Charles Caldas has to be many things to the independent label community – a valuable mix of diplomat, mediator, champion, dealmaker and firefighter.
Since 2007 he’s headed up Merlin, the agency which battles to maximise income for indies from digital services – both through licensing the likes of Spotify, youTube and Soundcloud and the legal pursuit of those sites committing mass piracy.
Caldas learnt the ropes of label world at once-imperious Australia distributor Shock, where he spent 16 years working originally in sales and industry relations, then as CEO – as the company enjoyed success with everyone from the Cocteau Twins, Nirvana, The Offspring and many more.
The seeds of Merlin, he explains, were sown at German trade show Popkomm – when the likes of Martin Mills (Beggars), Stephan Bourdoiseau (Wagram), Alison Wenham (AIM) and Michel Lambot (PIAS) organised a dinner to discuss a potentially collective approach to digital licensing.
“The decision was made that they needed someone to investigate the options, someone who understood their business but was not currently in their businesses,” recalls Caldas. “All the heads turned to my end of the table!
He adds: “I spent half my time during that initial phase talking to digital businesses and half my time talking to independent labels so it made sense.”
An experimental three-month consultancy soon became a six-month consultancy, which then became almost ten years of service.
In that time, Merlin’s annual payouts to indie labels have increased dramatically, up to $232m in the year to March 2016.
Its membership, meanwhile, currently stands at 700+ – representing 20,000+ labels and distributors across 51 countries.
Here, [PIAS]’s Kenny Gates picks Caldas’s brain on the future for independent businesses in the streaming music space and Merlin’s greatest victories so far…
Could you give us an idiot’s guide to Merlin: what’s its purpose?
Merlin was started really because of a concern from independents about how to compete long-term in the digital space. The independents knew they lacked the global scale the majors did.
There was a risk that the lack of efficiencies in the independent space meant it would become a secondary tier of business compared to the majors.
You could do one deal with Universal, Sony or Warner and get global repertoire through one license. To get the equivalent set of independent rights globally meant hundreds if not thousands of transactions.
The other driving principle was that everyone wanted to stay competitive. No-one wanted to create an artificial network where all-of-a-sudden there was an entity that became an uber-distributor. In some ways, competition is what keeps the independent sector alive.
“it’s well known we have equity in Spotify – I don’t think any independent company would have obtained that alone.”
So what we decided upon – what Merlin is now – was an central licensing and rights body for independents who want to leverage global efficiency to improve their business.
Our members don’t have less opportunity on these platforms than any of the majors. For example, it’s well known we have equity in Spotify alongside the majors which I don’t think any independent company would have obtained alone.
We also get other benefits on platforms that we can manage on a global basis that independent labels wouldn’t have got [alone]. And we’ve returned $12m – $15m of anti-piracy litigation money back into the independent sector.
In simple terms: Merlin is here to add value to the independent sector wherever we need to be. Otherwise, we stay out of the way and let people compete in their day-to-day business.
Could you be categorized as a digital distributor or aggregator?
No. The difference between what we do and a distributor does is that we don’t touch the content or get between the labels and their music on the services.
Merlin’s role is purely to do the deals, help maximise the return for members, do the anti-piracy protection stuff and make sure services are paying according to the rules of our agreement.
Merlin is sometimes described as ‘the fourth major’. Isn’t that negative PR amongst us indies?
It’s not negative PR. The point of saying ‘the fourth major’ is a way of illustrating the fact that, as the digital services evolve, there’s no argument anymore – especially giving the success independents are having in the marketplace – that independent rights are worth any less than those at a major label.
A perception was starting to emerge that if you were signed to a major label, your music was somehow worth inherently more than music which came from independent labels.
“Merlin represents about 12% to 13% of the global streaming market share.”
Agnes Obel’s music isn’t worth any less than Laura Marling’s in a marketplace, and rightly so.
Merlin represents about 12% to 13% of the global streaming market share. That’s just about the equivalent of what a Warner would be – the smallest of the three majors.
What’s the monthly turnover of Merlin?
We’re about to hit $27m a month.
