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IPhones, Videogames & The New War For Music Royalties

Tuesday, 19 Aug 2008 | 5:41 PM ET

If you're a music lover, you'll fall for Pandora, an online music service that allows its 1 million daily listeners to custom-create the equivalent of a radio station tailored to their taste.

It's remarkably easy: You plug in a favorite tune and it finds others like it -- tunes you've never before heard. It attracts 40,000 new customers a day and it's one of the top 10 most popular applications on Apple's iPhone. Sounds successful, right?

Not quite. Last year a federal panel demanded that Web radio stations double their per-song performance royalty, while traditional radio doesn't bear the weight of such fees. This new rule will make Pandora's fees 70 percent of its projected $25 million 2008 revenue, which means the company is teetering on the verge of shutting down.
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More iPhone interest -- from Wall Street:

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And then there are the music-themed videogames: Activision's Guitar Hero Game, or Rock Band from MTV Networks (owned by Viacom). The music publishers are now demanding a bigger piece of the $1.5 billion in sales of music-themed games this year, a number expected to grow as much as 35 percent in 2009.

Edgar Bronfman Jr., CEO of Warner Music Group, has long been complaining that his business doesn't get adequate revenue from successful music-based businesses. (Sure, the music industry would get a bigger piece of iTunes if THEY'd invented it.)

But back to videogames: Game publishers pay record labels roughly $25,000 for master recordings and $10,000 for the right to re-record a song.

But now the music companies also want a royalty of 4 to 8 cents for each copy of a game sold. After all, Guitar Hero sold 20 million copies, over $1 billion in retail sales. Think about all the songs on the game, and how much that would mean to music companies, which are particularly hurting right now. (Of course, it's not all bad: The music labels also benefit from the boost in music sales they get when a song is featured in a video game.)

But with precedent firmly established, it could be hard for the likes of Warner Music Group to get its demands heard.

Questions? Comments? MediaMoney@cnbc.com

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  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.