Wednesday, September 20, 2017 | Today's Vending Industry News
TouchTunes' Charles Goldstuck Discusses The Changing Landscape Of In-Venue Digital Music

Posted On: 1/25/2017

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TAGS: jukebox music, digital jukebox, Charles Goldstuck, TouchTunes, National Jukebox Day, Virtuo jukebox, Playdium jukebox, music licensing, Apple, The Beatles, Spotify, music fees, Jukebox Licensing Office, Amusement and Music Operators Association, Bruce Springsteen, Jimmy Buffett, AC/DC, in-venue entertainment

NEW YORK CITY -- It's official. The fourth Wednesday of November, the day before Thanksgiving, has formally been designated National Jukebox Day. TouchTunes identifies that day as "one of the biggest bar nights of the year as Americans flock to their hometowns for the Thanksgiving weekend." The digital music and jukebox giant worked with the National Day Calendar organization to create the occasion. The first National Jukebox Day was celebrated last year on Nov. 23.

The fact that the first National Jukebox Day fell on Nov. 23 is historically appropriate. Jukebox historian John Krivine claimed that Louis T. Glass demonstrated his first coin-operated phonograph in San Francisco's Palais Royal Restaurant on Nov. 23, 1889. This instrument was a precursor of the machines that -- bolstered by reliable motors, disc selection mechanisms and vacuum-tube, electronic amplification -- launched the modern jukebox industry in the 1920s.

Flash forward 120 years. The Internet jukebox remains a central part of the music scene in bars and taverns all over the world, thanks to the development of new products and services that have kept pace with consumer trends, and have sometimes been ahead of them. But TouchTunes chief executive Charles Goldstuck cautions that the cost to stay on top of technology trends and the increasing complexity of music licensing structures in the digital era are applying increasing pressures on the jukebox industry.

Charles Goldstuck, jukebox, TouchTunes
VIRTUO: Charles Goldstuck shows off the Virtuo smart jukebox. Its slightly angled, widescreen design is intended to catalyze social experiences, while "smart" uses of LED lighting attempt to catch the attention of consumers across a crowded tavern or barroom.

"Operator earnings in most amusement machine categories have been decreasing for the past seven years," Goldstuck told Vending Times. "But music has been the exception, with average weekly revenue generated by TouchTunes jukeboxes increasing over the same period, despite difficult industry conditions, and the significant increase in the number of TouchTunes locations. We were able to achieve this by consistently investing in new products and services."

TouchTunes offers two smart jukebox systems that run on the latest version of its Open Stage operating system. Virtuo, its flagship box, was introduced in 2011, and the compact Playdium almost three years ago. The TouchTunes mobile app, which is compatible with the company's entire North American fleet of 65,000 boxes, has been downloaded more than 6 million times and has about 2.2 million active users.

One of the biggest challenges facing the industry is the steady rise of music licensing fees. TouchTunes and other jukebox music providers are required to license music rights from public performance organizations (ASCAP, BMI, SESAC and GMR), music publishers and record labels. "Music licensing rates in general have increased significantly as the music industry has transitioned from traditional CD sales to digital and streaming models," Goldstuck said.

The TouchTunes chief executive said the upward movement in licensing rates for jukeboxes will also continue, just as it has for streaming and other digital services, affecting companies like Spotify and Apple. In today's market, the music industry actively looks for high royalty payments. Of every dollar that Spotify brings in, according to music industry analysts, about 75¢ goes right back out in the form of payments to labels and publishers.

Jukebox operators have in general been shielded from these fees since the introduction of the first digital boxes in 1999. TouchTunes, for its part, did not change the subscription rate charged to its operators during the first 12 years its boxes were online.

"The music licensing dynamic for the jukebox industry is getting more daunting," Goldstuck said. "Traditional coin-op, which relies heavily on music, will be impacted by our new licensing reality."

TouchTunes is obliged not to disclose what it pays in royalties and licensing fees, but it did stress that the fees for the millions of songs played daily on its jukebox network "are significant and have been increasing over time." Goldstuck said the rates that TouchTunes pays have increased "significantly" the past six years. Higher royalty rates are expected to go into effect this year, following another round of negotiations with the licensing community, which includes major record labels, publishers and PROs. These higher royalty rates probably will affect the entire jukebox channel.

As of 2012, there are only three organizations that can be referred to as "major labels" -- Universal Music Group, Sony Music Entertainment and Warner Music Group. A "sublabel" is a label that is part of a larger record company, but trades under a different name. Record companies and music publishers that are not under the control of the big three are generally considered to be independent, or indie labels. When a label is strictly a trademark or brand, not a company, then it is usually called an "imprint." An imprint is sometimes marketed as a project, unit or division of a record label.

