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Kobalt
Date.
20 January 2012
Publication.
News
Author.
Ed Christman

How Kobalt Publishing is Changing the Future of Publishing

Ever heard of Kobalt Music Group?

If you haven't, just ask Pearl Jam, Tiësto, Kid Cudi, LMFAO, DJ Shadow, Neil Finn and Joss Stone.
They're among the artist/songwriters who have signed administration deals with the music publishing company during the past two years. They join a growing list of other Kobalt clients that includes Lukasz "Dr. Luke" Gottwald, Max Martin, Kelly Clarkson, Skrillex, Bon Iver, Trent Reznor, Toby Keith, Vince Gill, Herbie Hancock, Rufus Wainwright and OneRepublic's Ryan Tedder.
How has Kobalt managed to build up such a high-powered roster? By providing what it says is a new approach to music publishing: delivering royalty payments with greater transparency and accountability.
Now the company is branching out into new areas. It has just acquired U.K.-based digital distributor AWAL as part of an effort to build a label-services division for artists who want to find their own way to the marketplace without a label. It has also jumped into the neighboring-rights market by creating a division to collect artist performance royalty payments around the world.
Finally, in a move to compete with the traditional publishers and digital distributors that pay out big advances to snare name artists and record label clients, the Kobalt Capital Management has received commitments of $50 million from five investment firms. Those funds will be used to pay out advances to lure artists to sign with Kobalt's music publishing operation as well as its new artist-services business.
Kobalt's emergence comes at a time of turmoil for the music industry, when artists are looking for alternatives to conventional label-publishing arrangements where they have to relinquish a great deal of control over their copyrights. The market is ripe for disruptive companies like Kobalt, digital distributor TuneCore and rights administration company Music Reports Inc. looking to cater to the demand for client services that go beyond traditional models.
Kobalt's expansion into new services isn't simply an example of a publisher taking on functions traditionally associated with a label. Rather, it's an example of the emergence of a new class of service-oriented music company.
"Kobalt came with a very transparent proposal, offering rates that are reflective of a new model for an old industry," says artist manager Jim Guerinot, who represents Kobalt clients No Doubt and Reznor. "But Kobalt didn't just add new technology on top of the horse and buggy. They do business in a new way and pass the savings along so that the songwriters get the lion's share of the money. No question, they are a new-model company."
The company's approach is reaping dividends in the market. In the second quarter of 2007, Kobalt broke into Billboard's quarterly ranking of the top 10 music publishers, based on its share of the top 100 U.S. radio airplay songs of the period, as calculated by the Harry Fox Agency using Nielsen BDS data. The company's share stood at 2.1%, ranking it seventh among all publishers.
Fast-forward to third-quarter 2011, the most recent period for which data is available: Kobalt's share of the top 100 songs had surged to 15.5%, vaulting it to second place-behind EMI Music Publishing (17.9%), but ahead of majors Universal Music Publishing Group (UMPG) (14.1%), Sony/ATV Music Publishing (11.5%) and Warner/Chappell Music (10.8%).
When you walk into Kobalt Music Group founder/CEO Willard Ahdritz's spartan New York office on 42nd Street, two images on the wall immediately grab your attention. One is a photo of a young Johnny Cash, looking pensive in a recording studio. The other is an altered version of the Beatles' iconic "Abbey Road" cover--with each member of the band on fire.
Is this Ahdritz's sly way of expressing his feelings for his old-guard competitors in the music business?
The mild-mannered executive shrugs off the question. "I try to be noncompetitive," he replies, recalling later with obvious satisfaction the initial reaction of established publishing executives to Kobalt's business model.
"I was told I am an idiot, 'This will never work,'" he says.
Finding A New Way
At first glance, Kobalt's business is pretty clear-cut: As a music publishing company, it represents its clients' songs and collects royalties for uses of those copyrights around the world.
But it's how the company goes about doing its business that has increasingly set it apart from its rivals. Under traditional U.S. publishing deals, songwriters give up ownership or control of their works for 35 years in exchange for advances. By contrast, Kobalt has no interest in owning copyrights and instead strikes shorter-term administration deals with songwriters under which creators receive smaller advances against royalties collected.