How many streams is that per day?
The closest we go to is a month’s streams back in July, which was 4.5bn streams.
What was the big threat when you formed in 2007, and what was the big first result?
Independents had had their very difficult start with Apple – which resulted in a contentious picketing of their press conference when they announced iTunes in Europe.
On the other side, there was the Kazaa and Grokster cases, where [anti-piracy settlement] money was flowing through to the majors but not the independents. And then there was the MTV case, where MTV basically decided to stop paying independents money for playing their videos.
I remember that MTV situation very well.
They were paying the majors for their videos, but said that independents should just be happy to have exposure on their platform.
MTV is part of Viacom – a global major corporation – and it was those things that were the trigger for Merlin.
MySpace Music was our first public fight – a platform built on the diversity and breadth of repertoire from independent musicians and labels, but when it came to turn it into a business it got bought by Rupert Murdoch who turned it into a joint venture with the major labels.
They tried to sideline independents, and we felt there was more of that coming.
“MTV were paying the majors for their videos, but said that independents should just be happy to have exposure.”
Our first big success was our Spotify deal. Weeks after I moved to London I got a call from this Swedish company saying they’d read about the formation of Merlin, they really liked the idea and they wanted to talk to us about licensing this new streaming platform.
I met with them – we didn’t really have an idea of what they were! They were a very impressive company and I felt we should be involved.
I remember going to my board and the underlying sense I had was: these people have flown me all the way from Australia to launch an organisation to tackle huge corporations like Viacom and the first thing I bring to the table is this little Swedish startup that no-one’s heard of!
The issues we had with MySpace were repeated in the future with platforms like YouTube and Rdio, but we also built really positive relationships with services like Spotify who very early on recognised the value in what we did.
Did Spotify save the music business?
I don’t really subscribe to the ‘silver bullet’ view of the music industry. But Spotify’s certainly led the way to helping people to understand that there are different ways to monetise these rights.
They showed you could marry those disruptive technologies with real commercial opportunities – not just threats.
Now if you look at the value Apple Music, Amazon and Google Play is bringing into the streaming business, you’re starting to see that’s shaping what the future of the business will look like.
This year pretty much every territory other than Japan – which is still at the point of resisting a lot of these platforms – has returned to growth. It shows that by embracing and looking for the opportunities in these technologies, you can return value to the marketplace.
There’s no doubt Spotify was a key moment in showing there were different ways to doing things.
The market is growing – but is it growing for everyone? It seems to be very led by pop hits. Niche genres particularly don’t seem to be growing much yet…
I agree on the genre point, but I also agree when you say ‘yet’.
Every year, Merlin does a survey of our members to take the temperature of their business. If I look at the last two years, two thirds of respondents said that even in this time of transition their overall business is growing. So there’s evidence now that these revenues are additive.
We look at how our members perform between free services and paid services, and the higher up the value chain you go, our market share on the paid platforms on the paid platforms is 27% higher than it is on the free tiers. So the consumers paying the most for music are also consuming the most independent music.
The fact we’re not fighting for shelf space means we have more opportunity to get to consumers. Some genres have done this incredibly successfully. If you look at dance and electronic music turning the brands of DJs and dance labels into successful streaming destinations – that market clearly works for them.
“Over the last four years our [annual] revenues have gone from $75m to $130m to $190m to $275m – that money is real and is flowing down to more and more people.”
On the other hand, more ‘adult’ genres like classical, jazz and blues haven’t yet found their space. But we have to understand this is a transition: the initial set of consumers that have come into the streaming space are mostly early adopters; young, tech-savvy people. It’s not yet a truly mainstream product, even though there’s tens of millions of subscribers on these platforms.
We were talking before about Merlin turning over $27m a month. Over the last four years our [annual] revenues have gone from $75m to $130m to $190m to $275m – that money is real and is flowing down to more and more people. My view is that once you have enough volume in the marketplace, you’re going to see better products and destinations for those genres emerge.
In some ways, it’s like it was in the physical world, where you’d never get Walmart or Our Price to have a very deep jazz section. So you needed specialist destinations for people to go and find that music.