Collections Are Good, For Labels & PROs

Despite massive disruption over the past two decades, including a mammoth decline in record sales, the recorded music industry remains highly concentrated at the top. According to independent label group WIN, 62.5% of all music sold, downloaded and streamed worldwide in 2016 came from just the three major labels. In the U.S., that figure is 64%, and in the UK it's a lopsided 77%. Sony, Warner and Universal are also enjoying a surge in streaming revenues. The Big Three command more than 80% of streaming royalties from Spotify, Tidal, Apple Music and others.

Likewise, copyright collection societies and companies are enjoying a boom. Revenue at ASCAP, the American Society of Composers, Authors and Publishers, topped $1 billion two years in a row. In 2015, ASCAP generated revenues of $1.014 billion, up 1.14% from the $1.003 billion in 2014.

TouchTunes jukeboxes
PHOTO: Show, from left, are Virtuo, TouchTunes Mobile on a screen and Playdium

Within that, 2015 domestic receipts grew to $716.8 million, up 9.3% from the prior year's total of $655.8 million. ASCAP also increased domestic distribution by 6.2%, to $573.5 million. ASCAP reported that general licensing rose $11 million, or 9.1% in 2015, which means that it collected $130.8 million from bars and restaurants, as well as music venues and background music services. That's up from $119.8 million in 2014.

ASCAP says it has more than 10 million songs in its database. It represents 560,000 songwriters, composers and music publishers; 40,000 new members joined in 2015. Under the Jukebox Licensing Agreement, professional jukebox operators pay ASCAP and other PROs a blanket fee to cover all public performances of the copyrighted music that is protected by the PROs.

The Jukebox Licensing Office, established in 1989 by the PROs and the Amusement and Music Operators Association, administers the agreement, which applies to stored-content media like CDs and vinyl records for play on jukeboxes. And the license covers the combined repertoires of ASCAP, BMI and SESAC, which represent virtually every piece of copyrighted music, in every format. In 2014, there were fewer than 10,000 CD and vinyl jukeboxes licensed by the JLO, compared with 70,000 in 2004, a drop of 90% over a 10-year period.

The agreement does not cover digital jukeboxes, leaving TouchTunes and other networks, mainly AMI Entertainment Network, without the comprehensive advantage of a compulsory license. But what they are left with is the expense of negotiating directly with the labels, and elsewhere. So licenses are obtained manually.

They include masters licensing, which is contracted through the music labels and gives permission to reproduce recorded music, along with public performance, mechanical and sync licenses. Each requires separate negotiations. Some artists retain the rights to their recordings and therefore negotiate their deals directly with the digital jukebox company. Sometimes these artists demand terms that are difficult to recoup.

And Revolution In The Air

Goldstuck, former president of music industry giant Sony BMG, promised operators that he would help build a world-class music catalog for digital jukeboxes as soon as he took the helm at TouchTunes in 2009. He delivered, most famously working with Apple Corps Ltd. and EMI Music to obtain the exclusive jukebox rights to play The Beatles' songs on the TouchTunes network. The Beatles, which went live on TouchTunes boxes in April 2012, are among several hard-to-sign artists in the digital realm, who are also key jukebox acts. Others include Bruce Springsteen, Jimmy Buffett and AC/DC, which are all available on TouchTunes.

"The next round of negotiations will take place in an even more complex technological and licensing environment," Goldstuck said. "The digital and streaming music models are driving up rates."

Many Options

Not long after TouchTunes introduced the first digital jukebox 18 years ago, competing online music delivery systems emerged. The first was Apple's iPod and other handheld music devices playing music downloaded in MP3 format. Operators in some markets were concerned about bars that allowed, and encouraged, customers to broadcast their personal playlists, sometimes using the operator's own sound system. Although the "iPod Night" phase waned, it served as a harbinger for streaming and mobile technologies, which today are among the jukebox's biggest competitors. The biggest competition comes from on-demand subscription services like Spotify, Apple Music, Tidal, Google Play Music and Amazon Music Unlimited, the newest player. And there are services that play music in radio format, including Pandora, Slacker Radio, TuneIn and iHeartRadio, as well as satellite radio.

"In the social era, everyone owns a smart device and the jukebox industry must accommodate social considerations associated with those devices," Goldstuck said. "A jukebox app needs to integrate with other social drivers ... messaging, for example."

Kate Montano, TouchTunes Allegro Jukebox
ALLEGRO: Young music patron surveys the choices on a TouchTunes jukebox placed in a Huddle House in North Carolina.

The TouchTunes mobile app has been successful in its simplest form, allowing consumers to select and pay for jukebox songs from their phones. And coupled with a Bluetooth beacon to create a proximity network, the app and jukebox can further integrate with the average consumer's social tools. TouchTunes has placed about 16,000 beacons since introducing its application of this feature two years ago. The company is expected to expand its beacon network this year.

Further leveraging its overall capability, TouchTunes has its own background music service for businesses. Last year it acquired Vancouver-based Music Direction, which provides music solutions to retail, restaurant and hospitality clients. TouchTunes is also involved in the interactive social TV space, where its Attract TV has become a leading messaging and advertising platform.