"We aren't looking for ownership, which means I am 100% in line with my client," Ahdritz says. "I have a business model where I am looking to maximize my client's cash flow, and I take a cut of that as a percentage."
More important, Kobalt has taken a different approach to royalty collection and accounting. By receiving payments directly from collection societies around the world, Kobalt claims it has halved the traditional two-year time lag in collecting publishing royalties and improved royalty payments to artists by as much as 25%. It has also provided unprecedented accounting transparency to songwriters and their managers, with its systems enabling songwriters to see what's going on with their copyrights around the world on a daily basis, and the firm backs that up with weekly reports.
"If a major publisher scored a $7,000 synch fee in Italy [on a contract that didn't need songwriter approval], do you think I would get a phone call telling me about it?" an artist manager asks hypothetically. "Or would I find out about it when the funds showed up in a royalty statement two years later? With Kobalt, I find out right away."
Kobalt non-executive chairman Tim Bunting sums up the company's approach like this: "If you say, 'I don't want to own your copyright, but I want to make you more money,' that's a very straightforward proposition."
Ahdritz says he considers himself lucky that he got his start in publishing with a "blank sheet of paper," instead of being faced with the challenge of shepherding a traditional music company through all the turmoil that has wracked the industry during the past decade.
Ahdritz was co-founder of Stockholm-based Telegram Records and Publishing, which was eventually acquired by Warner Music Sweden. Ahdritz went on to work in London for L.E.K. Consulting, where he worked with financial and transportation companies.
While he was working with an airline, he was struck by how the company tracked luggage using point-to-point routing, instead of the more common practice of hub-to-spoke routing. Noting how the latter resembled the way publishers interact with various performance societies around the world, Ahdritz realized there could be a business opportunity in developing the means to communicate directly with collection societies.
This was particularly true in the emerging digital marketplace, where one song could generate many different royalty streams. Accompanying this growing complexity in royalty accounting has been a sharp decline in the recording industry's fortunes, meaning that more energy had to be expended on generating the same amount of money from a song.
As Ahdritz went about setting up Kobalt, he recalled the most annoying aspect of collecting music publishing royalties: how long it took to get paid. Telegram had big hits, but it took two to three years to get publishing royalties, as money paid by collection societies to publishers or subpublishers slowly wound its way through the system. And when the money finally arrived, the accounting statement was incomprehensible.
"What I did was I removed the middle man, put in the simplest organization, coupled with a scalable relational database management system capable of handling billions of transactions," Ahdritz explains.
To ensure that Kobalt's songwriters get all of the royalty payments coming to them, the company also buys secondary data in each market to match against the collection societies' data. Those extra steps deliver superior results, Ahdritz says. Kobalt delivers, on average, 25% more revenue than other publishers in about half the time, which is why he says the company enjoys 98% client retention.
Clients can track on a daily basis how much revenue is coming into the pipeline around the world, with estimated statements supplied weekly.
Another key aspect of Kobalt's appeal for songwriters is that it charges them only 5%-15% of revenue for its administration services, as opposed to traditional music publishers that prefer to hold the full publisher's share of 50% or at least act as co-publishers and claim 25% of royalties.
A common criticism of Kobalt is that it doesn't offer the same support on the creative side of the equation as other publishing companies. But Ahdritz points out that although his business model was based on technology, his first hire was former Warner/Chappell Music A&R head Sas Metcalfe, now Kobalt's executive VP of creative. The company now has 18 creative employees and a synch department comprising 28 in-house and 12 outside agents.
Moreover, A&R services at the majors have been waning, as many label groups have been forced to slash hundreds of millions of dollars in overhead to keep their doors open. Joel Martin, who runs Eight Mile Style, a music publisher that oversees a good portion of the Eminem song catalog, says the majors are getting out the business of breaking new acts.
Nowadays, Martin says, the majors will only sign artists who have already built their own story. And even after signing them, the manager still has to get involved in marketing the act because the labels have scaled back staffing and resources.
