 2% of the Google cloud revenue from the music-publishing side of the business -- or were the two majors trying to take that 2% revenue cut out of Google's share? From the publishers' point of view, the labels are being greedy at their expense.

"With Google, both EMI and Warner labels were fine with the proposed deal, but the holdup was Sony and Universal griping about the publishers getting 12%," one music-publishing executive familiar with the situation told Billboard. "Now, Apple has concluded its deal with some of the labels and we are stuck in the exact same fight over what [the publishers] get. It is just crazy. They are holding up the entire industry on this brand new model."

But not everyone agrees that the majors are making a play designed to cut the publishers' share. "Nowadays, the majors are trying to get 80% of the revenue in the new digital deals coming their way, so I am guessing that the majors are trying to cut Google's and Apple's share," an executive who is often privy to such negotiations told Billboard. With that slant on things, the overall split with Google as sought by Universal and Sony could be more along the lines of 72/28% in the music industry's favor.

Google and Apple, like Amazon, want to offer a scan-and-match-style locker service, where instead of millions users each uploading different copies of the same track to store in their own locker, the service would scan users' libraries and match the songs the services have licenses for in a centralized server. Actual payments for individual tracks would depend on usage, with payment cuts pro-rated by actual plays.

But Amazon launched its cloud service without licenses, causing each user to upload their own music into their own lockers. Amazon executives have since said they will negotiate the necessary licenses so that they can expand their consumer offering. Likewise Google launched its beta cloud service without a license, although unlike Amazon, it first tried to obtain the necessary licenses. In fact, Google is still in negotiations to obtain the necessary licenses, major label executives say.

But others say the revenue split wasn't the only hold-up at Google, and now at Apple. "These are very complex negotiations, and each set of negotiations with each of the proposed cloud services come with their own set of complications," a senior major-label executive familiar with the negotiations told Billboard. "With Google, it is the piracy issue; with Apple, it is their near monopoly-like status in the digital business; with Amazon, one issue is their launch without first trying to negotiate any licenses."

That executive said he doubts Sony and Universal would let the Google deal die over a "trivial" point or two, especially when music executives viewed getting the 70/30% split from the cloud services as a big win for the music industry. But others point out that if the Google split holds, it could be precedent-setting for digital deals going forward, which a major music company with both sides of an operation might not want to endorse, especially if they have to pay it; they would rather the services pay the publishers.

Beyond the revenue split, the major-label executive and others suggest that piracy and advances may have also played a role in the breakdown of negotiations. On the latter, sources say that Google was willing to pay out $100 million to $150 million in advances to right holders, which would be divided up by market share. Normally, UMG would get the biggest slice, but so far this year, Sony Music has more U.S. market share.

On piracy, Universal Music Group is known to be taking an aggressive stance, demanding that Google eliminate all pirate music sites from all search results; and demanding the removal of YouTube user-generated content in instances where a copyrighted song plays with no user-generated video content, say sources familiar with the situation. A Universal spokesman declined to comment.

Some sources suggest that along the way, Sony's stance in negotiations with Google became more aggressive. At press time, Sony spokesperson had not responded to Billboard's requests for comment.

In any event, whatever Sony's stance on piracy, advances and the revenue split with Google, it is said to be one of the three majors, along with EMI and the Warner Music Group, that have signed on to license rights to Apple. If Sony has signed with Apple, how could the revenue-share fight be a hold-up in the Apple negotiations? But sources said that while Sony's recorded-music operation may have signed with Apple, some of the major publishers like Sony/ATV -- a joint venture between Sony and the Michael Jackson estate -- have yet to complete their deal with Apple. At press time, an iTunes spokesman had not granted requests for comment.

The music-publishing executive insisted to Billboard that the revenue-share split is one of the hold-ups with Apple, adding, "Things are moving fast. This could all be resolved [this] week," since Apple is expected to unveil its cloud-music service on Monday.