Interview With RoyaltyShare's Chairman & CEO Bob Kohn
RoyaltyShare is a premier provider of digital royalty solutions to records labels, with a special focus on the independents. Its powerful web-based suite of services called “Digital Advantage” collects and consolidates digital sales from nearly 200 digital music service providers and provides labels with reports that permit labels to “consolidate, manage and interpret data from your digital music revenue streams. ” RoyaltyShare tracks label’s repertoire on a broad spectrum of digital entertainment, distribution, subscription, mobile carriers and other services, and then sends reports on digital revenue back to the label, all with a click of the mouse.
RoyaltyShare’s “Label Advantage” program quickly and accurately processes both artist and mechanical royalties using a patent-pending web-based service designed specifically for the task of gathering royalty information from dozens of different file formats used by over 50 of the leading music download services, again, making the work of generating royalty statements as simple as a click of a mouse for the “Label Advantage” subscribers.
RoyaltyShare clients do not have to contend with expensive, complicated software programs and their maintenance because RoyaltyShare is a web-based secure system that is accessible to clients from anywhere in the world, 24-7, wherever there is access to the Internet. And importantly, RoyaltyShare’s system is backed up by disaster recovery technology and its servers are locted in remote location facilities.
Sorting through massive amounts of data generated by tracking tens of millions of digital transactions monthly for their label client’s tracks on nearly 200 digital services is RoyaltyShare’s specialty: Co-founder and Chief Technical Office Scott Holcombe, who is the technical guru for RoyaltyShare, has more than 15 years of software development experience, including stints as VP of engineering for eMusic and as a senior software developer at Vivendi Universal, where he was responsible for the ongoing development of eMusic.com, MP3.com, and rollingstone.com as well as senior development roles with NeoPoint, HNC Software and Mistix/Teleseat.
And developing and maintaining working relationships with the myriad of digital music services is nothing new for Co-founder, President and Chief Operations Office Steve Grady, who is “a veteran of the digital music space,” having held executive marketing and management positions at eMusic.com as well as marketing and communications roles in the Internet and PC Software industries, including Infoseek, Borland Software, Ashton-Tate, Teradata Corporation and Lotus Development.
And finally, RoyaltyShare’s web-based system of generating and reporting digital sales and royalties that encompass the obscenely complex splits, rates, payees and other nuances that make up a record label contract is the result of the life work of Co-founder, CEO and Chairman Bob Kohn, who is leading expert in music licensing and intellectual contract law and policy, as well as co-author “Kohn on Music Licensing,” the entertainment law industry’s “Bible of legal issues today in the music world,” as christened by USATODAY.
RoyaltyShare has added new accomplishments and milestones since I interview Bob Kohn at MIDEN in Cannes, France: In April 2007 RoyaltyShare completed a $5 million dollar Series B round of financing led by Trident Capital, a leading Palo Alto-based private equity and venture capital firm. RoyaltyShare plans to use the financing to expand operations, which, according to a recent press release, includes establishing regional offices in New York, LA and Europe; increasing support staff for its record label customers; developing new services designed to simplify the process of selling music through digital and mobile sales channels; and exploring and investing in additional market opportunities as digital media commerce continues to evolve, including a Web-based royalty solution for music publishers.
In May 2007, RoyaltyShare acquired the Los Angeles-based Independent Digital Entertainment & Arts, LLC (IDEA), a “provider of outsourced content management services to record labels, record distributors and digital music retailers," with which RoyaltyShare is now able to include digital content management and delivery services in its suite of services.
Also in May 2007, RoyaltyShare announced the appointment of Ray Farrell to senior vice president of Business Development and Label Relations, who will be based in the company’s New York City office, a step taken to expand the company’s domestic and international growth.
And in June 2007, RoyaltyShare acquired Musicalc, a UK-based provider of royalty accounting software for the music industry, which expands and enhances its services in Europe as well as adding royalty processing software and services for music publishers.
I managed to carve out a few minutes of Bob Kohn’s time at MIDEM 2007 to discuss RoyaltyShare to learn about the company’s services and approach to the world of royalties, records and labels:
[MusicDish] Bob, to start with, what kind of data is available to record labels who are subscribers Royalty Share?
Bob Kohn When a record company subscribes to Royalty Share’s web-based royalty processing services, we load in their metadata - that is their listing of their entire repertoire - track by track, album by album, audio visual work by audio visual work.
