Mobile Music Reporting Practices
By Les Watkins

(Originally published in Smart Licensing Volume 10, Number 1. March 2006)

The growth of the mobile music industry could best be described as explosive.  By some estimates, 2005 ringtone sales generated $500 million in revenue in the United States alone.  In 2006, wireless music aggregators and carriers are rushing to market with mobile services that offer a cornucopia of offerings, including full-track downloads, video, and Internet radio.  Without question, the music business is going mobile.

Previous Smart Licensing™ articles have focused on licensing issues facing mobile music services.  Undoubtedly, smart licensing practices, as advocated in those articles, will enable mobile music services to get to market with the widest possible catalog of music at the lowest possible cost.  But acquiring a license is only a first step—the license must also be maintained, through proper accounting and reporting practices. And based on what Music Reports has learned about mobile music accounting and reporting practices so far, trouble lies ahead for many services.

At the moment, there is very little pressure on mobile music services to report properly and accurately.  One reason is that, due to the rapid decline of physical record sales, record labels and music publishers view mobile music as a “goose laying a golden egg”.  They do not want to disrupt the growth of these services, which they hope will compensate them for the decline in traditional revenue streams.

Another reason that labels and publishers currently pay very little attention to mobile music reporting is that major label and publisher accounting systems, which were designed for physical sales, are not yet capable of promptly and accurately reporting to third parties (such as recording artists and songwriters), on digital sales. These companies are now investing tremendous resources to update internal accounting systems, so that they can handle disbursements to third parties.  In the meanwhile, it is better to leave mobile music royalties uncollected, than collect them without the ability to pay out to third parties, as required by label and publisher recording and co-publishing agreements with these third parties.

But as traditional record sales continues to decline, mobile music will become a primary, instead of a secondary, source of revenue for labels and publishers.  And label and publisher accounting systems will either be modernized, or recording artists and songwriters will force labels and publishers to account on digital sales. The royalties that these third parties get for traditional sales will diminish, and they seek out substitutional income.) Therefore, the “grace period” that mobile music services currently enjoy, with regard to proper reporting, will end.  Label and publisher royalty accounting audits will ensue.  Under this scenario, the best case for mobile music services is that they will be required to pay audit settlements and re-tool reporting systems, so as to ensure accurate accountings, at significant expense. The worst case is that mobile music service licenses with labels and publishers will be terminated.

Faced with this dilemma, mobile music services are well advised to devote the necessary resources to establishing sound accounting systems, from the outset.  But the task is more difficult than it seems, due to some established business practices between wireless carriers and the mobile music services that provide musical content to them.  For example, many polyphonic ringtone licenses from music publishers require mobile music services to pay the publisher a royalty for each ringtone sold that is equal to the greater of:  Ten Percent (10%) of the retail price of the ringtone concerned; or a “penny-rate” floor of Twelve and One-Half Cents ($.125) per download.   Polyphonic ringtones, when they are sold on an “ala carte” basis, currently sell for One Dollar ($1.00) retail.  In Music Reports’ experience, most mobile music services that sell polyphonic ringtones simply account on a “penny-rate” basis ($.125 per download), and publishers do not object to this practice, because the penny-rate is more than Ten Percent (10%) of the retail price of the tone concerned (that would be Ten Cents ($.10)).

But what if the wireless carrier offers to the consumer, in the form of a charge to the consumer’s mobile phone bill, a number of “credits”, which are redeemable over time, for polyphonic ringtones? This is a common practice in the wireless music business.  For example, a carrier might offer a consumer 6 credits for Eight Dollars ($8.00).  If the consumer only redeems 1 credit for 1 ringtone, and the mobile music service pays the publisher Twelve and One-Half Cents for that ringtone, then the publisher has not participated in the effective “retail” price of that ringtone—and the publisher has a strong argument that the effective retail price of that ringtone should be Eight Dollars ($8.00)!  It will not matter to the publisher that the wireless carrier collects all of the “breakage” (in the form of unredeemed credits) and that the mobile music service does not share in it.

In Music Reports’ experience, all licenses for the use of master recordings and musical works in connection with mobile music service offerings are structured similarly to the license in the above example.  As such, mobile music services must receive “transaction-level” reporting detail from their carrier distribution partners, in order to account accurately.  A “transaction-level” music usage report includes a separate row of information for each transaction, including but not limited to:  date of transaction (e.g., download); consumer identity; musical item identity; and price of item.

Music Reports has reviewed many carrier reports and has learned that many, if not most, carriers do not currently report back to mobile music services in this manner.  In fact, it appears to Music Reports that the carriers do not even collect this level of detail—if it is collected at all, it is collected by the micropayment processing companies that sit between mobile music services and carriers.

Even more surprisingly, Music Reports has learned that carriers are not reporting using unique numeric identifiers for each musical work. Instead, carriers are reporting on the basis of song titles.  This is a methodology that is fraught with risk of error.  For example, many songs share the same title—Music Reports’s SongDex® database of musical work copyright information lists over 13 different songs sharing the title “Dreams”.  And any given song may be known by several different titles. For example, the Rolling Stones song “(I Can’t Get No) Satisfaction” is known variously as: “Satisfaction”, “Can’t Get No Satisfaction”, and ‘I Can’t Get No Satisfaction”, in addition to its rightful title.  In order for a reporting system to scale with integrity, the musical works that are reported on must be identified by unique numeric identifiers (such as Music Reports’s SongDex® ID), at each stage of the reporting chain.

Undeniably, mobile music has the very real potential of reinvigorating the faltering music business.  For example, it is reported that Cingular had almost 50 million subscribers in 2005, and very soon, each of those subscribers will have access, at their fingertips, to all of the music that is commercially available in the United States.  But for all the royalties being generated by mobile music, a significant amount is being left on the table, due to faulty accounting and reporting practices.  It is only a matter of time before pressures come to bear on these processes.  When millions of transactions are at issue, mistakes can add up.  Music Reports has significant expertise in digital royalty accounting on the scale required by mobile music services, and we welcome the opportunity of working with the mobile music industry in this area.

This entry was posted on Thursday, July 16th, 2009 at 11:34 am and is filed under Mobile Licensing, Music Licensing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.