"If that's the case, why in the world would an artist want a deal with a major?" Martin asks. "The first thing I would do is run to companies like the Orchard or Kobalt. They know how to monetize music."
Since Kobalt began providing its clients more detailed statements and analytical tools, the majors have responded by offering more information and services themselves, "but it is not as deep as Kobalt and none of these capabilities would have existed if Kobalt had not come along," says Mark Beaven, a manager who represents the Dr. Luke, Dust Brothers, Jermaine Dupri, David Kahne, Amanda Ghost, Paul Oakenfold and William Orbit.
"Kobalt has become an instrumental force in driving numerous music publishing companies to look at the way they do business," he says.
Even when it comes to simple things like providing advances, Kobalt has set itself apart from the majors, setting up a system that allows a songwriter to take an advance, with a fee of 1%-3% against expected income, which the songwriter and his or her manager can calculate on the company's website. At other music publishers, such an advance would typically require adding another year to a contract, managers say.
One of the reasons why music publishers have been reluctant to embrace Kobalt's practices is because it is to their advantage to forward payments with a considerable lag time, which enables them "to play with your money," Eight Mile Style's Martin says, adding that the majors pocket fees each time money moves from one territory to another.
Since Kobalt has begun making its presence known, have other music publishers stepped up their game? Universal Music Publishing Group says it has. "Kobalt and Universal are doing a lot of the same things as it relates to online access and transparency," UMPG executive VP/worldwide CFO Michael Sammis says. "When you think about transparency, it's a culture. Either your business has a culture of transparency or it doesn't. There's no other major who has even done anything yet."
Sammis says UMPG could take on dealing with transparency because it is comfortable with the quality of its data. Left unsaid is the implication that the quality of the other majors' data may be questionable.
After building better royalty accounting systems, shortening the money pipeline, capturing a broader range of revenue and building its creative department, skeptics in the industry say Kobalt has no hope of ever turning a profit.
While that charge may be an overstatement, it is true that the company hasn't turned a profit in recent years.
According to U.K. regulatory filings, Kobalt lost £1.9 million ($2.8 million) on revenue of £48.7 million ($73.3 million) during the fiscal year ended June 30, 2010 (the most recent year for which financial results are available), narrowing from a loss in the prior year of $3.6 million on revenue of $56.8 million.
Ahdritz attributes the loss to Kobalt's investments in new technologies, which are included in the company's selling and general administrative expenses.
Kobalt is likely to stay in the red for the next few years as it ramps up its label-services and neighboring-rights divisions, which should lift fiscal 2012 revenue to $125 million, Billboard predicts. Despite these momentary financial challenges, Kobalt enjoys the backing of investors like Balderton Capital, which held a 24.9% stake as of June 2010, and Spark Ventures, which owned 18% of the company.
Kobalt's Bunting, a partner at Balderton Capital, says he is satisfied with the company's financial performance thus far.
"This is a company at the beginning of its journey," Bunting says. "We believe [our growth] will be many multiples in size."
Neighboring Rights and Label Services
In 2011, Kobalt moved into the obscure but potentially lucrative field of neighboring rights, which refers to broadcast performance royalties for artists and master-rights owners, not those paid to songwriters and publishers.
Kobalt hired Hans van Berkel, founder of Dutch neighboring-rights society SENA, as executive chairman of Kobalt Neighboring Rights Ltd., and Sabine Jones, who previously ran neighboring-rights societies PAMRA in the United Kingdom and SwissPerform in Switzerland, as managing director. In January, KNRL hired former SoundExchange executive director John Simson as U.S. representative for artist relations and business development.
Ahdritz believes the worldwide market for neighboring rights is worth ?1.5 billion annually and underserved. As it does with publishing royalties, Kobalt will collect neighboring-rights royalties directly from societies around the world, a unique characteristic for competitors in the space, he says. At the end of this month, Kobalt will issue its first statements and payments for neighboring rights.
