The Berklee College of Music’s bizarre “transparency report” is a gift that keeps on giving. One of the odder parts of the report is a quotation from one of the confidential emails stolen from Sony Pictures–allegedly by “North Korea”–and published on Wikileaks. Let’s put aside for a moment the antitrust implications of the coordinated goals of Google and Spotify’s interlocking management teams and take a closer look at the section of the Berklee report that uses one of these stolen emails to justify the ad supported business models of Spotify and YouTube.
This quotation is in a confidential “music strategy” email from the late David Goldberg to Sony Entertainment and Sony Pictures CEO Michael Lynton. We have to assume the Berklee authors (whoever they are as none were given a “written by” credit that we could find) actually read the confidential email if they didn’t study it in detail. Goldberg’s confidential “music strategy” is a prime example of what happens when a tech executive thinks they can solve the music businesses problems–problems that often are created by other tech executives. It also shows what happens when a tech executive gets the ear of a senior manager in an entertainment conglomerate–in fantasy land, tech executives think they can jam their ideas down the throats of the guys who actually sell records and develop artists (see the Bertelsmann/BMG fiasco involving Napster and Thomas Middelhoff). In reality, it’s not so easy assuming you actually want to have a record company when the dust settles.
Here’s the excerpt from the stolen confidential Goldberg email as quoted by Berklee:
Sony has at least considered how to move more solidly into the digital realm. Also released in the Wikileaks emails was a memo requested by the Sony CEO from recently deceased Dave Goldberg, former head of Yahoo! Music [which he left in 2007–eight years ago and had not worked in the real music business since 2001–14 years ago, and essentially pre-Internet], about how to pivot the company into a revamped all-digital enterprise. “The record company needs to act like a music publisher for new releases—putting up very little money but not trying to hold artists for long contract periods or to keep as much of the revenue. Advances would be $50,000 with a 40 percent revenue share after the advance… Most fixed headcount in new releases will need to be eliminated, artists will need to be paid quickly and transparently, deals will need to be simple and fair and catalog replenishment is the only goal of the new release business. Artist contracts that have large fixed marketing costs will need to be restructured or sold off as there will no longer be headcount to do the work. New releases will be tested on consumers before added money is spent to ensure that it isn’t wasted. In short, the new release business will become like an independent label.” To date, these recommendations have not been implemented.
To date, Sony Music is a very successful record company, notwithstanding the failure to implement these bizarre ideas. While the pitch is that Mr. Lynton sought out Mr. Goldberg’s advice (which we find no evidence of), CEOs tend to get ideas from a lot of people, and just because one of them gives some input doesn’t mean that their input becomes the operational plan. Give Mr. Lynton a little credit, please. Maybe the recommendations didn’t get implemented because we’re not the only ones who found them insane.
All Your Hits Are Belong To Us
With apologies to Mr. Lynton, we went back and read the actual confidential stolen email, which we highly recommend if you have about 20 minutes of your life you’re willing to sacrifice. Here’s the gist: Goldberg wants to convince Michael Lynton that Sony Music essentially should be converted into a catalog company because most of Sony Music’s revenues come from catalog. That’s right–Goldberg wanted to more or less eliminate the front line catalog and just keep the back line catalog. With no thought given to how…the front line hits…become the back line hits….rut roh.
That’s right. Because magic.
Let’s set aside the fact that, with all due respect, Michael Lynton has little to do with Sony Music on an operational basis although organizationally he seems to sit on top (which means, no doubt, his salary and bonus includes Sony Music’s performance, another possible explanation for not implementing the Goldberg strategy). Here’s the general thrust in a quote from Mr. Goldberg’s email:
If Sony Recorded Music (ex-Japan) is doing $250MM in EBITDA today, catalog is probably generating approximately $500 MM and the new release business, which is 98% of the headcount, is losing $250MM per year. The catalog is also primarily generating this revenue off “deep” catalog that is at least 5 years old or older. The great classics of pop music are stable earners, much like the consistent songs that generate most of the music publishing revenues.
“Deep catalog is at least 5 years old or older.” Really. Records released five years ago are very likely featuring current roster artists. How’s that become “deep catalog”?
Let’s assume Goldberg’s numbers are actually correct–if there are a couple hundred new releases a year at a major like Sony, but Sony’s catalog dates back to 1888 when Columbia Records was founded (as a successor to the Volta Gramophone Company), what balance is there between new releases and Sony’s sizable catalog? If you didn’t know anything else, might you possibly think that the back catalog makes more money than new releases because there’s a lot more of it? And it reflects the investment in recording, marketing, promotion and artist development at the time the catalog titles were themselves the new releases that Mr. Goldberg now wants to eliminate? With 98% of headcount allocated to new releases? Really? Any evidence of that? (And by the way, to our knowledge there is no division of Sony Corp. named “Sony Recorded Music”.) We’re not going to take the time to go chase down the real numbers, but eyeballing Mr. Goldberg’s baseline assumptions says they’re a little shaky.
But he goes on:
With catalog providing the base profits, new releases need to be cut back dramatically to the point where the new business either breaks even or loses a small amount of money (justified by the long term catalog income stream of those songs). Thus, if the new release business is oriented towards building new deep catalog, it changes the entire process from trying to pick big hits to safely getting some good music out that has longevity.
“Good music that has longevity” that isn’t “big hits”? What music is that exactly? And if the “music strategy” that Berklee is holding out to us is designed to replenish the hits that are already in the Sony catalog, will the go-forward catalog be “good music that has longevity” but not “big hits”? What does that even mean? Aside from a dramatic reduction in opportunities for Berklee students and grads?
Yep, that sequential thought thing is a bitch.
Some Good Music with a Good Beat You Can Dance To
You would have thought that a once prestigious institution like Berklee would have figured out this stuff before putting their name on a flawed report. But there must be some explanation for this strange interest in a stolen email?
Here it is:
Music is becoming a purely digital product. A digital- only recorded music company will be a much more profitable one after one-off restructuring costs [of mind-numbing proportions]. It will have lower revenue and higher margins. Its revenue will be very stable and grow with the overall digital music market growth. It will be a much more valuable company with its revenue base solidly coming from subscription and ad revenue. (emphasis ours)
In other words, it will be just like Google and Spotify but with “good music that has longevity” replacing “big hits”. And because there’s “lower revenue and higher margins”…wait for it, wait for it…they’ll make it up on volume! It is the Internet, after all. Only problem–we’re looking forward to meeting the artist who would sign to Goldberg’s (and now Berklee’s) vision of Sony Music. Particularly if the competition didn’t find a deckchair on the Titanic next to Berklee.
So then Sony’s business would be entirely dependent on catalog with revenue from subscription and advertising–funny, just like Spotify’s business model. What a bizarre coincidence. Let’s just overlook that pesky fact that about 50% of revenue still comes from CDs.
Look, we’re sorry that Berklee picked the confidential writing of the late Mr. Goldberg who died too young and was by all accounts a great guy. Given that he’d been out of the business since 2001, we have no way of knowing whether Mr. Goldberg would have wanted his thoughts included in the Berklee report in the form of the stolen email–a stolen email marked “confidential”. Perhaps on further review and discussion he might have relented and agreed with us that his music strategy email was not his finest hour. No crime there. But Berklee included the email nonetheless.
However sympathetic and tragic Mr. Goldberg’s situation might be, had Berklee not included the stolen email in their report, none of this criticism would have ever come up. Our beef is not with someone who is not alive to defend himself, our beef is with Berklee who decided to take his work with no regard for Mr. Goldberg’s wishes or for Mr. Lynton’s privacy.