Guns N' Roses 'Suits' to Guitar Hero, Rock Band: Pay Up!

Earlier this month Warner Music Group (WMG) held a Q3 earnings call that packed in some fighting words, alongside revenue statements. CEO Edgar Bronfman, Jr. stated that music-based video games, like Guitar Hero (ATVI) and Rock Band (ERTS), aren't paying enough royalties to record companies, and that Warner would start to pursue higher revenues from the gaming world.

That means the corporate suits who control the rights to the music of bands like Guns N' Roses want a bigger piece of the action.

"The amount being paid to the music industry, even though their games are entirely dependent on the content we own and control, is far too small," Bronfman said in the call. He went on to cite Apple (AAPL) and MTV (VIA) as other examples of outliers who depend on the music industry to make money, but are reluctant to pay enough money in an age of sharply declining CD sales. Bronfman's complaint underscores the tension that exists between interrelated branches of the entertainment industry right now, where one executive's marketing tool is another's royal rip-off.

This type of territorial battle is nothing new, and it all comes down to identifying precisely how a song is used to connect to the fans. The placement could be promotional, like on FM radio, where stations pay a small fee to the song's publisher (essentially the songwriter, although a wide variety of entities hold these rights) but not to the record company, as radio play is seen as a marketing tool for Mp3 downloads and CD sales. It could be licensable, which requires fees paid to both the record company and performers, and the publishing fee, which is how movie soundtracks and samples work. Or, it could be a straight purchase, an iTunes download or a CD from the record store. Currently, video game song licenses work like a combination of the first two options – they're seen as promotional marketing materials, and they also pay the publishing fee and an additional usage fee, which is almost impossible to calculate on a per song basis. Even in the same game some songs are rerecorded, which costs less to license, and others feature the band that made the song famous. Plus, neither the record companies, nor the video game publishers are willing to talk numbers, on or off the record. 

Although the struggle to keep customers paying for digital content exists across the entertainment spectrum, Bronfman identified the music industry's particular bugaboo when he referenced Apple and MTV. What at first seems like promotional gravy for CD sales can often become a new content delivery system that record companies see as a replacement for CDs. When MTV first started broadcasting, and actually played videos, record companies saw it as merely a radio on TV. (No one watches MTV as a replacement for owning music.) Now with the iPod and iTunes, Apple’s created a delivery system for music that the record companies see as a service they should be providing, and getting paid for. As it is, Apple loses money on most downloads (record companies get between 60 and 70 cents on the 99-cent download) and iTunes drives sales of other Apple products. 

In terms of Guitar Hero and Rock Band, a WMG spokesperson emailed MainStreet a statement explaining their take on the issue: "Game publishers and music content owners both bring critical elements to the table. We hope that our partners in the gaming space appreciate not only the value of their own contributions but also those of the recording artists, songwriters, record labels and music publishers on which their games are significantly based." From Warner's perspective you couldn't have either game without the music, so they deserve to renegotiate the fee structure and make more money. From the video game publisher's perspective, they're already paying for the use of the songs, and providing invaluable marketing to bands like Metallica, Aerosmith and Guns N' Roses, guitar heavy acts who aren't as popular on the radio as they once were, but make perfect gaming tracks.

Video games have been driving music sales for some time, says Aram Sinnreich, a media professor at New York University's Steinhardt School. "Even five years ago Madden Football was breaking new songs the way FM radio used to. Now we see artists thinking first about the video game and second about the CD, because the video game is going to instantly drive all those people over to iTunes to buy the single and the ringtones and all the other stuff that makes them money." He adds that the music industry could make it impossible for music performance video games to exist if they insist on an iTunes-like percentage.

Metallica, a WMG band, will release the first single off their upcoming album, Death Magnetic, through Rock Band, before the album hits shelves. The entire album will be available for play on Guitar Hero the day of release. This uneasy arrangement is nothing new, says Sinnreich. "They want to be paid for someone else to advertise their product," he says, "which is not an anomaly in the history of the music industry. Feist got a huge boost from being featured in the iTunes commercials and Apple paid handsomely for the right to advertise Feist's music." Again, the game publishers see their product as invaluable promotion and marketing for musicians, while the record companies see a content delivery system that’s getting a product on the cheap.

Sinnreich sees a comparison here to samples in music, which enjoyed a heyday in the late eighties and early nineties with records like the Beastie Boys' Paul's Boutique and De La Soul's Six Feet High and Rising. Those sample rich tracks would be impossibly expensive to produce today, and the insistence on paying for samples has killed the form, at least in mainstream music. Video games face a similar conundrum: The games cannot exist without the songs produced by the record companies and their artists, but if the fees become prohibitively high, game publishers will have to give up on titles like Guitar Hero and Rock Band, as well as similar games in development at Disney (DIS) and Konami Corp., a Japanese game company. The continuing success of this huge market depends on finding a balance between the two sides, in which everyone profits. Sinnriech summed up that task saying what most fans would probably agree with, "Don't do what you usually do and kill the goose who laid the golden egg. Keep the goose alive."