We also collect for them the digital revenue data from, right now, over 180 digital entertainment services around the world, such as iTunes, iTunesUS, iTunesUK, iTunesFrance,iTunesGreece; eMusic; YaHoo Music; MSN Music; MusicNet - which is the basis of maybe 50-100 stores; OD2 - which includes another 75 plus stores, anyone who has set up a store; anyone who has set up a music distribution service such as SNOCAP; some of the other advertising-based services; subscription services; and, of course, mobile services, including all of the carriers.
All of these services will provide monthly, sometimes weekly, reports in a common delimited file, an excel file or some kind of an electronic form to the record label. The volume of transactions is simply overwhelming to any of the existing software today to manage the data. Since we’re a web-based system, we bring this into one place: se match all of the sales data from the digital entertainment services to the metadata to make sure that every single transaction, no matter how small, whether its 70 cents, 5 cents, one cent, or 1/10 of one cent, is matched to a track in your metadata.
This is very critical because [for] every single one of those transactions you must pay a royalty share to an artist, a producer, someone like that. We put in everything that you own and all of the date coming in from the various revenue sources as a basis for our royalty processing services.
[MusicDish] How do you receive data from the labels? How do you obtain the catalogue information to put into your database?
Bob Kohn We work with the label to determine the most efficient means of doing that. In most cases, for all of the digital revenue, labels will ask us to go directly to the service, the iTunes, the Yahoo Music, etc., and we grab their file and process it within 24 hours so that it’s immediately available for them. Royalties might not have to be produced for 90 days or six months, but [the data is] immediately available to the labels for marketing purposes.
As far as the metadata, labels give it to us in large spreadsheets or any other format that they provide to us, and we help them manage it, clean it up, and get it into a position so that it can be meaningful information to them. [Whether it’s] stored in spreadsheets or current systems, or legacy software programs, we’re experts at exporting the data and importing to minimize any data entry that may be necessary to get the data into our system.
[MusicDish] How do the labels contribute data to their RoyaltyShare account once it's set up, such as new signings, new CDs or releases, on an ongoing basis?
Bob Kohn The beauty is that since RoyaltyShare is a web-based service, you can be sitting in a beach in Mexico as long as you have a wi-fi connection, and you can be managing your entire metadata and accounts. You can be uploading sales files if someone sends them to you directly, you can upload them into the system. You can actually add a new album, all of the new tracks on the album, you can a new a new contract, a new payee, the payee’s address and e-mail address, tax ID number, all on a web-based system basis.
If the label has an outside accountant, the accountant can be given access to the system to access contractual information, or your outside lawyer can be given access to the system so you don’t have to all be in one place at one time. Various people who provide services to you as a label can participate to make sure that the data that is going into the system is accurate so that the reports coming out of the system are accurate.
[MusicDish] Would you give us some examples of how your existing label clients are using RoyaltyShare? You mentioned earlies about using the data reports for marketing decision. How are labels doing that?
Bob Kohn I’m actually going to show you on the screen to give you a very stark example. (Editor's note: We look at a PowerPoint presentation of charts. The following edits are to clarify for the reader what I saw on the charts.) We’re looking at a screen of RoyaltyShare’s royalty processing service,[Digital Advantage]. We’re seeing a listing of all of the digital services for one of our clients, Laugh.com. It's a comedy record label that does about $75,000 a quarter in digital revenue, which is not small. You’ll see that 52.9% of the label’s [quarterly digital] revenue [is from] iTunes, 16.2% [is from] eMusic, 9.7% [is from] Sprint, 9.6% from Napster, then [the balance is from] Real MusicNet, Verizon, Musicmatch, and a long list of other services.
At the top, it shows 52.9% [of the label's quarterly revenue came from] iTunes and 16.2% from eMusic. Now let's look at the label’s top albums, top tracks and the top artists. If I click on their best selling track [for the quarter], which happens to be a George Carlin track “7 Words You Can Never Say On Television” and we all know that you can’t say during this interview, the total [dollar amount] of revenue for that track was $885.00.
We can also see that overall, the iTunes revenue [for the quarter] was about 52.9% percent [of the label's total revenue], and “7 Words You Can Never Say On Television” generated] 93.8% of the iTunes revenue.
Here we see that the eMusic revenue [for the quarter]is 16.2% [of the label's total revenue], but [“7 Words You Can Never Say On Television” generated] only 3.3% [of the eMusic revenue]. Why is the top selling track not doing as well [on a percentage basis] on eMusic?