A lot of people say streaming is not mainstream yet.
That’s an important point. When I was younger, I was trying to sell records into HMV in Australia which was the epitome of the mainstream retailer. Let’s be generous and say there were 10,000 titles in that store.
If you weren’t in those 10,000 titles you were invisible to the people in that store.
Now, the mainstream is whatever is on the services – every bit of music ever released. That’s why independents are front and centre in the market today. We’re not relegated to the specialist retailers or to the back of the shop.
Will the over-indexing of independents on streaming services last?
Yes. And I say that because we’ve seen territories go from low [paid] streaming conversion to a high one; where the majority of users are subscribers and our market share doesn’t change that much.
Look into it from a consumer point of view: you can come into an environment like Spotify and what you’re discovering is no longer limited to what you hear on the radio, saw on television or read about in the press.
What we call over-indexing today is to me the rightful performance of independent music in the marketplace. The days of ‘if only the record store would stock this record’ have gone.
But isn’t the streaming market at risk of becoming at the mercy of big playlists? Playlists the majors will dominate?
If we’re think about the streaming space being better for independents than the physical space; it must be less advantageous for the three biggest companies. And they’re going to try to do everything they can to regain the advantages they’ve lost. So we have to be vigilant about how these services evolve.
On the other hand, there’s always been a mainstream, hits-driven market. When you walked into HMV, if you didn’t sell enough records you wouldn’t be [advertised] on the chart wall. At the end of the year, unless you had a hit with scale you wouldn’t appear on Now! That’s What I Call Music.
“Streaming must be less advantageous for the three biggest companies than physical was.”
But once you scratch that surface, what lies in the layer immediately beneath [pop hits] is where a huge amount of streaming volume is coming from – and that’s where we’re performing the best.
We have to be careful in how we do our deals with these services to ensure they’re not constructing that playlist environment, for example, in a way that doesn’t work against us. But in some ways the challenge is ours to ensure we are doing the right things for ourselves to maximise the success of these platforms.
The streaming market now includes Spotify, Apple, Pandora, Deezer, Google, Amazon. Is the competition going to push the prices down?
The reason I would say no to that is because the fastest rate of [subscriber] growth we’ve seen in the overall streaming market came after the entry of Apple Music but was actually on other platforms; so the entry of Apple Music stimulated the rest of the market.
The more consumers hear about and have access to this kind of product, the more the market grows.
Isn’t the average per-stream payment going down?
It depends how you look at it. On a global basis, if you put all the streams in one bucket and all the money in another bucket, then yes – the fact streaming is becoming more popular in lower value markets like Mexico, The Philippines and Brazil changes the balance.
If you look at it in a more sophisticated way – market by market, region by region – then no, I don’t think streaming rates are going down like people think they are. We also have to look at revenue per user as much as we look at revenue per stream; we’re getting more people to pay for music, which is positive news.
Everyone is out of long-term contracts with Spotify and Youtube at the moment. Doesn’t that show everything is fragile?
Yes. We’re undergoing probably the biggest transition we’ve ever seen in the history of the music industry – from a world of sales to monetising the market in ways we don’t fully understand yet. All of this colour and movement and renegotiation is really difficult.
YouTube is a great example of a service that was off to the side of our business – a lot of UGC and video that people were promoting.
“all of a sudden that [YouTube licensing] decision looks far less sensible than it did at the time.”
Then they licensed their way into the market to have full catalogue availability. But two years ago the audio streaming world was worth 50% less in value than it is today.
So all of a sudden that [YouTube] decision looks far less sensible than it did at the time: YouTube is declining in per-stream rates at the time when the rest of the business is growing much more healthily. We have to look at the relative value of these services.
Was GEMA right not to allow YouTube in Germany?
I think YouTube should be a market segment of its own. The mistake the music industry made with the YouTube deals was agreeing to make all of the music available all of the time for free to all of their consumers.
YouTube has not built a compelling subscription business. The increased availability and consumption of music content has driven the per-stream value down.
