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    Saturday, April 5, 2008

    Reuters - Digital music firms pay heavy price for labels' support

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    Digital music firms pay heavy price for labels' support

    Saturday, Apr 05, 2008 10:31AM UTC

    By Antony Bruno

    DENVER (Billboard) - A stark truth facing any aspiring digital music service these days is that working with record labels is going to carry a hefty price.

    The last 18 months have seen the major music labels accept new technological and business models -- such as dropping digital rights management and allowing ad-supported free music -- that have given rise to a new generation of digital music services. But the flip side of this willingness to experiment is a demand for higher upfront advances for licensing music and in some cases a substantial equity stake in the company.

    Ad-supported download service SpiralFrog, for instance, paid more than $3 million in upfront advances to Universal Music Group alone before it even went live, and has paid additional millions in licensing fees since the original term expired. Imeem is said to have paid advances as high as $20 million and gave labels equity in the company. (Imeem disputes that figure but the equity stake is now a matter of public record.)

    Sometimes the price is so high it sabotages the deal. A mobile messaging company recently walked away from negotiations in which a label demanded 85% of the company's gross revenue, even though the deal didn't involve any music licensing.

    Labels say it's just the cost of doing business in today's music industry. Critics say it's stunting the establishment of a viable digital entertainment marketplace.

    With CD sales in continuing decline and digital revenue still not making up the difference, labels are unapologetic about their insistence in mining every new revenue stream to its fullest potential.

    "If you were opening up a retail store on Madison Avenue, I think you have to get a lease for the space," one major-label executive says. "If you want to build a legitimate business, there are costs associated with doing it, and that's no different in the virtual world than the physical world."

    Truth be told, digital services -- or their forebears at least -- bear some of the blame for the deal terms getting to where they are today. Just a few years ago, revenue-sharing deals weren't that uncommon. However, according to former EMI digital executive Ted Cohen, labels soon soured on that model as services began gaming the system so that labels ended up with nothing.

    That led to labels building "perceived value" of music into subsequent agreements along with various other checks-and-balances and advances designed to mitigate the risk of entering experimental deals. But even Cohen, now a consultant working on behalf of several digital music services, says the practice has gotten out of control to the point where economics are simply unsustainable.

    "What was once considered a major advance -- $500,000 or $1 million -- is becoming a $2 million or $5 million advance and really over-the-top requests for equity," he says. "The deals are still unrealistic. If you raise $15 million to start a business, and have to spend $12 million just to pay off the content companies, that leaves you with $3 million to run a company. I don't know anybody able to do that."

    Many rankled by these front-loaded deals accuse labels of going for the quick buck in order to meet quarterly revenue objectives at the expense of cultivating a lasting partnership -- essentially treating digital music startups as quick-fix ATMs rather than long-term investments.

    "They're trying to match every dollar against a lost dollar, not nurturing new markets," Digital Media Assn. executive director Jonathan Potter said at Billboard's Music & Money Symposium in March. "That's not helping build a business. You need each party to have an equal incentive."

    Yet one of the more controversial label demands -- an equity stake -- may in fact prove advantageous for services entering into such a deal. Labels receive dozens of partnership requests almost daily, many of which they don't think have any chance of surviving with or without their help. As such, they are only too happy to forget about them once the check clears.

    But if the labels have an equity stake in the company, they have more skin in the game and a greater incentive to nurture the company along. Imeem, considered by some as the poster child for predatory label deals, is actually a case-in-point. Sources on both sides say Imeem's relationship with labels is proving extremely fruitful as a result of the equity deal--with Imeem executives advising some label execs on technical matters and some label execs clearing the lines of communication to their imprints. Imeem would likely prefer more access to labels' potential advertisers, but the deal is still young.

    Imeem, however, is considered the exception, not the rule. Unwieldy usage restrictions and expensive licensing fees have already forced several promising partners out of the digital music space (Yahoo, Virgin, AOL). If the music industry wants to collect that Madison Avenue rent from the services of tomorrow, it may need to invest a bit more democratically today rather than trying to recoup the losses of yesterday.

    "Here's the big disconnect," Cohen says. "In the physical world, they're paying Wal-Mart for the privilege of selling their music. In the digital world, they're asking the partner to pay them for the privilege of selling. The middle ground should be both sides treating each other with respect and both sides making money."


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    GQ Wine Tasting Event, Sponsored by BrooksBrothers and MasterCard, hosted by David Lynch at The Tasting Room Restaurant, Downtown Manhattan 4.3.08

    On April the third, two thousand and eight, around six thirty in the evening, I attended a wined tasting at The Tasting Room Restaurant in downtown Manhattan, sponsored by BrooksBrothers and MasterCard, with GQ contributor David Lynch as the host. The place was jam packed as soon as I walked in, and I was on time. The Tasting Room is a small and intimate Restaurant with brick walls and homely decorations like parcels stacked atop a shelf and faux cowhide hanging on the wall. The setting was dimly lit with a dinner feel, with heour d'ouerves of popcorn and sour cheese on a table about eight feet by four feet sitting in the middle of the front of the room and an empty floor in the back that looked fit for a dance floor with dinner tables along the walls of both areas with plates of popcorn on them.

    The DJ played soft mid tempo jams to put the apparently upper crust crowd at ease but the music had enough bounce to satisfy the tastes of urbanites as well. A bespectacled man took the microphone at about six forty five to introduce or host for the night, GQ Magazine contributor, David Lynch, who writes articles on wines and food for the glossy.

