‘If people pay for music the industry will grow, otherwise it may die out’

Music makers are disturbed by the reduced revenues from royalties, mainly from FM stations. They are already suffering the impact of piracy and free downloads and they are worried that if this trend continues, many of them may have to shut down

As FM stations sulk over the Madras High Court's stay on the new royalty fee structure for radio stations, the music industry is getting increasingly apprehensive. In August, the Copyright Board announced that FM radio stations should pay 2% of their net advertising revenues as royalty to the music industry. This is a shift from the system in force since 2001, whereby FM stations paid music labels a fixed Rs850 per hour of music played on air, irrespective of the region of operation. Of this amount, Rs660 per needle hour is taken by the Phonographic Performance Ltd (PPL). According to industry estimates, FM broadcasters paid Rs1.2 billion-or about 18% of their ad revenues-as music royalty in FY10. A 2% share would mean a payment of only about Rs135 million. Music labels, disappointed by the order which reduces the royalties they would receive, have challenged the recommendation in court. Savio D'Souza, secretary general of the Indian Music Industry, talked about this and some other issues that are worrying the music makers.

Moneylife (ML): Tell us about the new royalty fee structure that is about to come into force.
Savio D'Souza (SD):
After the first spectrum auction, it was decided that FM channels would have to pay a fixed rate to music companies for the raw material, that is, the music. So they had to pay Rs 660 per needle hour, which is the actual music time the music is played excluding the advertisements. That time there was a hue and cry because they thought that the rate was too high, but they had not taken advertisement revenue into account. Now, the Copyright Board has suddenly decided that the channels will pay 2% of net advertising revenue. This is definitely good news for them, but for us, it was a shock. I can understand their perspective, but then, we have our own concerns.

ML: What steps has the industry taken in this respect?
SD: Ten days ago, the Madras High Court issued a stay order on the Copyright Board's decision. (The court has issued notices to the FM stations on the petition by the music labels.)

ML: Was the earlier fee structure the same for all locations?
SD: Yes, the Delhi High Court had ruled that the same rates would apply to all cities. It may seem unfair, but when we have to buy music from a banner like Yash Raj Films, we have to pay a hefty amount. If the rates were to differ, it would have made our position very vulnerable.

ML: Is there any other concern?
Yes, because the concept of ad revenue is problematic. Many products/brands advertise on FM channels at a subsidised rate, through an understanding with the channels. Hence, this so-called ad revenue would be less, and we would get a microscopic sum. It may not affect the broadcasters, because they have other income sources and somehow the amount will be adjusted with the sponsors.
On top of that, we have companies and media houses which have their stake in FM channels or own them. Naturally, for them there will be no advertising cost in their own channels. And for the music companies, it will be a sour deal because they will not get any money.

ML: But with the new auction, which will enable FM expansion in tier-II and tier-III towns and include a large number of towns, will it not mean a boost for the music industry as well?
SD: Of course. But then it is debatable how adequate that compensation would be for the loss that will be incurred with the new royalty fee structure.

ML: What then will its impact be on the music industry?
SD: Of course, it will be a bleak future. Because on the one hand we will have the government interfering and telling us how I should sell the material to the FM stations, but there is no regulation when I buy music from the music makers. They will not give it to me in charity. It means double jeopardy, and I am afraid if nothing is done, the industry will collapse.

ML: Isn't piracy also a concern?
SD: Yes it is. We have everyone downloading music on their laptops and cell phones. Pirated CDs of the latest albums are available at every street corner. We have taken measures to combat piracy and we have registered cases against some companies. We have also talked about licensing, that is, getting these shopowners and mobile phone sellers, who download free songs for their customers, to register with us.

ML: Has it helped?
SD: The response has been encouraging. We have this new programme called mobile music exchange, the first of its kind in the world. We approached some mobile phone dealers in Andhra Pradesh, telling them that what they were doing was illegal. We asked them to register with us, and that with the license they could get access to our music. That has really clicked. Within one year, we have other dealers approaching us voluntarily.

ML: With 2010 drawing to a close, what can you say about the music industry's performance?
SD: It has not grown. This is a Rs600 crore industry, and it is facing many difficulties. If people are willing to pay for what they want to listen to, it will also nurture the industry. Otherwise, it may die out.