But what’s positive and exciting about YouTube? From a rights-holder perspective it’s allowing you to potentially monetize things you can’t monetize on other platforms – interesting UGC; monetizing visual content that’s not exploitable on other platforms; music videos. There’s a particular market segment YouTube could be amazing at [presenting].
You don’t consider YouTube the enemy? ‘The devil’?
No, they’re not the devil – but they’re certainly not paying enough for music.
What do you make of Lyor Cohen joining YouTube?
[Long pause]. I haven’t had a chance to meet with him yet, so I’ll answer that when I’ve met with him.
Apple. Spotify. Amazon. Apple. Google. Who would you bet on to be the winner?
I don’t think there’s one ‘winner’. In the same way that, in the healthy part of the physical market there was HMV, Virgin and Tower, as well as all the independent stores.
We’re starting to see signs of that in streaming. If you look at South East Asia today, there’s KK Box, which is a successful local streaming platform, in Japan you now have LINE and others. The scale of the market is going to encourage new investment, new players and new innovation. The big technology services would like there to be big winners and losers, but not us.
Isn’t Spotify vulnerable because they’re facing competitors who want to use music as loss-leaders to sell other devices?
It isn’t the first time we’ve seen this. Selling music to K-Mart was selling music to people who used it as a loss-leader. It didn’t mean we stopped supporting the specialised punk rock, metal or dance retailers.
I do think at some point the industry has to reconcile where pure-play music retailers like Pandora and Spotify sit in the market against technology companies. But ultimately the market will become more sophisticated.
“Apple, Amazon, Google and potentially Facebook – they’re going to get involved in a battle for dominance.”
We have to expect that if you look at Apple, Amazon, Google and potentially Facebook – they’re going to get involved in a battle for dominance. What the industry has to be careful of is not becoming pawns in that game and not selling down the value of our music so that it just becomes a peripheral add-on to the tech business.
On the other hand, we would all like to see Facebook monetize our music- and YouTube deliver better and higher value, and SoundCloud for that matter.
SoundCloud! How could we allow a service to become so big without having proper licensing. Was that a mistake?
Well it was partly because they had the same [safe harbour] protections under law as YouTube have in terms of UGC.
It was partly because artists and smaller labels really loved SoundCloud as a promotional platform. Where SoundCloud sits in the market today is potentially really interesting. To your question about winners and losers; if you go through those services, they are different shades of similar products – all of the music available in one place.
What’s interesting about SoundCloud is that it potentially helps us monetise a different demographic; one that might subscribe to SoundCloud as well as subscribing to Spotify. It could become the destination to find remixes and derivative works – things that might not be on the other platforms.
We have to embrace innovation, creativity and development of the market other than just letting one winner dominating the market ahead of anyone else.
Isn’t it a bad sign that Spotify is trying to get bigger margins from the industry at the moment?
How these companies become sustainable in the long-term is a challenge for all parts of the industry.
It would be very easy for companies the size of Google and Apple to price kill the competition. In the same way that supermarkets have tried to price kill the competition.
As rights-holders, we have to take some responsibility for our retailers – where they fit in our business and what we’re willing to do to keep their business healthy. I’m sure [PIAS] loves dealing with FNAC, but not at the expense of other physical retailers. Or the fact you have a relationship with Amazon as a physical retailer doesn’t mean you don’t want to do interesting things with the Rough Trade stores.
As someone putting music into the marketplace, you can’t just turn a blind eye and put all your music where you get the biggest return. Because if you did that with your physical business, you would have ended up in a far, far more difficult world. And at some point, we have to reconcile that in the digital space.
Will Spotify IPO?
The press certainly thinks so, and the way they’re structuring the company suggests so as well.
But getting to an IPO is not an easy thing. As an industry, we have to approach the notion with an element of caution. Where and how do we want a partner like that to look and behave in the market?
What are the implications of Spotify as a publicly traded body as a partner? There are big questions around what that means for everyone.
So what does it mean?