    With so many people packed in the intimate setting and food all around, I was ready to dig in to the libations about to be served. And what would be more fitting for an evening of wine tasting than an apertif of champagne from Champagne, France. The waiters and waitresses strutted out with glasses of Pol Roger NV Brut, a luxury champagne that was bright and celebratory in it's taste. It is harvested from about two hundred acres of vineyards that is still family owned in Champagne France. According to our Program, this champagne retails at about forty five to fifty dollars a bottle. It was very lively in my mouth and I would recommend this champagne for any celebration. They served the champagne in wine glasses which led to new champagne experience for me. Champagne taste better when you can smell it first. Keep that in mind. As we were drinking our champagne, The Tasting Room Restaurant was treating us to samples from its own menu, which was very delightful, because as these Private Party events are always catered, guests are hard pressed to find the food or drinks that were served, that being, you can attend a party for a clothing line and know where to find the clothes, but the chicken wings they served were so good, and you don't know who catered the event so you don't know where to go to get it again. That was not the case here. The Tasting Room started of with steamed fish scallops. Mouthwatering good. Steamed fish scallops and champagne make a great combination.

    After our apertif of Paul Roger NV Brut and fish scallops, we were in for a treat of four rich and aged red wines from California to Italy.

    The first one was a well tempered Handley Cellars Anderson Valley Pinot Noir 2005 from Mendicino County California. As the wines were being served, Mr. David Lynch, our Professorial hosts got atop his chair and educated us on the kind of grapes used in the wine, the elevation they were grown on and the economics behind the Prices of a bottle of the wine we were having. His lecturing style is that of one of your favorite college Professors so google his name and buy his books and if you see him hosting an event near you, attend. It would be good for you. Our Programs for the evening had a wealth of information about each glass so a lot of what I'm relaying to you here was culled from the program and what I recall from Mr. Lynches lectures.

    The Handley Cellars Anderson Valley Pinot Noir 2005 is from, as its' name implies, Anderson Valley in California, its a wine made from tempestuous grapes which are grown along a coastal appellation in Mendocino County. This wine sells at about thirty dollars a bottle and is very soft in its taste. This is a good wine to drink on a Sunday evening after you've read your New York Times and are ready to mellow out for the evening. Its bitters aren't very rich but its sweetness is bold and flavor just heavy enough to awaken the tastes of whatever meal you would want to have with it.

    Following that was one of the most flavorful wines of the evening. La Rioja Alta Rioja Reserva "Vina Alberdi" 2000 from Rioja Spain, and one of if not the best Value of the night at twenty one dollars a bottle. The sweetness was deeply rich and well mellowed with a full biting bitterness and sharp aftertaste. This wine is sold at a minimum of five years old, and according to our program it is one of the youngest wines from the Rioja Reserva. At a retail price of twenty dollars a bottle, this is one of the steals out there with wine prices riseing due a weaker U.S. dollar. The La Rioja Alta Rioja Reserva "Vina Alberdi" 2000 is aged two years in the tank, two years in the barrel, and one in the bottle before it hits the market.

    Next was Luigi Pira Barolo 2003 from Piedmont, Italy. As the Handley Cellars Anderson Valley Pinot Noir 2005 this is a wine grown along an Appellation from the cool hills of southeast Piedmont, Italy. I recall this wine being especially light, with a bursting flavor, and smooth aftertaste. It is from a smaller producer with twenty acres of vine and retails at thirty eight dollars a bottle. If your taste is for soft, luxurious flavor this wine is for you as it delivers at its price point. But don't expect it to over deliver however. It is what it says it is, a three year old wine, but at thirty eight dollars a bottle, and with a name like Barolo, you really can't ask for more.

    After the Luigi Pira Barolo 2003 was served, the restaurant got a lot lighter. The crowd that was there at six thirty for the champagne and Handley Cellars Anderson Valley Pinot Noir 2005 filtered out and so there was an abundance of Chateau De Sales, Pomerol 2004, the final wine of the night for the one third of the crowd that was left. Before the final wine was served however, the waiting staff brought out some delightful treats from The Tasting Room Restaurant during the interim. There was a Pork sausage which I delighted in. I must have had about ten servings of that, along with some very sweet and richly sour deep fired dumplings that were so packed with flavor your taste buds dripped. There was also a Mushroom soup that they served in small Japanese tea cups that were so hot and smooth going down, and was complimented with servings of steamed mushrooms served on bread crackers. Very nice. After that they brought out these petite burgers that were so fulling I could only eat one. I had indulged in so much entrees the burgers just were too much to cap it off with. But it was tasty and the Beef was fulfilling.

    Finally our Chateau De Sales, Pomerol 2004, from Bordeaux, France was served. It was a good wine to finish the night of with because in my opinion the wined served that night were so good and so deep, that least flavorful of the bunch, was still a good wine nonetheless. It is grown on one hundred and seventeen acres inPomerol according to our program on a Chateau that once was a Carthusian Monastery. At twenty five dollars a bottle retail, this is a wine in which you get what you paid for. And that's not bad. It's a good wine. Just not nut as bursting with flavor as the Handley Cellars Anderson Valley Pinot Noir 2005 or the effusive taste of the Luigi Pira Barolo 2003. It had a bland palette of tastes, no bitterness, sours or sweetness to speak of. It was soft and somewhat pleasant and would probably be a good wine to watch a movie with. Now if you want a wine to eat a steak or a lobster with, from the samples of that evening I would recommend the Handley Cellars Anderson Valley Pinot Noir 2005 and the Luigi Pira Barolo 2003.

    That was it for the night and afterward everyone engaged in small talk and big talk depending on who you were talking to. But the taste of those fish scallops and red wines stuck with me through the night, and probably will throughout the remainder of my life.

    written by Keith Nation for, and
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