Digital Music

Charles Caldas (Merlin) Talks Streaming Growth [INTERVIEW]

In advance of his imminent departure from the independent music rights licensing agency Merlin, Charles Caldas sat down to chat about his time at the fourth largest basket of music recording rights in the world, where the company stands currently, and what the future of streaming looks like.

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Guest post from the Legrand Network

Charles Caldas, who has led Merlin for the past 12 years, will be leaving the independent music companies’ global digital rights licensing agency at the end of the year. Caldas hails from Australia, where he was running a local distribution company. Relocating to Europe with his family, Caldas started at the organisation when it had only a few members, mostly in Europe and North America, and built it into the fourth largest basket of music recording rights in the world after the three majors.
Merlin has since clinched deals with dozens of digital services, including SpotifyYouTubeMusicFacebookDeezerAlibabaNetEase and Tencent, to name but a few. In the process, revenues collected by Merlin went from a a few million dollars a year to hundreds of millions, with a cume between two and three billion dollars.
Merlin is registered in Amsterdam, and the organisation has offices in London, New York and Tokyo. Merlin counts over 900 members, representing tens of thousands of labels from 66 countries. Merlin’s board consists of 15 members – five each from North America, Europe and Rest of the World.
Caldas was awarded the Independent of the Year 2019 award from Dutch indie labels’ association STOMP for his role as CEO of Merlin. “As CEO, Charles Caldas has been a key figure for Merlin and its independent members for over a decade. Since the very beginning of the agency, Charles has been a driving force, making an immense contribution to Merlin’s success,” said the STOMP Board. Caldas spoke to Emmanuel Legrand a few weeks before leaving the agency.