It could mean all sorts of things. If it’s a successful IPO and it creates a business that continues to grow at the rate that it’s growing now and becomes a significant global retailer that’s sustainable and profitable and a core part of our industry, no-one’s going to complain.
If it’s less than successful and the IPO means it has to squeeze its operation in some way or limit the service’s operation only to what is profitable – slowing its growth rate – that’s a concern. You can’t predict these things.
It’s an amazing brand and an amazing company that’s built an enormous amount of users in a fairly short period of time, so the instinct is that this should be success. But this is the stock market. And the stock market can go either way for any company.
You’ve come from an Australian distributor dealing with all the independent label heads – and now you deal with them all in your role at Merlin. That’s a lot of egos to juggle in your career!
The independent sector is the independent sector for a reason. So the people who run the companies are incredibly strong-minded, opinionated and passionate – but you wouldn’t want it any other way. Sometimes I have to be diplomatic and non-interventionist, but other times I have to assert my own will and opinion. The independent sector wouldn’t be what it is today if you just had a bunch of pen-pushers who were purely financially focused.
The pleasing thing for me is that despite the potential for discord, with a board of 15 strong-minded individuals, Merlin is looking almost 10 years down the line now at an organisation that still has its founders involved and has the support of the independent community.
Who’s the most impressive person you’ve met in the independent sector – and who’s the most intimidating and who’s the most inspiring?
Everyone has their own area of specialty…
Don’t be a diplomat – I want names!
Well there’s one person I think everyone would agree about: Martin Mills has for many years been a hugely impressive leader for the independent sector.
If I look at our own board, the passionate founders of our world, Michel from [PIAS] – not just in terms of Merlin, but almost in terms of being the Godfather of collective action, his role in the founding of IMPALA. That’s another leader.
“Martin Mills has for many years been a hugely impressive leader for the independent sector.”
And other than that, let me put it this way: anybody who is willing to put themselves forward to be on the Merlin board, and dedicate their time and effort to an organization that is not their own business deserves the respect of the community at large.
These people are dedicating their own time, resource and in some cases money to the greater good.
Merlin recently did a deal with VK in Russia. What can we expect from that?
The first thing to expect is that we can now manage the availability of content that was once widely available to the market at zero value.
In some ways I look at that in the same way I look at SoundCloud. We now have a structure around SoundCloud to monetize, to choose what we can make available.
Transitioning services from outside our business to inside our business is never without its challenges, but it’s encouraging to see it happen.
You’ve just opened an office in Japan. What’s the purpose of that?
Two of the biggest dynamics we’ve seen at Merlin this year have been the global growth in members and the global growth in revenues.
It’s a totally new market: Mexico is now in our top ten streaming territories. We make more money in Brazil from streaming than we do in France.
Japan is probably the slowest major music market to evolve, but now with the launch of Google Play and Spotify, it’s also a market that’s potentially going to become one of the leading digital markets in the world, and one where our membership is growing quickly.
“Japan is a market that needs local expertise on the ground.”
Japan, culturally and language wise, is very different to the rest of the world. It’s a market that needs local expertise on the ground.
We’ve tried to be very careful about how we run Merlin – there’s essentially 10 or 11 dedicated people who run the organisation. Merlin runs at a cost of 2% to our members, and even at that cost, we’ve managed to rebate $2m in excess admin fees in the last couple of years. We’re very conscious of value to our members.
Japan can fit within that structure – it has zero negative impact on what we charge our members. The next obvious markets [to enter] would be Mexico and Brazil, where we’re starting to generate millions and millions of dollars but which both require local expertise.
What will the market look like in 10 years?
My hope is that in 10 years we’ll have a much more defined set of market segments. That will involve physical retail, physical online retail, all you can east streaming services and also a range of different ways of people to consume music we haven’t yet seen.
The car is a great frontier. Wearable devices are an opportunity. Messaging apps are an opportunity. Music bundled with other forms of entertainment are opportunities.
My hope is that on the label side of the business we’re going see a healthy market that is much more competitive than it is now. The kinds of opportunities that streaming platforms bring to our labels means that independents are going to be better placed than they are today.