Here's Why Warner Music's Deal with Clear Channel Could be Groundbreaking for the Future of the U.S. Music Biz (Analysis)

There's been a lot of confusion online about a groundbreaking new partnership between Clear Channel and Warner Music Group (WMG), but here's what you need to know: Clear Channel is paying artist performance royalties for terrestrial radio to the WMG. It is the first time such a deal has been signed with a major record company in the United States.

To date, Clear Channel has already cut deals with indie labels including Big Machine Label Group, Glassnote Entertainment Group, eOne, DashGo, Robbins Entertainment, rpm Entertainment, Wind-up Records, Fearless Records, Zojak Records and Dualtone Records to pay artist performance royalties to their artists when their songs are played on terrestrial radio broadcasts.

Clear Channel, Warner Music Announce Strategic Music Partnership

Other radio networks like Entercom Communications and Beasley Broadcast Group have also cut similar deals with some of the same small group of indie labels.

But up until now, as noble as those deals are -- agreeing to pay artist performance royalties that U.S.-based artists have been clamoring for and been rebuffed on since the 1950's -- when combined, the indie deals amount to small potatoes in the overall scheme of things.

The National Assn. of Broadcasters has successfully beaten back every legislative attempt by record labels and artists to force broadcast radio to pay such an artist performance royalty, something that is paid in the rest of the world, but is only paid here in digital broadcasts.

In doing these deals, Clear Channel Media Holdings CEO Bob Pittman, was going against the grain in the radio industry, but he says he has made these deals because he wants to build a successful digital broadcast business, something that the current rate structure prevents, according to him.

The statutory payment rate for webcasting is $0.0022 per song for a compulsory license is predicated on a per play rate per listener. Since radio can't control how many listeners will tune in, it can't predict how much will have to be paid out. Pittman says these deals give him a predictable cost structure that allows him to build an economically feasible business model.

According to sources, the deals pay 1% of advertising radio from terrestrial broadcast as artist performance royalties, 2% for digital webcasting and the equivalent to, but not exactly, the statutory rate for a pureplay license for its iHeartRadio Pandora-like service.

Initially, when Pittman cut these deals one can only imagine the consternation they caused with radio broadcasters, who have fought tooth and nail to avoid making such payments. But as he only cut deals with a few small labels -- about a dozen out of thousands and thousands of labels -- some terrestrial broadcasters might have ascribed an heretofore unsuspected, and possibly unintended, Machiavellian wisdom to those deals.

In other words, with some legislatures saying that they would revive artist performance royalties for terrestrial broadcasts in the next congressional session, some broadcaster might have come to the conclusion that instead of betraying radio's stance, Pittman's gambit amounted to paying lip service to the issue, without having to make big payments. Soon, broadcasters were saying that they preferred market-based deals that Pittman and others like Entercom and Beasley cut, instead of legislation-imposed mandatory rates.

But now, with this deal they see Pittman is doing more than paying lip service; he is making a commitment to pay big bucks at least so far to one major. How much specifically is not yet known, but watch this space. To be sure, it is more than the deals that Clear Channel has cut with the indies. All three majors, including WMG, turned down that 1% terrestrial, 2% digital revenue formula well before Pittman started shopping it to indie labels.

Now, the question is will Clear Channel drop the other shoe and make deals with the other majors and also reach out to all the other indie labels. In other words, will Clear Channel and Pittman make the total commitment to the concept of paying terrestrial artist performance royalties for every song it broadcasts?

Also, will all those broadcasters giving lip service to market negotiated royalty rates follow suit and also cut deals with the majors and all other independents too?

So far, the first reaction heard from the radio industry is indeed positive. "The Clear Channel/Warner Music agreement is another important step forward in establishing a new business model that aligns the interests of artists, labels, consumers and broadcast radio," Entercom president and CEO David Field said in a statement. "While not without its costs and compromises, it represents a smart, bold and visionary approach that will foster further innovation, growth and value-creation for all stakeholders."

Funnily enough, it is the record label side of the business that still wants more than what Pittman has offered. MusicFirst, a coalition of trade groups representing artist, managers and labels, applauded the Warner Music and Clear Channel deal, but added its "no substitute for a real, industry wide AM/FM performance right."

The group added that it hoped Clear Channel's leadership would result in it breaking away from "NAB's obstruction of performance rights."

The above analysis deals with the most important part of the Clear Channel/WMG announcement. Now lets look at the rest of what they announced, which appears to be partnerships to help break new music. The deal includes "a host of powerful new promotional opportunities to reach a wider audience," WMG CEO Steve Cooper said in a statement.

The deal sounds like it includes placement of WMG artists in Clear Channel's Artist Integration Program; its televised events including the Jingle Ball annual holiday concerts, the iHeartRadio Music Festival, Pool Party events, and Album Release Parties.

It also promises new targeted user interfaces in digital that make it easier for listeners to buy music when they hear it.

“The team at WMG understands that old formulas don’t work as well as they must in the digital age, and that we have to think differently to build a robust future for the music industry," Pittman said in a statement. "Today, music companies and media and entertainment companies need to be more supportive of each other’s needs. This agreement begins that new era, and will help both companies thrive in the digital world.”

WMG corporate COO Rob Wiesenthal added in a statement, "From high visibility live and televised events to unique digital services, the breadth and strength of Clear Channel’s platforms will enable us to propel our artists' careers in an extremely competitive marketplace.”

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