Van Berkel says he sees opportunities to sign American artists. Many in the U.S. music industry harbor the illusion that American acts aren't entitled to performance rights from foreign terrestrial-radio broadcasts. That's because the United States has no such royalty itself, although those rights do exist for satellite radio and Web broadcasts. Nevertheless, the majors and most savvy independents generally get paid their label share of performance royalties from abroad, mainly by setting up offices outside the United States.
But van Berkel says that in certain circumstances, U.S. artists are entitled to royalties when their music is played on terrestrial radio in foreign markets. Yet, American artists and some labels often leave those dollars on the table, he says. For example, if an album was recorded outside the United States, or if an album is released in foreign territories within 30 days of its U.S. release, American acts are eligible for payments in certain markets.
"With our inside experience, we know when artists are entitled to those royalties and we are going to make sure that we will get those funds for our clients," van Berkel says.
While a move into neighboring rights plays to Kobalt's strength of hunting down new revenue streams, a riskier move is the company's acquisition of U.K. digital music distributor AWAL (Artists Without a Label).
By expanding into label services, Ahdritz says Kobalt is addressing a fundamental shift in the marketplace. With more artists opting against label deals to retain control of their masters, managers are discovering that a DIY approach to retail is more complicated than they realized, he says. "For the sharp entrepreneur, I am saying, 'You don't need to do it all because we are going to do it for you,'" Ahdritz says.
AWAL distributes the music of more than 5,000 independent artists and labels to 200 digital partners. Billboard estimates its annual revenue at about $5 million.
Kobalt Artist and Label Services managing director Paul Hitchman is working on building other capabilities and enhancing AWAL's systems, including Buzzdeck, which offers artists and labels a host of online metrics and the ability to track how many views, plays, mentions, followers and other interactions are going on with an artist's music.
AWAL employs 15 people at offices in London and Sheffield, and Hitchman says he will grow complementary services around the company in an organic manner.
"We won't parachute in a global infrastructure overnight," he says. "But the time is right for a scalable and professional enterprise-grade operation to handle the challenges of the current music industry. You can see what Kobalt has achieved in publishing. In looking at the opportunity on the label side of the business, who better than Kobalt to take on the heat of those challenges and make it work?"
AWAL was founded by record producers who saw an opportunity for artists to control their master rights. When iTunes launched and allowed indie artists to submit their own tracks, "we saw a great opportunity to bypass the gatekeepers," AWAL co-founder Kevin Bacon says. "We had a modest start but kept running into like-minded people. After a couple of years, [AWAL] had grown to a degree that we had to take our business seriously, so we began investing a lot of money and time into building the company."
But as the AWAL founders' vision for the company's capabilities grew, they realized they didn't have the resources to develop their ideas and decided to look for investors, which led to Kobalt. "We realized that Kobalt is a great fit for us and with our ethos," Bacon says. Along with Bacon, AWAL's entire management team--including fellow co-founders Denzyl Feigelson and Jonathan Quarmby--are staying onboard.
As Kobalt moves into distribution, will it play the price-disruptive role that it did in publishing? Here it faces a steeper challenge. AWAL typically takes a 15% cut of sales revenue it generates, which is midrange in the U.S. market where digital distribution fees range from 12% to 20% depending on a label's or artist's clout.
But even AWAL would be hard-pressed to compete with the likes of TuneCore on price. TuneCore charges only $50 per year to distribute an album to digital music services around the world, including iTunes. In addition to thousands of unsigned indie artists, TuneCore distributes such acts as Trent Reznor, Joan Jett and Cheap Trick, among others.
In moving into two businesses at once, is Kobalt taking on too much risk? Bunting says he isn't worried about Kobalt failing to meet the challenge."I worried about [competition] much more three years ago than I worry about it today," he says.
He adds that the biggest risk to the Kobalt game plan is major music publishers reinventing themselves and matching Kobalt's offerings.
Not that Bunting is expecting that to happen anytime soon. "Do you think elephants can dance?" he cracks, adding, "Anyone who looks after their clients better to that degree will start to clean up. And that's what's happened."
Additional reporting by Louis Hau and Glenn Peoples.

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