Ubiquity Drives 'Free' Market

While the music industry has become more efficient in collecting royalties and fees from providers in all digital channels, listeners are still on a quest for free music. Nowhere is this more evident than on Google's YouTube, which accounts for one in four music listening hours, according to Music Watch, a music research firm. This makes the non-subscription service another dangerous competitor to jukeboxes.

Where Spotify has an estimated 115 million users, Music Watch believes YouTube could be 100 times larger, even though the video-sharing website is regarded as an inferior music experience. Spotify, on the other hand, is said to work seamlessly on mobile, pays artists more and is widely considered a much better music experience than YouTube.

So how can YouTube dominate? It's not only because YouTube is free (after all, Spotify has a free tier that accounts for 70% of its users), but also because it's ubiquitous. In other words, anybody can jump in, which is not the case with Spotify, Apple Music and Tidal, among other streaming services. Without that pervasive context, Music Watch observed, the "free factor" might not be a big motivator. But when users can share anything with anyone on YouTube, "free" is even better.

Music Watch recently surveyed music fans who designated YouTube as their preferred service and asked them why: 74% chose it as their favorite because it is free; 31% because of its on-demand features; and 26% because there are unlimited song skips.

Last Call

It's getting harder to find a bar, let alone a bar with a jukebox. Neighborhood bars have been on the decline for several decades. In the past decade, according to research by Nielsen, roughly one in six neighborhood bars has shuttered. The two-year-old study found that 334 new bars were opening every month, but 609 were closing at the same time.

Even the nightclub segment, not a typical jukebox venue, has experienced strain. With the onset of the recession in 2008, revenue in the sector contracted for the first time in more than 10 years, according to the National Club Industry Association of America. At the height of the recession in 2009, industry revenue declined 10.1% to $1.9 billion. Revenue began to recover marginally in 2010 as the economy started to strengthen.

One area enjoying some growth is bars specializing in craft brews, a favorite among millennials. The Millennial Generation, born between 1981 and 1997 (age of adults in 2016: 19-35) is now the largest population cohort, an experience-oriented generation that appreciates entertainment. Like the postwar generation that enjoyed drinking in bars and playing jukeboxes, millennials also love to drink, and craft beer is a favorite among the group. Yet jukeboxes have made few inroads into this budding bar segment.

The tavern market, where a majority of jukeboxes are placed, has been under immense pressure, Goldstuck observed. "Traditional coin-op, which relies heavily on music, is morphing and operators need to adapt," he said.

"TouchTunes is progressive, but it needs to step up to the next level and look at the broader world," he continued. "We need to develop better products for operators, and create expansion opportunities into new markets."

The jukebox is not under threat, according to the TouchTunes chief; nor is the jukebox operator. "The jukebox is entrenched," he explained, "and it's difficult to compete against a well-established industry." For this reason, on-demand streaming services and so-called pay-for-play social music apps have been unable to eclipse the jukebox. Goldstuck describes the jukebox as a "call to action," an attribute that other music services lack.

On location, operators need to evaluate, and improve, if possible, what they charge for a song, since a jukebox's price menu is left up to them. On the TouchTunes network, the most common price options are 2/$1, 12/$5 and 25/$10. But some operators price songs lower than this recommended range. Other operators, however, have begun to vend a single song for a dollar. Successful rollouts of the $1/play format suggest that music patrons see the value in today's digital jukeboxes.

The advent of digital music has also made it much easier for locations to own their own jukeboxes. However, direct-sales businesses, pitching "own your own jukebox and keep all the money," have made little progress, for reasons that have been well understood for a half a century, underscoring the importance of the operator.

"Those jukebox manufacturers who have tried to go direct-to-venue with their product have fundamentally misunderstood the importance of the operator in our industry," Goldstuck said. "Operators are the glue that binds manufacturers and service providers to the ultimate consumer. Their day-to-day efforts and close relationships with their local customers are ultimately what allow in-venue services to thrive. For a company like TouchTunes, that relationship goes even deeper in that we work hand-in-glove with our operator community to test, improve and perfect our product and service offerings. That in my mind has been one of the big drivers of our success over the years, despite very difficult industry conditions."

For Goldstuck, it's all about remaining relevant, but that cannot be sustained without R&D. He warned that the dynamics of the jukebox industry, and the cost structures surrounding it, are going to need to change, if the industry wants to continue to keep up with the rest of world.

TouchTunes will continue to invest in research and development, and plans to launch a new suite of products in the next 18 months, Goldstuck told Vending Times. Operators will get a first look at the new developments before the second annual National Jukebox Day, which will be observed on Nov. 22, 2017.

 National Jukebox Day
NJD  REVELERS: Bar patrons celebrate National Jukebox Day, Nov. 23, 2016, in Philadelphia.