6 years ago

The business model of music selling has to change taking into account things such as piracy as well as listeners choice.
Earlier the business model was to include songs along with movies which ensured that at least the Film producer paid the music artistes/producers. Then came the concept of music videos and telecasting the videos on TV paid for the music.
I would suggest the following changes to the music industry model:
1. Stop releasing music CDs altogether. Release only online music with DRM (Digital rights management).
2. Establish tie-ups with various e-commerce sites to sell DRM music. Tie the song purchased to the user and allow repeated download of the same song by the same user. That way you are telling the users that they have purchased the music, not the medium (such as CD or cassette)
3. Have tie ups with various cellphone providers for paid downloading of music directly to mobile phones. Have a fixed cost per song rather than charge for bandwidth.
4. Have flexible rates depending upon popularity of song, date of release, quality of release (2 ch audio vs 5.1 ch audio) single vs album etc.
5. Allow download of free preview/partial songs to let the user know what he's buying.
6. Last, but not the least, charge reasonable rates for the music.

When financial crisis is an opportunity

The troubles in Greece, Spain, Portugal, Ireland, have forced these countries to refocus their priorities. On the other hand, so-called successful economies like Brazil, India and China may have to pay, perhaps very soon, for lop-sided growth

Investors don't like trouble. Instinctively, like vast herds of wildebeest running across the Serengeti Plain, investors will also often stampede away from assets, markets, and countries that are having problems. Although it often sounds both prudent and cautious to follow the herd, over time it may be a bad idea.

Recently, investors have been savaging the so-called peripheral countries of the euro zone. For one reason or another, countries' sovereign debts have been considered very risky, at least by the default swap markets. Certainly if you look at some of the numbers this appears to be true. However, it might also be prudent to think of something else.

As the American White House Chief of Staff, Rahm Emanuel, said, "You never let a serious crisis go to waste." What he meant was that crises, especially the ones forced on countries or companies by the market, create a climate where reform goes from should to must. The greatest contribution that the market can make to efficiency, and ultimately economic growth, is discipline. And market discipline is never as effective as during periods of economic stress.

One of the most economically stressed countries has been Greece. Prior to the recent economic crisis, the Greek economy benefited broadly from its membership in the European Union and the euro. It allowed the Greeks to borrow at lower rates without the requirement of fiscal prudence.  But it was not simple profligacy that brought the Greeks down. Their monetary problems stemmed from an economically inefficient legal infrastructure.

The Greek regulatory environment is a major detriment to growth. The economy is filled with inefficient state-owned industries that were a heavy burden on both the economy and Greek taxpayers. Its tax system is complex and compliance was a bad joke. There are substantial barriers to entrepreneurship and the labour system fails to align wages with productivity.

Before the crisis, reform of all these barriers to economic growth seemed politically impossible. But the cost of international help required that the reforms proceed. The resulting strikes and riots were evidence that the political fears were justified. Nevertheless, the reforms have gone forward and they will increase Greece's productive potential and economic growth whether it remains within the euro zone or not.

Spain is another country that has recently been a victim of the markets. Like Greece, Spain suffers from inefficiencies within its legal infrastructure. One of the most severe problems is a two-tiered labour system. Centralised, compulsively collective bargaining agreements, indexing of wages and protection for permanent employment worked exceptionally well for those people with jobs, especially those within the civil service. But the system discouraged new hires and so discriminated against the young. The result is an unemployment rate stuck at over 20%.

Earlier this year, Spain's prime minister initially refused to attempt any reform and steadfastly maintained that Spain was not Greece. The recent troubles with the Irish banks and Portuguese sovereign debt have happily refocused his priorities. If market pressure continues, the result will be real reform followed by real growth.

In contrast to the problems of developing countries, economic growth in emerging markets seems positively stellar. The economies of Brazil, India and China were almost untouched by the global recession. They are all now growing at an impressive rate. This is a problem. Over the past two decades all three countries have undergone extensive and often painful reforms of their regulatory systems. The fruits of these reforms are evident in their more recent economic growth and resiliency. Sadly, their success has led them to rest on their laurels.

In Brazil, economic growth has created a new middle class intent on using credit to purchase imported consumer products whose price has been lowered by the strong real. The result has been a deficit and inflation. Since there has been little need, the Brazilian government has not dealt with its tangled bureaucracy, inefficient tax system and poor infrastructure.

The booming Indian economy and the stronger rupee have also pulled in more imports than exports. This trade deficit is being filled by short-term capital. Like Brazil this could easily lead to a disastrous balance of payment crisis.

China's growth has led to a new assertiveness which is based on the false conclusion that their market-controlled economy functions far better than a market system. The optimism and exuberance masks massive problems with their financial system, real estate market and mercantilist export strategies.