What was the original promise of Merlin and why did it exits in the first place?
The real impetus for the starting of Merlin was that the independent sector had always worked globally as a network. What I was doing in Australia with Schock as a distributor was mirrored elsewhere in the world. If you were a French label that needed distribution in Australia, especially if you were in electronic music, at some point, you’d be talking to Shock. And vice versa: we had local artists that we thought had potential in Europe and we would start to talk to our network of people in Europe or in the US. And we were all operating on the knowledge of our local markets. Once global retailers started to emerge, and iTunes was probably the first one of those, the independents were at a structural disadvantage compared to majors that already had this global infrastructure, which meant that with one deal with SonyUniversalWarner or EMI at that time meant that you had access to the world’s repertoire they represented with one transaction. To reach the equivalent geographic scope for independents would have meant thousands of individual transactions. It was very difficult for all those platforms to get to all the repertoire, so independents were at the back of the queue when these services were launching. It was also more expensive for these platforms to make business with the independent sector with potential thousands of individual deals, so the initial discussions about Merlin happened around that time.
Wasn’t there also an issue related to how much independents were paid compared to majors?
The prices that independents were commanding for their music were lesser than what the majors were getting. I think independent were concerned that they were entering the digital world with the repertoire of the majors worth more commercially than the independents’ repertoire. So that was one of the impetus, and the other impetus was that anti-piracy in the physical space was very much an industry issue with organisations like the IFPI combatting physical piracy and shutting down pressing plants of illegal manufacturers of CDs. It benefitted everyone because everyone was at the risk of having their rights infringed in that way. Once infringement became digital – and I think KaZaa was the first instance of this – it became much more profitable for majors to sue these platforms directly and extract damages directly from the platforms rather than doing it as an industry action. In the KaZaa case, it was painted as an industry action, but in reality it was the majors taking the damages and the independents were left in the cold. So the first thing with Merlin was to figure out how do we make easier for these digital platforms that are emerging to get our music and how do we better protect our rights, both in terms of infringement of those rights but also in the commercialisation of those rights. And that was really the key reason why it started.
So fast forward 10 years, Merlin has distributed over $2 billion to its members…
…and we are on the way to out third billion!
Did you expect figures like that when you were making your five-year and ten-year projections?
No. I am actually going through old papers and I found a report from one of the earlier board where we said that if Merlin could turn around 10 million pounds a year it would be a resounding success! I think we are currently turning around 10 million pounds every few days. We would have never expected that we would be paying out the levels that we are paying out now and that we would have distributed so much money from infringement settlements and things like the sale of Spotify shares.
When you were having your first meetings with platforms, were you taken seriously?It depended on who the partners were. My first involvement with Merlin in the first six months was as a consultant, looking at how this could look like. It struck me very early on that some digital distributors where not going to pay us less because they could but that it was genuinely more expensive for them to deal with independents than with majors, to get all this repertoire and do all those deals. Power in numbers was an important foundation for Merlin but the efficiencies that it brings really allowed Merlin to continue to grow. If we were not able to deliver tangible value to the digital services, they would have had no reasons to pay us the rates that they pay us. Whilst we had a responsibility towards the labels to protect and maximise the value of their rights, we also had a responsibility to our DSP partners to make an offer as valuable, as efficient and as compelling as possible, and there should be no questions as to why they should be engaging with us.
Did it work?
In the early days we had very different examples. One of my first phone calls was to that small Swedish start-up called Spotify that was doing some test with some university students and the tests showed that the students were leaning heavily towards independent music and they realised that they did not have enough of it on their platform. They came to us to see how we could actively help them maximise the users’ experience by making sure that all the independents that we represented were on their platform when it launched. At the same time we were having a very public fight with MySpace. They had built this platform mainly off the value of independent musicians and independent labels were using it to interact with their fans at the time; and yet when it came to commercialise the service, they gave major labels deals, equity and commercial deals but they refused to do it with independents. So we took a very different approach to that. In the first year, we made a deal with Spotify, had equity and we were there at the launch of the service, but on the other hand we were also fighting very publicly with MySpace about the value of our music. It does not surprise me to see who prevailed and became a success twelve years later…
How would you characterise Merlin? Didn’t it purpose change over the years from an agency representing independent labels to an organisation doing collective management of rights?
We call it a rights licensing agency because at heart this is what we do. Obviously, as the market has evolved and as our membership has evolved, and became globalised, we have added over the years a lot of things to our offering as a response to the evolution of the marketplace such as the importance of access to data, access to real time reporting, fast payments. But it is still essentially a rights licensing agency that collects the most significant rights outside of the three majors for the use of recordings.
Do you view yourself as the “fourth major”?
We know that we are the most valuable basket of rights outside of the three majors. If you look at the Spotify IPO document, they very openly said that the three majors and Merlin represented 87% of all the streams on their platform. In a more recent earnings call, Spotify said that two of the four majors deals have been completed and obviously to say something like that we must be an important partner. It’s a nice short way to say that we are virtually the fourth major, in terms of the value that we represent, but the difference is that Merlin has always been empowering our members to do the best for their businesses without having a middleman between them and the marketplace. In that sense we are nothing like a major. We are not aggregating the practicalities of having all those rights on the platforms and how people are using all the tools available to them.What share of the global market do you claim?
We always say Merlin represents in excess of 12% of the digital marketplace, but that depends on the platform and the territory. It can go higher on some platforms and in some territories.
You regularly say that there is now a significant amount of money coming from territories that were previously were not delivering anything, such as Latin America, Asia and even Africa. How do you explain that?
I think it is partly because the cost of putting products out in these markets is less than it would have ever been in the physical space. Trying to physically move music that has been made available to consumers around the globe was an impossibility in the physical space. Streaming platforms are the most compelling, customer-attractive, cost-efficient ways for consumers to access music, more than it has ever been in the physical space. Taking Brazil as an example – consumers rely so heavily on their telephone and it is such a musical culture that having a music product added to your phone plan and having access to music through the device that’s in your pocket at the price that’s very reasonable is very compelling. We’ve seen the growth of Apple Music or Spotify around the world and once they are present in these markets, consumers like it as an offer. If you look at the emergence of mobile technology, alongside streaming platforms, it is then not a great surprise that wherever that population is, there is going to be a segment of that population that will be willing to pay for that offer.
