Amazon Launches Prime Music Streaming Service, Minus UMG

The new streaming services features catalog titles, tethered downloads and music from just two of the three major labels.

 

When Amazon launched its Amazon Prime music subscription service this morning, it immediately became one of the largest paid interactive music services in the U.S., if you're measuring by subscriber base.

While Amazon hasn't admitted how many subscribers its Amazon Prime service has, in January of this year one company executive publicly said it has millions of subscribers in the U.S. and tens of millions globally.

Amazon Prime was initially started as a way to increase Amazon customer loyalty. The gigantic internet retailer initially charged a $50 annual membership fee for free two-day shipping on all orders. Over the years, it added a movie and TV viewing service that today holds 40,000 titles, as well as a library with over 500,000 books.

When it began planning an increase in its annual membership fee to $99, up from $79, it wanted to add features to justify the increase, and a music subscription service was seen as just the ticket, according to industry sources.

Amazon VP of digital Steve Boom says music fulfills their Prime customers' demand. "Wouldn't it be great if we could have a music benefit in Prime?" Boom said. "Our Prime members are getting their wish... access to a large catalog of music."

At launch, the service will offer over one million songs from tens of thousands of artists, Boom said. Moreover, the tracks in the service can be mixed with each subscriber's own personal collection.

Amazon took an unusal approach to its service; it told most labels it only wanted catalog titles. Indie label executives said that once music has been out for six months, those titles would be offered in the service.

The service makes those titles available as tethered -- or conditional downloads -- or as streams, the subscribers choice. (A tethered download disappears from the subscribers device once they end their subscription.)

The service comes with a variety of features, including the ability to stream or download music. For the latter, subscribers can complete albums from which they own a song or two via tethered downloads. Listeners also have the ability to actually purchase music, as the service also features buy buttons next to the music.

In fact, the music service was also pitched to labels as a way to potentially increase sales, label sources said. According to Boom, the Amazon movie and TV service has increased sales of DVDs, and the merchant is hoping the same will happen for music. But some music executives are skeptical that will occur based on iTunes Radio service's inability to impact music sales within the iTunes Store.

Boom says Amazon hopes the service increases sales noting that music download sales are down, but not as much as the U.S. market's overall decline of 12.3% for track downloads and 12.1% for digital albums so far this year.

Other features include no advertising during playback and, where possible, songs being synced along with lyrics during playback, through a deal with LyricFind. The service also offers the option of building playlists. In addition to its interactive features, the service has made an effort at having human curation, building hundreds of playlists based on genre, artist, mood or activity, compiled by a team of music editors.

While you won't find most albums a part of the service at launch, you may eventually see Hot 100 songs available for playback, since songs often take a while to climb that chart. Moreover, some albums may well be available on their street dates, because some labels say they may allow new music to be put up immediately. For streaming, sound quality will be adjusted for available connectivity, which will range from a high bit rate of 256k to a low of 48k, according to Boom.

But that's all on the front-end. Behind the scenes, the Amazon business model for its service is considered controversial. Initially, the majors were told they would only be paid a pro-rated share of a $25 million pool, while indies would only be paid pro-rated share of a $5 million pool; and further there would be no per-play rate paid, regardless of how many subscribers or plays the service generates. In other words, payments would be capped.

In the indie sector, the $5 million offer caused quite a lot of consternation and only some independents say they've signed on. The $25 million cap, and the lack of per-play payment, also caused concern among the majors, which according to sources was alleviated by pushback on the dollar amount allocated to the majors.

As it is, only two of the three majors -- Sony Music Entertainment and the Warner Music Group -- have signed on, while the Universal Music Group has so far not signed any deal with Amazon.

While Amazon initially offered the majors $25 million, they received pushback on the amount from the two majors that did sign, so the total pool could now be as much as $50 million, if UMG signs on and its marketshare is allocated a commensurate share of that pool.

Music publishing, as usual, is a whole other matter. Initially, Amazon was doing direct deals and built an offer sheet with terms modeled around the payment and usage terms of a compulsory streaming license for an interactive subscription service, sources say.

While Amazon is believed to have made deals with Sony/ATV and Warner/Chappell that include all music publishing rights, including synchronization, the Universal Music Publishing Group is a holdout. So in addition to UMPG, it appears Amazon will need to do compulsory licensing deals for hundreds, if not thousands, of indie publishers who own the publishing on songs included in the direct deals.

For those deals, the new service will have to pare back its offerings to listeners -- songs with lyrics would have to be cut out, as the compulsory license doesn't include the synchronization right.

For the performance right, Amazon has been engaged in negotiations with the three U.S. performance rights organizations, but if those talks don't pan out, it always has the option of using the compulsory license there too, which means they can immediately start playing the music. That means if Amazon can't come to terms on rates with ASCAP and BMI, either side can invoke rate court -- but it will have to negotiate with SESAC, or pull down the songs it controls.

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For the mechanical compulsory, publishers surmise Amazon will use either: the compulsory license for a limited interactive service (which pays music publishers their pro-rata share of 10.5% of revenue or 21% of total cost or 18 cents per subscriber, whichever is greater),  the mixed bundle compulsory (which pays publishers their pro-rata share of 11.35% of revenue or 21% of total content cost, whichever is greater) or the bundled compulsory (which pays publishers 10.5% of revenue, less performance royalties, or 25 cents per active subscriber, whichever is greater). Whichever compulsory license formula is ultimately applied, these formulas all include performance royalty payments, too. That means the mechanical portion would be paid to publishers out of what's ever left after subtracting out performance royalty payments to the PROs.

"We didn't join because we don't see the end game here," says one music industry executive who decided not to do a deal with Amazon. "It's not a compelling offer since it's a limited offer. It seems they are using music as a promotional tool to keep customers in their ecosystem so they will sell more merchandise. They claim it will lead to greater sales of music, but it feels very self-serving to us."

That executive says he doesn't expect the Amazon service to succeed. "If that's how we feel, then why not grab the cash and forget about it because its going to close down?" he asks. "Because we are more concerned about the precedent of licensing to a service without a per-play rate [with] a cap on payments."

But another music industry executive at a different company disagrees. "We think its important for music to be one of the pillars of Amazon Prime," he said. "So while it's not a disruptive service and is just a toe in the water for Amazon, they may learn enough to launch a full-scale subscription, which is something we want Amazon to do."

With apparently less than 10 million Prime members in America, and not all of them necessarily taking advantage of the service, that executive says his company is gambling that the amount of money being paid will eventually result in a very high per-play rate for its artists. That executive said the deal signed is short-term, maybe a year long, and if the new service results in high usage, it can always renegotiate.