Q&A with Gerd Leonhard, CEO of Licensemusic.com

LicenseMusic (www.licensemusic.com) offers an interesting proposition: selling a huge library of pre-cleared music for use in Web production and broadcast media. The idea is that the Web offers the best and least expensive way to add music to your project.

Unlike other music sites, LicenseMusic handles strictly B2B e-commerce transactions. Production professionals can sample, purchase and download music. The company says it has 50,000 tracks online from many different vocal and instrumental styles including over 175 subscribing music labels and publishers. In fact, LicenseMusic.com recently placed a song in the motion picture "Meet the Parents". Among LicenseMusic's partners are Getty Images, Soundelux Entertainment Group and Playboy.

Recently, Streamingmedia.com reporter Scott Bass, spoke with Gerd Leonhard, CEO of LicenseMusic, about how the Internet has transformed the way music can be licensed.

Q: I'm oftentimes tickled because I'm afforded the unique opportunity to speak with very interesting people when I do these interviews and I'm always impressed by the backgrounds of some of the people heading up the companies… I find your past particularly interesting. You're an accomplished musician, promoter, educator, consultant, and government policy maker, among other things. What the heck got you into the online music licensing business?

Well, when I was a musician I was doing a lot of projects for film and television, advertising, and things like that. So I knew that there was some real money to be made in that business. Subsequently, when I worked for the European government, I was a consultant for the European Commission, which is like a political organization that streamlines all Pan-European issues of economy and technology and things like that. The European Commission has a lot of think tanks that deal with how to improve the economy and these kinds of issues. I was an expert advisor to the European Commission for three years on music industry development, employment and technology.

Q: So you understand the music industry?

When I was working for the European Commission, I got to see thousands of music-related business plans. I was giving away public money for "seed-grants" to get people into projects. After looking at all of these business models, over time, we came to understand that it was best to deal with music over the Internet if it was business to business, and not to consumers. As you can see right now, it is a difficult thing to sell music on the Internet to consumers. Business to business, the rules are much more defined. And people are actually paying. So that's what got me into this almost five years ago.

Q: Makes perfect sense. Lately we've been hearing lots of talk about ASPs and you guys also position yourself as a LSP. What's that mean?

Any business-to-business company has certain technology assets that it develops over time. For example, we have a licensing engine that computes license fees. We've invented it and it's a very large monster of what we call the know-how matrix of licensing deals. There are 250,000 different kinds of licensing deals. So if you're doing a motion picture, the rates are different if it's opening credits, closing credits, world distribution, cable networks, all that stuff.

Q: I noticed that there are a tremendous number of factors and it's really amazing to see how the price will change instantly before your eyes as you adjust the variables.

That's our technology. We have all these assets and now we're starting to integrate some of these assets into other people's sites. So for example, very soon you'll be seeing Web sites that sell graphic images and video clips and things like this, which will allow you to buy music along with the clip through us. So in this case, we are more like an ASP. We go to third party sites, and our service is applied into that other company's site. Now the LSP is a licensing service provider function that we make available for content owners, or anybody that aggregates content. For example we have a deal with garageband.com, with allindie.com, and a few others, that allows the artists and the composers on those websites to use our licensing engine to sell.

Q: For the bands on garageband.com it sounds like a great opportunity. But given the immense amount of content available online, which surely will continue to grow at a rapid rate, how do help people find exactly what it is that they're looking for?

People come to our Web site if they're interested in buying music for professional purposes, for any audio/visual production. What's on our site has already been filtered, edited, and indexed. So, there's very strict quality control. Around 90% of what we get, doesn't make it to our site because the quality isn't right or it's not really a song that anybody would want. I don't think there's any inherent good in stockpiling works of music.

Q: You do categorize things very specifically; I was amazed to see under "Heavy Metal" that both the "Black Metal" and "Death Metal" genres were quite extensive. I have to be honest; I don't even know the distinction. It seems like a lot to process for the average person. Is this where your consulting arm comes in?

Larger customers that we work with like NBC, Paramount, and Universal Pictures, they will call us and say: "We need something that sounds like this." And we do that. The Web site can do the same thing. If you go to the site and type in "Portuguese girl on the beach in Havana", you will get a result.

Q: And it's an accurate result?