I don’t know the answer to that question. RoyaltyShare can only give you a tool to help you, but the person at Laugh.com should go to eMusic and ask the question, “Why is my top selling comedy track only selling at 3.3% [of my total revenues] on your service?” The answer might be that that track is misclassified in the Classical Music section. That’s hundreds of dollars of lost revenue, and that’s only one track out of about a thousand tracks that this label has. How many other tracks have been misclassified?
With your data, we can give you tools that will help you to understand what’s going on with those services. We’re not a record company, we’re not a marketing company, you have to go to iTunes and eMusic to promote yourself and to get better placement, but certainly you can take this data, go to eMusic and say, “Hey, what’s wrong with this track? Why is it not in the comedy section? Why is the genre mislabeled?” It will help you increase your sales on online services.
[MusicDish] And that’s a very important issue, especially in the indie world where you don’t necessarily have a marketing department and a finance department, where you have personnel to do this kind of research, monitoring and follow-up.
Bob Kohn I would venture to say that on the physical side, these kinds of tools are not available to the marketing director. What they’re using is SoundScan, which is a rough approximation, but it doesn’t tell you store by store what’s going on. What we’re providing at RoyaltyShare is store by store information on a monthly basis. If we can get the information from iTunes weekly – we’ll get it to you on a weekly basis. If we can get the information daily, we’ll get it to you on a daily basis. As fast as we can get it, within 24 hours we’ll give it to you so that you can act on this information, and you can increase your sales.
[MusicDish] What has been the response of the labels – I think that you have over 55 labels …
Bob Kohn We have over 55 labels, and some of the biggest independent labels in the world: Sanctuary Records, Fantasy Records in Canada, Koch Records in the US, Razor and Tie, Jeweltone Records, and we’re also working with one of the majors - which we’re not privy to talk about yet, large record labels, and mid-sized independent record labels. They’re using our “RoyaltyShare Digital Advantage Service,” which permits them to do everything I’ve just described in terms of understanding their digital marketing data.
They’re also beginning to use our royalty processing service, "RoyaltyShare Label Advantage.” We get their contract information as to what they owe the artists, the producers, the publishing companies and any other payees, like A&R. We do the splits and the revenue calculations. Record contracts are unusually complex, with military sales and record club sales with different royalty rate configurations, depending upon whether it’s a CD or a digital download or a stream or an LP. Territory rates vary, [and] there’s packaging deductions, free goods deductions, percentage of sale deductions.
We calculate controlled composition clauses, reduced statutory rates for mechanicals, all of the potential variables that you can imagine. We can do net revenues, percentage of retail deals, percentage of wholesale deals, list price to dealer deals. Every kind of variable is handled by this system, so we can match up those contract terms to the digital revenue data and physical revenue data.
Your monthly revenue report from your distributor - whether its ADA, Fontana, Caroline Distribution, Koch Distribution, overseas distributors - we match up all the sales transactions against the contracts for the artists, producer, and mechanical royalty statements, relevant publishers. A mechanical royalty statement is produced by our system, as I’m showing you on the screen. We produced it with the Harry Fox Agency in the format that they use to uploaded to their system, so we help records labels to become very seamless with their partners like Harry Fox. Harry Fox then downloads [the label’s] mechanical royalty statement electronically from RoyaltyShare. There is the report that the label has to produce to the Harry Fox Agency with all the detail behind it.
We do this for large, medium and small independent labels, and the good news is that you don’t have to install any software. You don’t have to have any computers other than to access an Internet browser. A royalty manager for a record label could be on that beach in Mexico or in an Internet Café managing their royalties.
[MusicDish] You might change their job descriptions ...
Bob Kohn Well, work is not a place anymore - and that’s our philosophy.
[MusicDish] Bob, I want to ask you about your pricing. I understand that there you use a sliding scale pricing from the small label up to the large label.
Bob Kohn Yes. The good news is that since there is no set-up fee for the label, no upfront costs, we don’t bill you until we start generating statements for you. When you start working with us, getting your metadata into the system and making sure that it’s right, you’re not spending one penny.
We have a two-tired system: we have one rate schedule for physical CD revenue or traditional revenue, and one rate schedule for digital. Digital is much more complex than physical. For physical revenue we only charge 1% of your revenues processed, and that’s net revenue, not on returns. If we have a label with large returns in one quarter, their royalty processing fees are virtually nothing because they have a lot of returns and the royalty revenue becomes very small.
