BusinessTN

Music technology seems to develop as quickly as data passes through high-speed Internet connections, adapting almost instantly to the tastes and preferences of new consumers. Laws and industry practices accompanying those technologies, however, are more dial-up than T1. Time is money, and it takes both to reinvent the wheel.

A case in point, and one that represents both a major industry challenge and what many call an unprecedented industry success, is that of subscription services for digital music. For the better part of the last decade, businesses like Napster and Rhapsody have started offering consumers the opportunity to listen to streaming audio by paying subscription fees.

The technology defies old royalty compensation mechanisms, according to Bart Herbison, executive director of the Nashville Songwriters Association International (NSAI). Music royalties most broadly exist in the form of mechanical royalties and performance royalties, the former generally stemming from physical products like album sales and the latter from things like radio plays. Subscription music doesn’t fit either category very well, and the quandary of how to reconcile the differences triggered significant division among industry players.

"All this began as an exercise in how to license what essentially is rented music—subscription music," Herbison says. "That's kind of a new model for the music industry. You plug in a device, you pay your 10 bucks a month, and you get all the music you want. But like HBO, if you fail to pay your bill, that music disappears. So is that a mechanical royalty? Is that a performance royalty? At the end of the day, we all agreed there are elements of both in every model of subscription music."

About eight years passed between the beginning of subscription digital music services and the passage of industry regulations dictating accompanying royalties. Eight long years in which songwriter revenues from the services were placed in a "black box," Herbison says, to be awarded retroactively once regulations were adopted. The pot of money at stake wasn't huge by music industry standards, but the potential precedents were important.

Finally, in October of 2008, a ground-breaking deal was forged. The deal represents an agreement made by major industry groups -- including the NSAI, the Recording Industry of America (RIAA), the National Music Publishers' Association (NMPA) and others -- and formalized in draft regulations that were submitted to a panel of Copyright Royalty Board judges. The board passed those regulations in the spring of 2009. The agreement stipulates royalty rates for interactive streaming and limited downloads, including for subscription and ad-supported services. Retroactive revenues from the subscription services are just now starting to trickle down to songwriters, according to the terms of the agreement.

Furthermore, the deal establishes a partnership that many consider transformative. As Herbison explains it, the many organizations involved agreed that they'll never again oppose each other if there's a third party involved paying for music. The agreement provides an important foundation for resolving future gaps between technology and industry practices.

Now that royalty questions have been addressed, the technology and businesses supporting subscription services are free to blossom. Herbison believes this music delivery mechanism will generate "an astonishing amount of money" in the next five to 10 years, with potential income for those in the music industry estimated to be on par with what currently stems from album sales. James Elliott, a Belmont University instructor and coordinator of its songwriting program, says the new technology could help compensate for the decline in mechanical royalties for songwriters.

This spells big changes not only for the music industry, but also for the many Tennessee businesses supporting it. The music industry fuels the economy statewide, generating an estimated $6.2 billion annually in Middle Tennessee alone, according to a 2006 economic impact study from Belmont. Ron Cox, a songwriter and vice president of the music and entertainment division at Nashville's Avenue Bank, says there are currently unprecedented licensing and development opportunities for making money with music. Increasingly, he says, entrepreneurs who are truly "thinking outside the box" have approached him.

"In a very real sense, it has created tremendous new entrepreneurial opportunities," Cox says. "This new technology, in conjunction with an entrepreneurial spirit, is creating some new opportunities for some new kinds of businesses and new ways of doing things that never previously existed."