How does it translate financially?
Brazil, Mexico, Chile and Argentina are now in our top 20 markets. Philippines and Indonesia are coming up quickly too. It is extremely exciting from a revenue perspective. And the other thing for us is how much our membership has boomed. If we go back to our launch data 12 years ago, we maybe represented companies from about 20 countries around the world. Now, we are at 66 and it grows all the time. The value is not only great in terms of international labels getting revenues out of these markets but also labels and artists from these countries getting their music out in the global marketplace and bringing value back into those territories. It’s a fascinating phase in the evolution in the whole music space.
What was your approach with regards to China?
We sensed that China was a great opportunity and also a market that was structured inherently differently. When we started looking at China, which was quite a while ago, the preferred way to license your music there was to do an exclusive deal with, generally, Tencent, which is the dominant player, and relying on them to get your music to all the other music platforms. But once we started spending sone time on the ground – we worked with some local experts that helped us navigate the market – we realised that having a middleman control how your music is exploited in a market, given what Merlin does, felt inherently wrong. So we spent a lot of time trying to figure out how we could build relationships with the key streaming players in the market, and not do exclusive deals but do individual deals with the key players. We were very clear that if we were to do business in China it would not be by giving control of our music to middleman but dealing with each of the platforms individually. This took a long time to get to that but we felt vey good about where we got to. It’s a complicated market. It’s a market that still takes a lot of navigating. The way these platforms are structured is much more challenging in the sense that there is much more UGC on them, content can be uploaded and we had to do a lot of cleaning up. Despite all of that we are seeing very positive signs in China.
What are your views on TikTok?
We definitely think they should be licensed. It’s an incredibly interesting development in how music gets to consumers, how they interact with it and what they want to do with it. It has incredible implications from a marketing perspective. My personal view is that we are going to see several of these left field entrants come into the market in the next five to ten years, and the way that music is being shared, viewed, exploited, is really fascinating. As for any product using music, we believe they should pay for that music. I am sure that we and the rest of the industry will find a way to license that platform. TikTok is not the only new platform that is going to be there. What is interesting about the value of music in the digital space at the moment is that it is encouraging investment and innovation again, and where there’s money there’s interesting ideas and I don’t think TikTok will be the last of the interesting models that we will see.
The debate in some countries such as France is about the user-centric model. Some of your members are adamant that platforms should switch to such model. What are your views?
We are certainly looking at that issue. I think the only way you can really make a decision on which model works best for the market is to do very deep and very detailed analysis of it. We want to take a very robust research-based approach to really understand what effect the change in that metric would bring to our members, territory by territory, genre y genre. It is probably much more complicated than people are making it up. A lot of what I read in the press is very simplistic, with people making assumptions that are not backed by facts. Like with everything that we do at Merlin, we will look at it from a very fact-based approach before we take any position.
How do you see the streaming market evolve, especially now that it is maturing in markets like North American and Europe?
We are not seeing any signs of a slowdown. Obviously some territories are closer to maturity than others, but I still think that the level of penetration into the mainstream of the market – such a the home, the car, places where music consumers are not fully served – means that there are still a lot of opportunities ahead of us. There also opportunities in the form of convergence between different type of media and devices. At the moment we are looking at growth in the streaming space with the existing models but we are going to see a lot of innovations coming in the future around access to music where the model will not necessarily be the all-you-can-eat model for 9.99. People will find new and interesting ways to offer music which will bring a new wave of monetisation of music. From where we sit we are very bullish that the growth will continue.
And how do you see Merlin evolving is such environment, more as it is or more as a service-driven organisation for its members?
I don’t think Merlin will ever replace the role that distributors play in the marketplace. The things that Merlin is looking at now – and that the next leadership will continue – is how do you keep independent in an evolving marketplace. Previously it was all about commercial terms and access to the marketplace. We are now using a much more complex set of measures, in particular how do you use the vast amount of data that comes from the platforms to enhance your business or keep yourself competitive and learn how to best exploit your music in the marketplace? There’s still a lot of works for us to do in terms of helping maximising the effectiveness of the global marketplace. There will also be challenges. We talked about TikTok. So how do we help our labels navigate these technological challenges that are happening and make sure that their rights are protected. I think that Merlin will keep evolving in the way that the market will keep evolving. Merlin’s principles are still in place and it’s about maximise the value in the marketplace, so that will always be about commercial terms, but looking forward this is also going to be about how do you navigate technological challenges, what tools do you need to deploy to remain competitive, maximise your revenues, in order to understand the development of the global marketplace. I don’t think there will be any shortage of challenges for the next leadership to look at!
You have on your board people with pretty strong opinions. Was that easy to navigate?
Look, boards are never easy to navigate. Independents are independent by nature. But whilst it can be challenging, to be involved in an organisation like Merlin has also been the most inspiring. You have those occasional differences of visions and opinions, but the thing that an organisation like that does is to keep you on your toes and keeps you thinking. I’ve appreciated that because to navigate the digital space at the speed that it is changing is a complex task, but those extra voices of people who might see what you don’t see or who challenge things that need to be challenged – some might be right and some don’t – are all part of the beauty of Merlin. Having fifteen people on the Merlin board that all think the same way would be a disaster. The strong personalities and the geographical differences bring different visions and this is what makes Merlin special.
Why are you leaving Merlin?
It’s been an incredible 12-year adventure. The organisation is in very good shape. It has great executives. It is growing both globally and in terms of membership. It feels in some ways that it’s a good time for the organisation to enter another phase. As for me, I have very much appreciated this adventure. Having been deep in this for 12 years, it was time for me to start a new adventure, whatever that might be. I feel like I am leaving the organisation in a very good shape and I am in good shape. Really, this is a life choice, not necessarily a professional parting of ways.
Do you have any plans for the future?
It is still a story to be written. I am energised and fascinated by what is going on in the digital music field. I can’t imagine I am going to land too far from the tree. But before I do that we are going to have our first Australian summer in 12 years and that’s the only firm plan I have at this point.

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