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Issue Date: Vol. 42, No. 8 / July 25, 2002 - August 24, 2002 , Posted On: 7/25/2002


For Juke Biz, The 'Wait-And-See' Continues As Industry Considers CD Sales Decline, Potential AMOA Downloading License


Marcus Webb

U.S.A. - Conditions in today's jukebox industry reflect the surface simplicity , and underlying complexity , of a market in flux.

On the surface, conditions are basically unchanged from a year ago. The jukebox itself remains a dependable profit center on the street operator's route. Sales of new jukeboxes remain stable, although at much lower levels than the industry's compact disc heyday a decade ago.

Not surprisingly, jukebox factories are jockeying for position, seeking to maximize their share of today's softer market. Five years after the U.S. introduction of downloading jukeboxes, all brands together probably comprise (at most) some 6,000 downloading units in the field. There are probably many reasons why operators have not made a massive changeover to this technology. But one reason is that this time around, the older format (CD) remains plentifully available.

Meanwhile, operators are continuing to buy new jukeboxes , both CD and (to a lesser extent) downloading types. But operators are also waiting to see what happens with downloading music and how it will impact the jukebox industry.

And that's where the complexity comes in. In the world of music downloading, developments are flying fast and furiously, both within and beyond the jukebox arena. Among the highlights:

· Napster, Audiogalaxy, and similar online file-swapping sites have been driven out of business by copyright infringement suits. But new sites pop up faster than the music industry can shut them down.

· Following a pause last winter, the jukebox licensing subcommittee of the Amusement and Music Operators Association has resumed negotiations with the American Society of Composers, Authors and Publishers. AMOA leaders are optimistic they can create a broad license to cover certain key copyright obligations for jukebox use of downloaded music from multiple labels.

· The world's $40 billion music market experienced a 5% overall drop in sales volume last year, mostly due to declining CD sales. Sales in the U.S. fell by 6%. In some European countries, CD sales plummeted as much as 10%. It was the industry's first CD sales drop in a decade. Many observers expect the CD sales slump will only get worse.

· According to the Recording Industry Association of America, 2001 was the first time that blank CDs outsold pre-recorded CDs. This indicates the vast scope of CD burning , much of it illegal. Blank compact discs now cost as little as 25 apiece.

· Online music sales, meanwhile, are booming. One research group, In-Stat/MDR, says the music industry can expect online revenues to grow 33.4% from 2001 to 2006 (compound rate). The same study forecasts that shipments of digital music player units (both solid state and disc-based media) will grow around 400% over the next five years , from this year's 7.2 million to nearly 30 million by 2006.

The meaning of these developments for the future of the jukebox operator remains a tantalizing question.

For years, CD jukebox manufacturing executives have reminded customers that when it comes to choice of music formats, the jukebox industry traditionally follows the larger music industry. This assertion is demonstrably true. But, who or what does the music industry itself follow?

MAKING THE CHANGE

If consumers are slowly moving away from pre-recorded CDs, then the future direction of the jukebox itself may be wide open. On the other hand, it's entirely possible , perhaps even likely, given past history , that pre-recorded CDs will remain widely available for decades to come, even if (as seems likely) rival formats continue eating into consumer sales of this technology.

And so, the jukebox industry continues to mull its own technology options, its licensing structures, and its factory-operator relationships.

If downloading technology does become a key part of the future of the jukebox, AMOA wants operators to be ready. The association's leadership is currently working to achieve a copyright licensing vehicle for downloaded music that would help preserve their independence, so that operators could remain customers , not partners , of jukebox manufacturers. (See sidebar on the history of jukebox copyright issues, Page 84.)

ONCE AGAIN

Since summer 2001, AMOA's jukebox licensing subcommittee has been negotiating for such downloading music license with the music industry's three Performing Rights Organizations , ASCAP, Broadcast Music International, and SESAC.

Talks with ASCAP were briefly put on hold last winter. AMOA leaders said the two sides were at loggerheads regarding rates and fees for operators' use of digital audio files. But AMOA's Jim Pietrangelo, who chairs the jukebox licensing subcommittee, advised that operators and the PROs agreed on most other issues. As expected, negotiations with ASCAP resumed by this past spring.

"That's right, we have resumed talks," Pietrangelo told VENDING TIMES. "Progress, however, is slow. We are, I believe, mostly in agreement on the individual discussion points that make up the license. We disagree on the dollar amount of the rate. Speaking as chairman of the committee, I believe that we have made compelling arguments as to why the rates that the publishers have negotiated directly with some manufacturers will not work for the jukebox industry as a whole. This rate issue is at the very heart of our negotiations."