Well, the keyword search isn't too sophisticated yet, but if you use the other engines you can get a search result and then whittle down to what you want to see. The average transaction on our Web site is 15 minutes. That's how long it takes to find and buy.

Q: Can you divulge what the amount is for the average transaction?

It's hard to say. It ranges between $50 and $5000. It's hard to give an average but for a motion picture, average would be around $2000, if it's not a huge project. Our market is really the independent mid-level producer. It's not Disney. We have customers like that, but most of the money comes from the multitude of users.

Q: Is it a fair assumption that your market that you've described, has been particularly quick to embrace use of the Net?

Absolutely. 70% of our sales are to web-based applications and corporate customers. There's only 300 major motion pictures made a year in Hollywood, and we're not going to sell a lot to those guys, because they have huge budgets. They're going to get Santana or Ry Cooder or someone like that to do a soundtrack. We're selling to around 25 countries all over the world; people who want high-quality music for things like corporate videos, Shockwave projects for Web sites and all kinds of interesting stuff.

Q: It seems to make perfect sense the more I think about it. Individuals may not be so concerned about getting sued for improperly using copyrighted music. Companies, on the other hand, are going to be much more interested in seeking official licenses. Obviously the site serves this business market very well, but it also makes it easy for anyone to come to the site and listen to thousands and thousands of full-length streamed songs. Is there a concern that Joe Surfer is going to start coming to the site and treating it as a giant jukebox?

Not really, because if they wanted to, it would be a lot easier other places. Especially right now with places like Napster, where you can get anything you want. And if people do want to come and listen to the full tracks, it's really not a problem for anyone. Sure, they can copy them and save the file, but they can do that anywhere.

Q: But as a DJ, I recognize tons of material by a punk group called Blanks 77, who are pretty popular with the kids, I'm assuming that if it was widely known that entire albums' worth of material by Blanks 77 were available for instant streaming for free, I'd suspect that you'd start attracting undesirable traffic.

We don't see that as an issue; we really don't have many people on the site like that. It's because the site isn't really artist-centered. It's hard to actually find who the artist is, the way we list the music.

Q: I see your point; I only noticed how much Blanks 77 material you had because I recognized the songs. This past summer you struck an agreement with BMI. How important is it to work with established organizations like BMI and ASCAP?

Since we exist somewhere between the new-economy companies and the traditional music publishers, we're trying to meld the two together. It's not important for us to work with the companies that are currently on that turf, and at the same time we have to try to kick their butts all the time, to move them forward. It's both a good and a bad position to be in. For the most part there isn't going to be any new thing on the Internet that works without the existing players one way or the other. Because there are a lot of relationships and built-up trust between companies and people that do business together right now, that can't just be wiped off the slate. We have been very successful in striking deals with "old time players" so to speak, that are trusting us to do the right thing. We have to sort of evangelize them a little bit.

Q: It seems a necessary friendship. But are you concerned that BMI might become competitors at some point?

No, because they are not in that frame of mind. When you're in the car, it's hard to look under the hood. It can take a long time for them to get out of the car and look under the hood.

Q: So they've come to the conclusion that it's best to leave the auto work to the mechanics?

Yes. Because, for example, we have a lot of assets that they wish they had. And we're leveraging that both ways and essentially are working on an opt-in scenario.

Q: What's your take on the whole Napster issue? It seems that a new culture is growing around peer-to-peer technology that says, "I can grab this, therefore it's OK to do so." It seems that regard for musical copyright is, as a result, in decline. How do we deal with this?

I think it's actually quite simple. If you look at Napster, the threshold to use Napster is very low because really all you have to do is download, install, and get going. You don't pay, there's no credit card. You just download and go. On the other hand, the threshold to get the music you want from the major music companies at any time, anywhere, is very high. Basically they're only giving you what they want to give you. So the threshold for the customer to be really satisfied under the current resources is very high. You really have to bust ass to find an old John Coltrane outtake of "Love Supreme" in a store, or from any legal source. So my opinion on this, is that if the threshold is lowered, legally speaking, if the companies came around and said "here's a really cool and easy way to get all the music you want" then people would be doing the right thing. Which is to eventually pay something. Because it's so easy. But the fact that Napster is much easier and quicker, makes them go to Napster. So I think it has to be an offering that allows people to do the right thing and get it as easily as they can get it right now. It needs to be a fair-deal scenario. The deal just isn't fair to the consumer right now.

