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Record labels pressure ByteDance to share ad revenue with TikTok

According to people familiar with the matter, major record companies such as Universal Music Group, Sony Music Entertainment, and Warner Music Group are pressuring ByteDance to ask TikTok to share advertising revenue and increase the royalties paid to them. The record labels have been in talks with ByteDance for the past year and hope to reach a new deal before their contracts expire in the coming months.

TikTok has attracted more than 1 billion users and is growing in popularity, making it one of the most powerful star-making platforms in the music industry. Record companies rely on TikTok to find promising artists and promote new releases. TikTok has become the most important marketing tool for these companies, said Mark Mulligan, an analyst at consultancy MIDIA Research.

At the same time, TikTok also began to profit from it. The platform generated $4 billion in revenue last year and is on track to hit $12 billion in 2022, according to market research firm eMarketer. Music companies want TikTok to share more of the revenue and get a cut of ad sales based on the number of on-demand views of their artist's work. Under similar deals with other platforms with large audiences, such as Facebook and YouTube, TikTok should pay two to 10 times more than existing deals, an executive at a major record label said.

These music groups are weighing how to better grow their revenue from TikTok without having a public dispute with their most important partners.

Oberman previously served as a chief digital officer at Warner Music Group said, we are committed to creating value for copyright owners, songwriters, and artists when they use their music, for the deals, we make, and for our Proud to bring a growing revenue stream to the industry in just a few short years.

When music companies first licensed TikTok, it was a small, unprofitable app. TikTok pays big music groups a flat fee to use music from their catalogs in videos shared on the platform. Many of the songs that are now at the top of the charts are thanks to the publicity they receive on TikTok. TikTok draws users to platforms like Spotify, which pays music companies based on the number of plays.

Sony, Warner, and Universal reached current agreements with TikTok in November 2020, January 2021, and February 2021, respectively. TikTok’s agreement with Merlin, the music digital rights agency representing independent record labels, expired earlier this year, and both parties agreed to a short-term extension to avoid removing music from the TikTok service.

Mulligan, an analyst at consultancy MIDIA Research said, the record labels and publishers gave TikTok a license to monetize their music catalogs while figuring out how TikTok works. Now, they seem to have achieved their goal.

TikTok is cannibalizing the ad business of rivals like YouTube and Snap, so from a record label’s perspective, now seems like an opportune time to propose an increase. Many music company executives believe that TikTok should share in ad revenue and that its parent company, ByteDance, should create a paid music service that can operate globally. ByteDance could then use TikTok to offer its subscription products to users.

ByteDance already created a paid music service called Resso in 2019 and introduced it to three markets, Indonesia, Brazil, and India. Resso has tens of millions of monthly active users, but so far the service has struggled to convert many of them into paying customers, according to people familiar with the matter. ByteDance has also been pursuing opportunities to expand Resso into 12 new markets for more than a year. The company has asked partners to lower fees and hopes to pay less than peers like Spotify and Apple Music. Copyright owners were hesitant, and Sony pulled its music from Resso earlier this year.

A TikTok spokesperson said, we do not comment on commercial negotiations. We are working with Sony to bring their music back to Resso.

ByteDance has registered the TikTok Music trademark and is exploring whether to use the name to replace Resso. But the company has yet to ask record labels to authorize TikTok to use their music on its own branded services. Music companies remain optimistic they can convince ByteDance to share revenue and are looking for ways to deepen their relationship with the company. Universal has partnered with TikTok on a project to connect newcomers to the music space with well-known songwriters like Max Martin.

Record labels' tensions with TikTok have reminded music industry executives of their decade-long disputes with YouTube and Facebook. For years, music companies have criticized their Silicon Valley business partners for not doing enough to stop piracy. Both YouTube and Facebook position themselves as marketing tools. Record labels are urging YouTube to offer a subscription-based music service, arguing that even a fraction of its 2 billion users could be lucrative by converting even a fraction of its 2 billion users into paying customers. YouTube's initial forays into paid streaming had little success, and many music industry executives felt YouTube wasn't doing all it could.

But YouTube overhauled its paid service in 2018 and has added more than 50 million paying customers since then. YouTube paid the music industry more than $6 billion between July 2021 and June 2022 and is now the industry's second-largest revenue generator after Spotify. YouTube offers rights owners a share of ad revenue based on how many times a song is played while driving subscriptions to ad-free music services. A portion of subscription revenue is also shared with copyright owners.

While Facebook has yet to create a paid music service, it is now also starting to share revenue with music partners. In March, TikTok launched SoundOn, a service that allows artists to upload their music directly to TikTok and earn royalties when the music is played. Earlier this month, ByteDance began searching for executives who could spot new people and sign them, just as record labels do. A few years ago, Spotify allowed artists to upload music directly. However, in less than a year, the company shut down the feature.

Universal CEO Lucian Grainge told investors of TikTok last month, we’re going to fight to get our artists more paid. I’ve seen a similar scenes, so I know the end result.”


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