By Eduardo Loret de Mola from Berklee College's Music Business Journal.
The music licensing market is actively expanding its scope within the entertainment industry. Musicians’ net earnings from traditional licensing deals are decreasing with each passing year. Nevertheless, there are still opportunities to be found if one is creative enough to spot them. The prospects for musicians to license their works for use in video games, mobile apps, and other innovative outlets are increasing exponentially, and can more than compensate for diminished returns in traditional media.
Other forward-looking artists are looking into foreign markets. Technology brings those markets closer and opens up opportunities of greater revenue. Today, for instance, musicians can set up their own distribution networks in foreign territories and handle their own licensing in those markets instead of relying on record labels or publishers to act on their behalf. However, international transactions can be complicated, particularly when it comes to exchange rates of foreign currencies—a topic that deserves more attention.
Currencies can be divided in two categories: hard currencies and soft currencies. Hard currencies can be “easily traded for other forms of currency without cost-prohibitive fees and at the prevailing exchange rate.” In short, they are ready to be made liquid immediately on the foreign exchange market. Examples here are: U.S. Dollars, Euros, Pounds Sterling, Japanese Yen, and Swiss Francs. On the contrary, soft currencies, like the Chinese Yuan, are difficult to convert into the hard currencies and are therefore considered less desirable.
Dealing with soft currencies on international licensing transactions could be potentially disadvantageous for the musician. For example, receiving cash payments in a soft currency would be beneficial only in the case where the musician would want to spend the earnings in the country where that currency is used. However, if said musician would like to exchange the money for US dollars, there could be significant financial implications. Although there are banks that will convert soft currencies into dollars, the likelihood of receiving an unfavorable exchange rate is very high. Also, there are fees that would have to be paid in order to complete the transaction, ultimately making a promising deal much costlier than originally expected.
There are a couple of measures that could be proposed in order to avoid such problems. One solution could be to agree that all payments be in hard currency, though this may not always be an option. Another increasingly popular solution is to agree on a “countertrade” in place of cash settlement. For example, a musician could enter into a foreign licensing or distribution agreement with a company that deals in a soft currency—a synch license for a Brazilian film studio, for example. But instead of asking for money in return, the artist could ask for an interest in economic activities that the other party has in other parts of the world, such as distribution rights for the studio’s films in the US. This allows the musician to earn income in a choice currency.
Although it can be stated that hard currencies contribute to the profitability of the deal, there will always be an element of exchange rate risk. International currencies reflect the state of the market, and this can change over time. Long-term licensing or distribution agreements will not be immune. It is perfectly possible that during the term of an agreement, sliding exchange rates devalue a once beneficial deal. However, this applies both ways; a deal can be made with a weak currency and, after a period of growth, it could turn out to be extremely lucrative.
A New Player
Continuing globalization and growing trade with emerging markets will make the above considerations more pressing for musicians. So will the international use of social media. Sites like MySpace, YouTube, Facebook, and Twitter are already providing an outlet for musicians to promote their music to world wide audiences without the support of a major record label (not all of these sites have the global reach that Facebook has). The effect of social networking is also spreading to the licensing industry as evidenced with the creation of SourceAudio, a startup aiming to connect buyers and sellers of licensed music worldwide. Founded in 2007, and based in Los Angeles, it has recently raised $1.2 million in seed funding, confirming that the licensing industry is evolving towards a more integrated platform.
SourceAudio is a cloud-based sync-licensing platform for music publishers and administrators to manage, search, distribute, and monetize their audio assets. It also works as a networking site for people interested in purchasing or selling licenses. The site takes licensing & distributing music to a groundbreaking level, allowing music publishers, musicians, and labels to host and deliver their music to a network of advertising agencies, broadcast networks, production companies, movie studios, and radio broadcasters all over the world. This is innovative in the sense that traditionally, a publisher would have to spend resources building an own site capable of hosting music. Co-founder and CEO Geoffrey Grotz explained that the goal of SourceAudio is not to build a “consumer music store, but rather a platform that will allow musicians and music companies to build their own sites where the people who are looking to license music for their ads, TV shows, or other can search for tracks.” Users can customize the way their sites look but the technology and software remains the same.
The company generates its revenue through a combination of charging for hosting music tracks and taking a small cut out of each licensing deal, between a 7 to 10 percent cut. The more tracks the user has, the higher the price to be part of the SourceAudio network. For example, “hosting between 1 and 499 tracks costs $99 a month, while hosting between 250,000 and 499,999 tracks costs $999 a month.” Consequently, if a record company with an extensive catalog steadily adds tracks, it will move up the scale of pricing. Currently, the company hosts around 600 catalogs with 5 million tracks of 3,400 music labels.
Grotz has stated that the long-term vision for SourceAudio, is to become “the iTunes or Amazon of the multi-billion dollar global music licensing business.” Others have tried the concept before, notably entrepreneur Gerd Leonhard in San Francisco with LicenseMusic.com. But, in the late 1990s, before the explosion of social media Leonhard may have been ahead of his time. Funding for SourceAudio is likelier now than it was for LicenseMusic after September 11.