BMG Rights Management President Creative & Marketing North America Laurent Hubert and Executive VP BMG Chrysalis Darrell Franklin sat down with MusicRow recently to discuss digital music services, growing a recorded music division, buying out KKR, acquisitions and signings. MusicRow Publisher/Owner Sherod Robertson and Sr. News Editor Sarah Skates conducted the interview. See Part 1 here.

MR: Let’s talk about the future of digital music services. 

Hubert: I’m an optimist about the business from that perspective. The idea is to engage at every level, to place as much music as we can. We’ve been very aggressive in the digital space to engage with Google, which has Android and YouTube. We were in negotiation for almost five years with YouTube and settled that earlier this year. Look at Amazon and Apple which are in the hardware business and technology business. They are market makers and it would be silly not to engage with them.

Since 1999 I have used a pre and post-Napster comparison. Pre-Napster, music was bought; post-Napster music is consumed. It is a profound change in the perceived value of music. It’s no longer an activity that you go and buy, it’s in the background of your life, it’s on your PDA, it’s on your computer, or satellite radio. The question is how to monetize it.

In the US, we are in a very unique situation. Under the copyright law we have a set rate, determined by a CRB [Copyright Royalty Board] process. So you don’t really have a willing buyer, willing seller environment yet, but I think eventually we’ll get to that point.

Look at precedents when you have a willing buyer, willing seller. Look at the sync market, you find that market rates are much more favorable than a set rate. Not only is it more favorable in terms of payment themselves, but also in terms of the parity between the label and the publisher: the master is 50% of the fee and publishing is 50% of the fee. That’s clearly not the case today. Look at an iTunes download, where we only get 9.1 cents.

I am convinced that adoption of streaming services will continue to increase, and the real challenge for the industry is how to monetize it. I want to be an optimist that we will ultimately bring those rights to market. In fact, if you look at the CRB, starting in January 2013 the rates have improved, not only in terms of the headline rate, but also in terms of the parity between publishers and master owners, so that’s good news.

MR: Are there any plans to develop a recorded music division?

Hubert: We created a division back in October 2011 where we have both publishing and master, and we work on the 75/25 formula with 75 in favor of the artist/writer. It is taking the concept of a co-pub split and applying it to a label model, where both the publishing and master are crossed. It is not advance driven, it’s project driven.

We commit an investment to a project and every project will have a different team. We have a traffic controller project manager, that handles some of the signings and then assembles the right team around each project. Some projects don’t need radio promotion, and others do, so obviously the investment would be different. We try to customize each project as much as we can. We’ve done a few deals, but we plan to accelerate that in 2013 and Nashville is one of the markets we want to be in.

If you look at [the traditional label model] the biggest issue for artists is number one, they have no real input in the project, basically the label takes control; and number two, they don’t own their masters. They may have those masters reverting at some point, but in most cases they don’t own them. Number three: the lack of transparency when it comes to accounting, in many cases, is appalling.

We looked at it and said, “how can we build an attractive alternative?” We’ve taken into account three pillars. When it comes to control they are going to be partners with us, and because they have 75 percent of every dollar, it creates a sense of partnership because they have skin in the game. If the project does well, the upside is so tremendous that they want to be partners. The second aspect is we don’t actually own the master, we work under an exclusive license for a period of time, typically 12-15 years, but we never really own the master. The third aspect is to provide clear accounting. We build a budget together and both parties approve it, so there won’t be any surprises when the artist gets the statement.

I’m not saying the label model is a bad business, but we don’t think it’s our business. This is an alternative and it doesn’t fit everyone, and we’ve seen that in some negotiations. Some managers who have grown up in the current label system, where there’s little input and you push all the responsibility to the label [don’t like this model]. We go to them and say, “you’re equally responsible, so come to the table and make these decisions,” some of them don’t want to do it, or they prefer a big advance. That doesn’t work for us. Obviously you can’t pay a 75 percent royalty rate and pay a significant advance, because we need to put that advance money toward the project.

MR: What do you want the Nashville music industry to know about BMG?

Hubert: We’ve taken a lot of flack for being a company that is all about acquisitions and I want to address that head on. Bertelsmann is the oldest media company in the world. They strategically exited the record business in 2008, and the music publishing business in 2006 and 2007, not because they didn’t like the business, but because they had to. Today, number one, there is a real commitment to be in this business. This is not about flipping an asset.

Number two, in 2011 we’ve started to invest heavily in talent signings. You can see this especially in Nashville, and not only in the U.S., but across different companies. The U.S. market tends to derive about 60% of our investment, and that’s the nature, the size of the U.S. market. We’ve also been hiring and putting in place a creative and marketing team that is fairly sizable.

Our business is the talent business and we believe in building a catalogue of tomorrow. The only way you can build a catalogue of tomorrow is signing today and taking risks on those investments. We’ve been taking our share of risks of investments and risks in our portfolio. Risks may be different from one market to another or one deal to another, but the idea is to build a business around talent and we’ve done that in Nashville. We’ve invested far more than our share of our market in Nashville and that’s starting to pay, if you look at those recent No. 1 hits we referred to earlier.

Franklin: We are also investing a lot of time, energy and money into developing new writers, because that is what’s so unique about Nashville. If you’re not doing that, if you’re not investing in the future, then you’re not in the game here.

Hubert: Because songwriting is so core to the Nashville business and the way the process works—which is essentially you have to create those opportunities—you can’t be a passive publisher here. You have to be an active publisher and therefore you have to invest, you have to put a team together, and you have to have the best material behind it, which is the writer.

Read Part 1. For more music publishing news, check out MusicRow’s upcoming print Publisher issue.