On the digital side, we charge 3% of revenues processed. Think about that: if you do deals directly with iTunes and eMusic and some of the other services, you’re collecting that revenue. And if you have no distribution fee to pay, you only have to pay us 3% to do all of your royalties for you. Of course, it’s totally variable – it’s scalable. You can take your entire catalogue and put it on some obscure website, like a Norwegian punk site or an African music site, and if you’re selling Classical Music, your revenues might be $100 for that quarter from those sites. But we only charge you $3.00 to do the currency conversion, all of the data matching, all of the statements, on that $100 of revenue.
RoyaltyShare picks up an “Innovation in Music and Entertainment Award” in the category of Digital Music
& Marketing Innovations, B2B Solutions at POPKOMM in 2006.
[MusicDish] That sounds affordable.
Bob Kohn It’s very affordable. You can talk to our label customers about the amount of work that we’re doing for them and the amount of time that we’re saving them. Plus, with the information that we’re giving them about their sales, they’re actually increasing their top line. You could, theoretically, use the information that we’re giving you to help your marketing and make enough money on the marketing from that information to pay for your RoyaltyShare percentage, because if you can increase your sales by 3% by using us, that pays for our 3% fee.
[MusicDish] Can music publishers use this system as well?
Bob Kohn We are working on a full publisher system as we speak. It’s based upon the same platform, but rather than your payees being other record companies, producers, artists and publishing companies, the payees become songwriters and other music publishing companies and subpublishers. And of course, the splits among publishers are a lot easier than a recording contract. The songwriting contracts are very simple compared to your typical recording contract.
We think that record companies and music publishing companies that are using legacy software systems that cannot handle the volume of the transactions and the complexity of revenue splits that are occurring are going to be at a serious disadvantage to their competition. And you have a choice: you can either build this yourself or you can outsource it on a variable cost basis that varies with your revenues. The trend is to outsource, and I’m not talking about outsourcing to overseas or China. This is to San Diego, where our corporate offices are, with royalty professionals who are there to help you 24 by 7 to make sure that your statements are done on time, and done as accurately as possible.
[MusicDish] Companies hiring intermediaries with expertise is the industry trend that we see, as well.
Bob Kohn Absolutely. You hire lawyers. And when you do your payroll, you don’t go and hire someone to write you a payroll software. You don’t even license the payroll software and install it on a PC, you hire a service to do your payroll. Well, this is a service that you hire to do your royalty processing.
[MusicDish] Are you anticipating user-generated content, mash-ups, YouTube, etc., to be the next wave with regards of tracking down and collecting royalties?
Bob Kohn A lot of the user-generated content are being uploaded onto systems like YouTube or MySpace or things like SNOCAP and Musicane, and all of those services. We already work with services like SNOCAP and Musicane, and anyone who generates digital revenue data for an artist. Individual user-generated content - if they use a Beatles track, they need a mechanical license - and they’ve got to pay. We’re the perfect system for even user-generated artists to be outsourcing all of their third-party payments.
[MusicDish] Bob, thanks for the conversation. Any closing thoughts?
Bob Kohn One of the important things that a record label should know is who we are. Many of the attorneys representing record labels already use my book, “Kohn on Music Licensing,” which I wrote with my father, Al Kohn, who is a retired vice president for licensing for Warner Chappell Music for 20 years. It’s a legal treatise on music contracts. And, I was the founder of eMusic. Steve Grady, our president, was the general manager of eMusic.
Our chief technology officer, Scott Holcombe, built eMusic, and he’s an expert on digital revenue data. We’ve generated thousands of reports to independent record labels over the past six years or so, and we generated reports based upon a million tracks and up to 20 million transactions a month. Scott also built portions of MP3.com and the 200,000 websites with GarageBand, which is a massive, scaleable reporting system in which every GarageBand member could go to the back end, if you recall, and see how many downloads, how many unique visits, how many streams, how many compilations CDs. And, most importantly, they got a report on how much money they earned at the end of the month. These are web-based, scaleable reporting systems.
If you can find the domain expertise of people who’ve run a digital download service, who’ve built massive, web-based, scalable reporting systems, and who are experts on contracts in the music industry, including music publishing and records, we think we’re the right people to do this. Right now we’re the only ones who are doing it this way. It’s the modern way to do it.
Because we're founded in music, we have a very special relationship with the record companies. And because of that history, we’re focusing on the indies. The majors have their large IT departments, but they do need assistance and we do provide assistance to the majors. But again, our focus is on the independents and allowing independents to leverage what they know best. What RoyaltyShare does, at the end of the day, is allow an independent record label to do is to focus on A&R and on marketing, and that’s what they should be focusing on, not all of the headaches of royalties. They’re your royalties, but they’re our problem.
Visit RoyaltyShare at www.royaltyshare.com .
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