Digital start-up Mixcloud had to confront copyright issues early. WIPR talks to co-founder Nico Perez about how to stay out of trouble as a start-up and why the models need to change.
“When we started out we knew virtually nothing about copyright,” says Nico Perez, co-founder of Mixcloud, a four-year-old online music service that already boasts more than 3 million users a month. A kind of Internet radio, Mixcloud is free to consumers, allowing users to stream but not download content (DJ mixes, for example) uploaded by other users. It’s social media meets music provider: a YouTube for radio.
From knowing nothing about copyright four years ago, Perez is now something of an expert, regularly speaking to European Commission meetings about digital policy and copyright, as well as to industry conferences worldwide. It’s been a steep learning curve, but an essential one.
When Mixcloud started, he says, “we didn’t know anything about licensing, didn’t know who you had to speak to, didn’t know that there were several different copyrights within a musical work, so we all ended up learning about it”. As the person in charge of the product side, Perez took the lead.
“I was responsible for trying to work out what we can do legally, and what was the area we had to work within. For example, can we do downloads? [The answer was no.] Can we stream? Can we show a track list? All these seem like minor technical questions, but there’s actually quite a lot of friction with what you’re able to do with certain licensing.”
Being based in the UK meant that such questions had more expensive answers than they would have done in US. While Perez acknowledges Mixcloud’s good relationship with the UK Performing Right Society for Music (PRS) and various other collecting societies, he points out how difficult it is to run this kind of business in Europe.
“Here in the UK, for example, and in every single EU country, you’ve usually got one collecting society that represents artists, and one that represents labels and essentially, they’re de facto monopolies because they have no competition and they only operate within their country.”
That means there is no price competition for streaming music and songs, and there’s no-one else to negotiate with who can bring some sort of leverage. “Because ultimately, it comes down to ‘how much should someone pay?’,” Perez says.
“What is the economic value of listening or downloading a piece of music or film or book? Our argument is that because there are these monopolies in place, it’s very difficult to set a fair value. The result is that a lot of US radio companies like Pandora are not operating in Europe or the UK because the rates just don’t work with the reality of the economics of the Internet.”
For an Internet start-up facing copyright challenges for the first time, there’s a certain paradox. While record labels shout very loudly about the importance of their IP, until a company gets to a certain size, it’s difficult to get the labels to listen.
“At first we tried to speak to the labels directly,” Perez says, “and the feedback we got varied from ‘sorry you’re too small, we don’t have the resources to deal with everyone asking for licences’, through to some people who said ‘just go, do it and if you reach a certain scale, that’s when you can begin to have the conversation about licensing’.”
While this sounds like a strange attitude from an industry that is notoriously twitchy about infringement, it makes a certain sense. “I can understand where they’re coming from, because they probably have a dozen digital music services knocking on their door every day, and they don’t know which will survive and which will waste their time,” says Perez. “From their point of view, it’s easier to wait until someone grows to significant scale and then have that conversation.”
In most countries, it’s a threshold question for Mixcloud. Its listener base is increasing exponentially, but given the challenges of having licensing in place before launching operations in a given country, the team waits for listener numbers to go up before those deals are made. “We’ve thought about it from the beginning, but especially in Europe, it’s really difficult to get licensed everywhere at the same time,” Perez says.
“Our approach has been a pragmatic one, of waiting until we reach a certain scale within a country, especially if we’re starting to do commercial projects there. So when we’re doing a big ad deal in a country, that’s when we start looking at licensing. Around 300 to 500,000 visitors a month is the sort of scale where we start looking at getting licences from the country.”
The cost of running a business like Mixcloud varies from jurisdiction to jurisdiction, as do the various challenges of securing licences. Perez explains the basic figures: “For us, it’s about a tenth of a penny per stream, per listen, of a song to the PRS and about the same to the PPL [Phonographic Performance Limited], so we pay it twice, but that’s just for the UK.
"In America, it’s a tenth of a cent, which is 30 percent less on the sound recording side, where you pay the labels. And on the publishers’ side it’s far less than that—sub 5 percent of your revenue.
“The UK and Germany are some of the most expensive places to operate in, so we’ve chosen a difficult place to start up, but the good news is that we are making the economic model work, so we’re pretty hopeful about what we can do.”
“GIVEN THE MORE FAVOURABLE TERMS, AMERICA WOULD SEEM THE OBVIOUS MARKET FOR EXPANSION, AND PEREZ CONFIRMS THAT MIXCLOUD HAS A GROWING PRESENCE THERE.”
Given the more favourable terms, America would seem the obvious market for expansion, and Perez confirms that Mixcloud has a growing presence there. The US also offers a good model as to how rights can usefully be administered. “We’re in the process of signing up to the equivalent deals in America, with something called the Sound Exchange, which is the equivalent of the PPL, but not exactly. The interesting thing about the Sound Exchange is that basically the government said, ‘we’re going to create this entity that you can get statutory licences from, and the record labels can never refuse you a licence’.”
