Will License for Equity?
By Mark Levy, CEO MaxxoMedia
MCPS-PRS, the U.K. music publishing licensing and collecting organization, recently released a proposal suggesting that new digital media companies that want to license their copyrights should provide equity in their fledgling companies in exchange for the license.
They cited as some of the reasons behind this proposal:
1. Start-up firms present an undeniable headache for music rights entities. At incorporation, emerging firms tend to lack the financial resources, both in terms of cash holdings and cash revenues, to pay otherwise standard fees for music rights.
2. Emerging firms are not stable entities, in terms of their chances for success and the nature of their business models.
…and…
3. Nascent firms tend to operate at, or far beyond, the edge of the envelope that is offering music to the general public according to previously understood, acceptable and agreed upon terms for a license.
Therefore the music companies are taking a large portion of the risk in entering into a licensing relationship.
They go on to state that these companies are created principally for the benefit of the founders who will build the business and flip it for unknown rewards. The rewards, they contend, do not in any way benefit the music entity which helped make the transaction possible. Therefore the music companies should have a stake in that potential upside.
Before I offer some alternative proposals, there are a number of issues to consider here:
1. What experience does the society have in determining valuation vs. investment? These deals are highly speculative. I envision that after a few failed companies blemish the society’s investment record, the societies will charge valuation to investment ratios at unacceptable levels to hedge their bets. This would end up defeating the purpose of the proposal and bring us full circle to where we are now.
2. Would the company that operates on a multinational basis be required to give up equity in each territory? The process of getting licensed in multiple territories is complicated enough without having each society and label as equity partners. Rates vary by territory, so why wouldn’t the equity valuation and complications vary also?
3. How do the proceeds of an equity liquidation event get distributed to the members of the society? I’ve always been confused by the distribution calculations from public performances, which are mostly undocumented (restaurants, retail outlets) — will these calculations be the basis for distributing a windfall?
4. Finally, what level of control will the societies and labels demand or have over the direction and operation of the invested company? Do they get board seats? These organizations are strapped for personnel to handle the levels of digital media business development they have now. How do they expect to manage all of these investments? And how do you prioritize two companies competing in the same or similar markets with whom you have equity investments?
While I applaud the writers of this report for their efforts in coming up with a proposed solution for this evolutionary challenge, I think it misses the mark and raises many more questions and concerns than it answers.
I offer two alternate high-level solutions to the MCPS proposal.
1. Develop an experimental license fee program that will help companies of certain funding levels “get off the ground.” Many companies have an interesting idea that they think will “revolutionize” the music business. The problem is that unless they try out the idea in the public marketplace, no one will know if it works. Give them six months to one year from launch to develop the business at extremely reduced rates — the solid companies will rise to the top and become viable businesses from which the societies and labels can extract their revenue.
2. Maintain the status quo because the marketplace will take care of the issue itself. Much to the chagrin of many an idealistic entrepreneur, until music copyrights truly become part of the open source revolution, there has to be a price to pay to use these valuable assets. I don’t understand how companies can take the position that because the owners of copyrights charge what they think is too much for the use, they can just use these assets without permission. Music licensing is a right given by the owner, not an obligation (aside from the statutory mechanical rates). Those that build businesses on the backs of these copyrights without permission tread at their own risk.
In the end, I vote for #1. It’s going to take a lot of new ideas to revive this business. Given the way music sales decrease year after year, it would benefit the societies and labels to allow entrepreneurs to experiment in the hopes that together they can help the music business find a new footing.
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