In time, perhaps very soon, the markets of China, India and Brazil may have to pay for their success. In contrast, the productivity forced upon Greece by the markets will no doubt reap rich dividends. What investors need to understand is that investment in regulatory reform during a crisis is a signal to change direction and run away from seeming success toward apparent failure.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected])



nagesh kini

6 years ago

The PIGS - Portugal-Italy-Greece-Spain now added Iceland-Ireland all free market countries like the South Asians and Mexico are under going the pangs. Russia and the so-called Eastern Bloc has managed to stay out.
India under no circumstances should opt for rupee convertabilty.
Reduce imports of Californian oranges, Washington grapes and Chinese Ganesha's ( I've been gifted one!), now onions from Pak.

Weekly Market Report: Not yet out of the woods until the Sensex crosses 20,000

The local market witnessed a lacklustre performance in the week ended 10th December on the back of a huge sell-off in the broader markets. However, the announcement of better industrial output numbers for October, on the last trading day of the week, provided some relief and helped the indices pare some of their losses.

Investors will keep a watch until the Sensex crosses the 20,000-mark to make any big moves. The wholesale price index based inflation for the month of November will be announced early next week, providing some direction to the market on that particular day.

The market opened the week flat, as the indices after having crossed their crucial levels in noon trade, could not sustain the gains. A sell-off in select blue-chip stocks kept the market under pressure on Tuesday, forcing a close with a marginal loss in a generally choppy session.

A sell-off in the broader markets on Wednesday, after a news report that intelligence agencies are looking at price-rigging in select stocks, pulled the indices lower at the end of the session. The broader markets were thrashed for a fifth successive day on Thursday on offloading by institutional investors. The losses widened in the post-noon session, sending the indices further southwards. But on Friday, the domestic market made a good comeback, recovering over half the losses it had suffered in the previous trading session. Gains by select blue-chips and stocks in the broader markets supported the rally.

The market ended the week with a loss of 2% with the Sensex declining 458.04 points and the Nifty falling by 135.45 points.

The top Sensex gainers during the week included Wipro (up 5%), NTPC (up 4%), BHEL (up 3%), Jindal Steel & Power and Reliance Industries (up 2% each). The major losers were State Bank of India (down 11%), Reliance Communications (down 10%), DLF (down 8%), HDFC Bank and Reliance Infrastructure (down 7% each)..

BSE Oil & Gas (up 1%) was the only notable gainer in the sectoral space while the BSE IT index ended flat. BSE Bankex (down 8%) and BSE Realty (down 7%) were the top sectoral losers during the week.

India's industrial output soared by 10.8% in October. Robust demand for automobiles, electronic goods and power equipment spurred the growth in factory output, which encouraged finance minister Pranab Mukherjee to exude optimism that industrial output growth would be in the double-digits on an annual basis as well.

The Index of Industrial Production (IIP) had registered a slowdown in the previous two months and was at a sluggish 4.4% in September 2010, after surging by 15% in July.

Food inflation rose again, albeit marginally, to 8.69% for the week ended 27th November from 8.60% in the previous week, which was the lowest since May last year. The upward trend in food inflation also marked a break of seven consecutive weeks of a fall in food prices.

After four consecutive record-setting months, vehicle sales in the country slowed down in November, growing by 17.81% as against 45.93% growth registered in October on a year-on-year basis.

According to Society of Indian Automobile Manufacturers (SIAM), the total number of vehicles sold in the country stood at 12,21,981 units in November this year as against 10,37,232 units in the corresponding month last year. The industry body expects lower sales in December from that in November.

State-owned oil companies are likely to raise petrol prices by Rs1.50-Rs2 per litre early next week, while a Rs2 per litre hike in diesel rates is under government consideration, according to a senior government official. A hike in diesel prices looks imminent as crude oil prices have inched closer to $90 per barrel, widening the gap between domestic retail rates and the import cost.

India's exports in November rose by 26.8% to $18.9 billion year-on-year. Imports also grew by 11.2% in November to $27.8 billion. The trade balance in the month was $8.9 billion. The increase in exports prompted the government to exude confidence that outbound shipments will touch $215 billion this fiscal.

India's foreign exchange reserves grew by $2.41 billion during the week ended 3rd December to $296.40 billion after two consecutive weeks of decline, the latest Reserve Bank of India (RBI) data showed. In contrast, the country's forex reserves stood at $293.98 billion at the end of the previous week. Foreign currency assets, a major component of India's forex kitty, rose by $1.98 billion to $267.23 billion during the week ended 3rd December.

In international news, China's inflation accelerated at the fastest pace in 28 months in November, beating analysts' forecasts. Consumer prices rose 5.1% from a year earlier, driven by food costs, a statistics bureau report showed on Saturday. In October, inflation was 4.4%. Meanwhile, on Friday, the People's Bank of China-the country's central bank-hiked the Reserve Requirement Ratio by 50 basis points. The revision will come into effect from 20th December.


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