The Sound Exchange exists as the result of a historical negotiation between labels and the national broadcasters’ association, and replaced a system that required licences to be negotiated by state. Mixcloud has been guided in the US by Bobby Rosenbloum, a shareholder at GT Law in Atlanta, who has experience with leading online brands and copyright issues and understands better than most how to get the best from the systems.
The Europe problem
The EU has brought down trade barriers and allowed most types of businesses a level of freedom to operate that would have been unthinkable a few decades ago. But in the digital environment, it’s lagging behind. The US Sound Exchange has no European equivalent. “It’s ridiculous that you have to go through almost every different collecting society when it’s meant to be a single digital market,” Perez says.
“The digital commissioner (Neelie Kroes) completely understands and knows this, but the problem is, there are so many different rights holders in so many different countries—you’ve got the artists, the publishers, the labels, the digital music services, and that’s just music, then you’ve got film and books too.”
The solution is clear, and that’s a competitive European-wide market for collecting societies, or a version of the Sound Exchange, but it might not happen soon. “I think it will happen, but because it’s a government level thing, it takes a long time,” Perez says.
“THE IDEA OF A LISTEN AGAIN, ON DEMAND RADIO SHOW HADN’T REALLY BEEN DONE BEFORE. SO WE HAD TO CONVINCE THEM THAT IT WAS WORTHWHILE TO GIVE US THAT LICENCE.”
In the UK, there has been some progress in the form of the Hargreaves Review, which suggested a digital copyright exchange in the UK, but again, it’s a question of how quickly and effectively it can be implemented. “We’ve been following the Hargreaves review closely,” Perez says. “We submitted evidence to it and now Richard Hooper’s leading the feasibility study, and we submitted evidence to that as well. Just last week I was in parliament, and Professor Hargreaves was there too. We had breakfast and talked about our experiences and I guess that from a sort of top level, everything looks like it’s going in the right direction.
“The government is pushing for reform and a review of copyright, the question is whether any of this will actually come to fruition ... the number one recommendation that would affect us and everybody else is this idea of a digital copyright exchange, and it’s an idea that I think is very forward thinking and would be incredible, but the actual implementation is going to be challenging. Who builds it? Who runs it? How does it fit into the existing framework? What happens to collecting societies?”
These are important questions, not just because of their specific effects, but because a digital copyright exchange would send the right signals to digital companies looking to get started in the UK. While industry and government are certainly developing their attitudes in the right direction, there is still work to be done on the mindsets, on how people in these industries see the business.
An example from Mixcloud’s early days makes the point: “When we first approached the PPL, they didn’t have the mandate to license us, so essentially they were saying ‘we quite like what you’re doing, but the record labels who are named shareholders haven’t given us the authority to license what you’re doing, because it doesn’t fit in to a pre-existing category’. And the idea of a listen again, on demand radio show hadn’t really been done before. So we had to convince them that it was worthwhile to give us that licence.”
With no experience and little expertise, not to mention the lack of funds often associated with start-ups (Perez and his co-founders lived in a warehouse for two years, on a pittance while they launched Mixcloud), convincing an entrenched organisation like the PPL was no easy challenge.
“It took a long while—probably about nine to 12 months, and it’s only really through working with one of the best rights lawyers here in the UK, a guy called Gregor Pryor at Reed Smith, that we managed to do that,” he says. “It was a lengthy process, at quite significant cost, and that’s very challenging for a young, small business. If people want to see more innovation happening and more businesses building on top of the IP legally, then they have to streamline that.”
Going to record labels and telling them that you’ll pay royalties for people streaming music from a website is not the same thing as being able to do it. Given that Mixcloud allows users to upload their own content, recognising everything on the site and dealing with it appropriately is no easy task.
Perez explains that there are two strands to the procedure. “The first is in terms of identification: we’ve just launched a technology that does music fingerprinting, that will take the radio show or the DJ mix and analyse the audio, matching it to a huge database.
"We’re working with Juno Download, an MP3 store, on this and we match it against the huge database of all the songs they have (I think it’s something like 60 million) so we can identify what songs have been played,” he says. “Then in terms of recording and administering it, we send that information and we record all the playback and every song that is listened to, and that’s what we report back to the collecting societies.”
Added to this robust approach, Mixcloud also has a notice and takedown policy which record labels and others can use if they suspect infringement. “We’re required to comply with [a request] within 30 days but we generally do it within about three. To be honest, it’s very rare that people request that—we get maybe five to 10 requests a month,” Perez says.
“It tends to be if there’s a festival and, say, someone DJs at Glastonbury and someone records that set and then puts it up, then the people running the festival might request it be taken down, because they want the music to be associated with their brand.”
