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Behind The Scenes: Record Label Demands From Amazon

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This is a guest post from Michael Robertson, a 12-year veteran of the digital music business. He is the founder and former CEO of digital music pioneer MP3.com. He is currently the CEO of music locker company MP3tunes..

Amazon defied the record labels by launching an unlicensed personal cloud music service. (Disclosure: I’m CEO of competitor MP3tunes.) Music companies immediately expressed their dissatisfaction and Amazon public stated they would discuss licenses with labels. Since then considerable speculation has swirled about regarding licensing discussions Amazon, Google and Apple are having with the 4 major record labels.

Dominating the discussions is the labels concern that personal cloud services will exacerbate piracy and erode their business even further. Consequently they want to impose substantial restrictions on any such service, but each labels has different concerns and demands. Below are examples of the startling limitations major labels wish to impose on such services.

Universal Music Group is concerned that users will load pirated songs into lockers. Average MP3 players house more than a thousand songs and UMG believes that many were unpaid for. They do not want to see the billions of songs that came from P2P system laundered (think drug money) in a cloud service and become legitimate.

To combat this they want only songs with digital receipts to be able to added to lockers. For some time UMG has been demanding that online music retailers embed personal information in every song they sell. They call it UITS. iTunes has been inserting email addresses into every song while other retailers like Napster are using a unique receipt number. (Techcrunch first wrote about Dirty MP3s a year ago and how these might be used by future cloud services.)

All songs without a proof of purchase would be assumed to be unauthorized and not accepted into the system. Songs ripped from CDs would not have unique identifiers and wouldn’t be loaded. Any song purchased prior to retailers inserting personal identifiers or from retailers who have yet to personalize every song would also be excluded. (To date, Amazon’s MP3 store does not put any unique identifiers in songs despite UMG’s demand that they do so.) Promotional songs download online would also not work.

Sony Music Group shares UMGs concern about the laundering of songs, but seems more concerned about locker sharing and downloads and is demanding restrictions in those areas. Sony believes users will share lockers by visiting each others houses and syncing in each others music. To combat this Sony wants loading to happen from only one computer. Each locker owner would have to designate a single location from which they could upload songs. Users could load music from either their laptop or desktop or office computer but not all three. Their belief is that this will prevent friend to friend file sharing.

Downloading is another area of concern for Sony. To prevent lockers from become Napster like repositories they want to restrict downloading to one emergency download only. Locker owners would only be able to download their music files a single time if they claimed they were lost. All future downloads would be forbidden. This would limit the ability for a locker owner to go to a friends house, download all their music and then have the friend upload those songs as their own. This means that syncing to portable players and smart phones would not be allowed. Neither would download to laptops for offline playback.

Most worrisome to Warner Music Group is that users may setup multiple lockers and the distribute the extra lockers to friends. Imagine if a locker owner setup a locker at Apple and Amazon and then gave their less used locker away or maybe even sold it. What WMG would like to see happen is that a central locker authority would administer all locker assignments. For awhile they were pushing Catch Media as the solution. More recently they may have relaxed their demands in this area and insisted that locker identities be uniquely tied to a valid credit card or some other such verified identity.

The above list of demands is by no means complete but rather an illustration of the labels mindset. There are others issues dealing with simultaneous user access, family accounts, mobile access, local caching, regional restrictions and more. The one company who had such a personal cloud license is the now defunct Lala who had to agree to no downloads whatsoever, no mobile stream (web browser only) and costly per song stream fees.

In addition to usage restrictions, labels are demanding that cloud services pay them an annual per user fee. Labels will demand a minimum per user fee each year and not the more business friendly percentage model. Such a flat fee will mean no free or advertising sponsored service will be possible. For subscriptions services such as Rhapsody and MOG they demand the HIGHER of: per user fee, percentage of revenues or per stream fee effectively boxing in services and insuring they’re never able to turn a profit..

The challenge for cloud services such as Amazon’s is how to appease the record labels and still have a consumer friendly service that is financially viable. Even one of the above restrictions renders a cloud service mostly useless. Combined they would make a locker service utterly worthless, for sure nothing that a music fan would pay for making it impossible for the company to cover the demanded per user fees. Amazon has publicly stated that their position is that a license is not required for a service such as theirs. This issue is currently being litigated by my company in EMI v MP3tunes where we await the Judge’s ruling. With the record labels wide reaching demands it’s difficult to see how Amazon, or any company, could arrive at a workable license for personal cloud music.