Pietrangelo further advised that "Recently some rather unique ideas for nontraditional rate structures have been suggested to the committee. We are currently discussing those ideas with ASCAP. As of today [July 22], we are waiting for a response from them before we take the next step."

RADIO RATES

In June the U.S. Copyright Office established a rate of 7 per listener per song for online radio stations. Pietrangelo said he does not expect this "Internet radio" rate would impact any eventual rate structure for online music played on jukeboxes. At the same time, he conceded, "It wouldn't surprise me to see it [Internet radio rates] raised as validation for higher performance rates during our negotiations. In my opinion, the whole idea of charging an online radio station performance fees on a 'per listener' basis is ludicrous and will, if left to stand, undoubtedly make mortality statistics out of many fledgling businesses. I'm confident that this concept will not find its way into our business."

Commenting on the widely publicized facts that blank CDs outsold recorded CDs for the first time in 2001, while recorded CD sales dropped for the first time in a decade, Pietrangelo expressed strong confidence in the future of compact discs as a viable jukebox media format.

CDs ARE CHEAP (TO MAKE)

"What makes a digital file so dangerous to the recording industry is that any copies made are each identical in all respects to the original file," he said. "The media upon which the file resides is less important than finding a technology that will thwart attempts to exploit the artists' work by circumventing copyright law. Compact discs are a cheap-to-manufacture, portable, fairly durable medium for digital files that will most likely remain the dominant jukebox format for the foreseeable future."

At the same time, Pietrangelo believes that the momentum will shift strongly in favor of downloading jukeboxes after licensing issues are resolved. "Once the licensing issues have been addressed in a manner that satisfies the needs of all parties concerned," he said. "then I would expect digital downloadable jukeboxes to begin to seriously take over the market for CD jukeboxes. As for what file storage medium they will use, it is irrelevant. Any medium now in existence or yet-to-be-discovered will work just fine, so long as it can provide the operator with relatively cheap storage of his digital music files."

Pietrangelo called upon the larger music industry to embrace and support the jukebox as a vital promotional tool, much as it now views the radio industry. "Because of the transitory nature of digital music," he said, "it's going to be much more important to somehow get the music industry to once again view the jukebox as a frontline promotional vehicle for new music , one that they should embrace and actively pursue in the course of planning new artist introductions, new release promotions, etc. Record labels, the artists, publishers and songwriters need to understand that the jukebox operator is their friend and ally, someone to be treated as you would any business partner."

If AMOA does succeed in creating a universal operator license for downloaded music (based in part on the model of the Jukebox License Office license for 45 and CD music), then any such license would cover only publisher and public performance rights. Accordingly, operators would need some additional method of meeting their copyright obligations in terms of synch rights and mechanical reproduction rights.

"That's correct," Pietrangelo confirmed. "Currently AMOA is negotiating, individually I might add, with ASCAP, BMI, and SESAC. Until such time, if ever, that the PROs recognize a digital downloading jukebox as a jukebox per se under copyright law, we are forced to negotiate three separate agreements. This is because Congress allowed AMOA to negotiate with all three on a collective basis only with regards to performance rights for 'jukeboxes.' The PROs do not consider a downloading jukebox to be a 'jukebox' as defined under copyright law. AMOA disagrees, but understands that both sides in a negotiation must agree to a common fixed set of rules that will guide the discussions. Otherwise, negotiation is stalemated before it begins."

BACK TO THE TABLE

The AMOA jukebox licensing subcommittee is currently in negotiations with the three PROs for performance rights to the music in their publishers' respective catalogues, Pietrangelo said. Discussion is underway within the committee concerning whether AMOA should proceed to the next level, which is to secure digital reproduction rights for that music. This would provide operators with a legal method of downloading digital files to a jukebox. The very act of downloading a file entails making a copy of it. Reproduction rights would cover the act of making that copy, said the subcommittee chairman.

"It is important to understand that there are multiple pieces to the puzzle of securing all the rights to obtain and use its digital music files," Pietrangelo cautioned. "If AMOA is successful in its role of obtaining performance rights and, possibly, reproduction rights, the industry will still be dependent upon content providers who will need to negotiate with the individual labels for the right to distribute the files in the first place."

AMOA's negotiating team consists of president Mike Leonard of Coin-Op Specialists (Adrian, MI); government relations committee chairman Russ Mawdsley Jr. of Russell-Hall Inc. (Holyoke, MA); AMOA first vice-president Rich Holley of Southeast Game Brokers (Tampa, FL), and Pietrangelo.

For more information, contact AMOA at tel. (800) YES-AMOA or online at www.amoa.com.


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