As for the wider questions of how to deal with online piracy, Perez is clear that offering a good service is the best way forward, not litigation. “On sites like Pirate Bay, people don’t really enjoy using them (for example, content doesn’t always work, you can’t always find what you’re looking for)—but people are generally willing to pay for things if it’s a good experience.
That’s been Spotify’s approach, and it’s our approach. People have done studies and if you can offer a superior experience at a reasonable cost, people are willing to pay. But in order to do that, you need the cooperation of the rights holders, and that’s where the challenge is.“
Most arguments about music on the Internet rest on the assumption that artists and record labels are entitled to make a living from recorded music. That argument certainly has some merit, but it’s worth noting that it’s been possible to earn a living in this way only comparatively recently.
“Music has existed for thousands of years as a way of communicating, and story-telling, and it’s really only within the last 150 years that there’s been an industry around it, and really only in the last 50 that there’s been a recorded music industry, so it might just be that the reality of the digital world today means that the recorded industry might not be enough to survive on if you’re not a huge artist,” Perez says. “But there’s other means and ways—live music is now counting for more artist revenue than recorded.
"And we play a major role in promoting new artists and discovering new talent. We did a survey and the number one reason people use Mixcloud is to discover new music. They can discover it through experts and enthusiasts and if we can help encourage people to go to concerts, hopefully it will be beneficial overall.”
Perez is not averse to paying artists, but he’s realistic about how much revenue that is likely to generate. “We pay the royalties per listen, and I guess the question is can you survive on that? It’s a tough one.”
“IT’S REALLY ONLY BECAUSE WE WERE SO PASSIONATE AND WORKED TWO YEARS WITHOUT A NORMAL SALARY, LIVING IN A WAREHOUSE, THAT WE MANAGED TO SURVIVE.”
And he’s also sympathetic to how the labels have had to deal with a changing landscape. “I think in the last two or three years, labels have really come to realise how significant and important digital music services are going to be for them, and I think Spotify has helped enormously with that,” he says. “I’ve heard people describe what’s happened as like the bereavement process— when Napster came out they were shocked, and then they were angry and started suing everybody, and then they were sad and didn’t know what to do. Now they’re coming round to the acceptance stage where they’re accepting that they need to embrace this new technology.
“I think there have been people at the labels all along who have been pushing for that and who are pushing for modernisation, but I can also understand how it’s very hard to have the carpet taken out from underneath you. The CD was a cash cow, it made so much money—I’ve seen the graphs from the amount of revenue LPs, cassettes and CDs used to bring in and online just doesn’t compare yet.”
One of the things that Perez does see happening is a shift in how people understand music online.
“It’s this idea of looking at media as a service rather than a product in itself: of moving from an ownership culture, where you own individual songs, or CDs or books, towards a service model where you pay x pounds a month and in return, like the television model, you subscribe to it, you can access what you want, dip in and dip out. I personally think the idea of owning individual songs, books or movies will be redundant in a few years.”
This is, arguably, already happening: “If you look at the way things are going with Spotify, Netflix and LoveFilm, we’re doing a similar thing with radio shows and DJ mixes. Books still seem to be sold on a product basis, but I wouldn’t be surprised if Amazon or someone soon offers a subscription model, like a library. I think that’s easier to swallow from a consumer’s perspective. If you know you just pay Åí10 a month and get all the music you want, it’s quite a good deal.”
Looking to the future
Most start-ups struggle with funding, at least initially. Any idea, no matter how good, is likely to need a jump start before it becomes truly successful. There are really only a couple of ways to do this. Either do what Mixcloud did (start small, work hard, make no money for a couple of years and prove your product), or get interest from venture capitalists. Of course, if you can do both, that might be best of all.
“In the beginning, we tried to raise investment from venture capitalists, but because of the issue of copyright, a lot of investors weren’t interested or were scared, for example because they had had a bad experience of doing this kind of investment before and didn’t want to do it again,” Perez says.
This sounds like a hard luck story, but it has wider ramifications for innovation in the industry. The result of uncertainty over copyright is that there are fewer investors interested in this area, which means less innovation and fewer start-ups. “It’s really only because we were so passionate and worked two years without a normal salary, living in a warehouse, that we managed to survive.”
Of course, doing it the hard way has big advantages for the future. Perez explains: “The irony is that now we’ve made the economics work and have an audience, they [venture capitalists] are interested. But the question is, do we need them now? We don’t know if it’s worth it, because if we can survive and grow organically, we might not need them. It would accelerate things and it’s always an option, but we’ve made it this far without it and I feel like the longer we go without the easier it becomes.”
While it’s sometimes billed as YouTube for radio, Mixcloud has a way to go before it can be mentioned in the same breath in terms of numbers. But in the space of four short years, it’s gone from two friends with a good idea to a profitable Internet business based entirely on word of mouth and with millions of customers. Who knows where it could end up?
This article was first published on 01 August 2012 in World IP Review
Mixcloud, music, copyright, EU commission