Q: I agree that given the opportunity to the right thing, most people will. As long as what's being asked of them is reasonable.

Of course, people will pay for what they like. That's one of the principals of capitalism, right?

Q: True, but unfortunately greed is a component too. Part of the problem seems to be, like with the SDMI effort, is that the industry can't seem to come up with a standard that everyone likes. It almost seems that everyone is so greedy for the most attractive slice of the pie that time just continues to go by as nothing is accomplished. Do you have any thoughts about what can be done to help catch up?

It's inevitable that they will catch up. When Napster closes down and MP3.com closes down, irrespective of all of that, what the consumer wants, will eventually happen. It's obvious that the consumer wants to have a quick and easy service to get all the music anytime they want in any kind of format. If the suppliers of music don't get with the program to figure that out, they're going to lose it to illegal activities. As soon as that comes around and there's alternatives like subscription services -- look at AOL/Time Warner. Once that stuff is all online and sold through AOL on a subscription model, everyone will pay their $5.95, $15.95, or whatever it will be to get this service. Just like they pay for cable now.

Q: So you're pretty confident that the subscription model is something that will become widespread in the future?

Definitely subscription. Down the road, in as little as five years, you will have services where you pay for magazine subscriptions, ISP services, cell phones, and content services all on one bill. You would basically subscribe and get blanket access to a lot of stuff. If you look at the cable model, it works the exact same way. I saw numbers the other day that said 40% of cable users don't actually ever use it -- but they still pay the fee. In case they may want to use it. This is the same kind of model that works very well for AOL. There are users that use it all the time, almost all day, and then there are users that use it once a year. AOL does great over the average.

Q: Do you see Licensemusic.com working towards this kind of model, or is not as appropriate business to business?

It's something we're working towards. It's tough though because a blanket deal scenario for licensed content is rather complicated. We're looking at business models there, but right now our positive experience has been that our customers always pay because they always see the value.

Q: It's kind of nice when the customers pay.

And they never come back and say, "It's too much." They pay because it's good.

Q: How much of your market is aware of you? Do you think that many production houses have yet to find out about you?

We're growing at the rate of 50-100 customers a day. It's a viral thing. People tell other people. We have no problem attracting customers because the service is a no-brainer and doesn't cost anything until you actually license. And when you do license it's sometimes, usually around half of what it would normally cost. Plus, there are the transactional costs that are saved when you cut out the lawyers and the faxes and stuff. Yes, there are people that don't know about us yet because we don't have a huge marketing budget, but they're finding out.

Q: Sounds like the whole process was more complicated before the Internet.

Before you would have had to first find the music, through friends or record stores. Then you have to figure out who the content owner is and then you contact them…

Q: That's what I would think to do. I figured professionals would've done it differently.

No, that's how it had to be done. Of course, a lot of times they get pitched by record companies and end up using something that is just on the table. Right now we're kind of like the image site Corbis (www.corbis.com) where you can say, "I want something for a tree in the desert." And you can find something appropriate. Before we came along, doing that for music was a very tedious process. And this is a big industry; worldwide we're talking about $3 billion that's spent on music licensing. Most people don't even know that this business exists, but it's huge.

Q: Personally I had never thought about it too much but after seeing your site it makes perfect sense that the Internet should simplify the task of licensing music. It became clear to me quite fast what a convenience your site could be for the right person?

When you think about it, everything has music in it: motion pictures, videos, CD-ROMs, websites, micro media things. And that is only increasing because now we have more medias available. So there's a fantastic growth opportunity here for artists and record labels and publishers to sell their stuff on an "incremental revenue" kind of idea.

Q: As a final question, amid all of the recent shakeups and shutdowns of entertainment and music sites on the Internet, do these new market casualties cause you to make many course corrections?

Of course we're making adjustments every day as is you should with the Internet, but the basic business idea is still the same that it was three years ago. In fact, the average license fees that we predicted three years ago, we have today. We're making adjustments in terms of trying to reach profitability sooner. The fact is that you have to show revenues and progress quicker now. So we've made adjustments for that.

Q: How far would you say you are from profitability?

About 18 months. The main point is that any company that has yet to really figure out how to make money, and we're talking about making a lot of money; you don't have the luxury of saying "We'll see what happens as we do it." That's not going to work anymore.