A Tale of Two CIOs
DeTullio was hired as CIO of Universal Music in the fall of 2001, just one month before Tsvi Gal took the top tech spot at Warner Music. Neither of them had any experience in the music businessDeTullio was CIO at Seagram's Spirits and Wine Group, and Gal was president of AT&T's ATT.COM. But both were given the same marching orders: Do something about digital piracy, and fix our aging royalty processing systems.
As it turned out, Apple Computer Inc.'s iTunes and a handful of other legal, though less-used, subscription services had just begun to address the first problem, but that, in turn, has only exacerbated the second. In the first half of 2005, digital music sales were estimated at $790 million, or 6 percent, of the global music marketmore than triple the same period in 2004, according to IFPI, a recording industry trade group.
The uptick in online sales has added to an already dizzying maze of complexity for music companies trying to track sales of everything from CDs to single-song downloads to ring tones. Every sale, no matter how small, needs to be run through a unique set of rules based on the record label's contracts with the artist, producer and writer, as well as with any union, or other interested party, before royalties can be paidwhich typically occurs on a quarterly or semiannual basis. "It's a huge transactional nightmare," says Warner's Gal. "The number of contracts is in the thousands, and each one is different. And there is no off-the-shelf software that can scale to what we're talking about. This is tens of millions of transactions a month."
Further complicating matters is the music industry's push to move single-song pricing to a variable model, rather than the flat feeusually 99 cents a songthat Apple and other music services charge. "Not all songs are created equal," said Edgar Bronfman Jr., CEO of Warner Music Group, and the most outspoken advocate of variable pricing, at an investor's conference in New York City. "We want, and will insist upon having, variable pricing." Demand-driven pricing, possibly even auction-style pricing, for digital songs would add a mind-blowing layer of IT complexity to an already overwhelmed industry.
Royalty Services LP
New York City
Universal Music Group; Warner Music Group; Lightspeed Venture Partners; Exigen Group
Royalty processing for record companies and other royalty-based businesses
Though all four major labels are struggling with the same issue, the problem is most acute at Universal. When DeTullio came on board, in 2001, UMG had just scrapped a two-year, multimillion-dollar attempt to create a new royalty process in-house, with the help of an outside consultant. The company had nothing to show for it, and it cost DeTullio's predecessor his job. "The reason Joe came was to fill a vacancy created by that old program," says Nick Henny, vice chairman and CFO of UMG. "We needed someone to come up with a solution, not just a bunch of guys in a room dreaming something up. We told Joe to shift away from a proprietary solution and start thinking about an industry solution."
After DeTullio and Gal met and agreed that royalty processing was not a competitive differentiatorGal likes to say that "no artist ever joined a major label because of its royalty system, but they have left because of it"and that both companies were in desperate need of a fix, Gal started working the phones. He called the CIOs of other major labels and asked them the same two questions: Are you having the same problem we're having? Do you consider this to be a strategic advantage to your company? The calls confirmed his suspicion that everyone was, more or less, in the same boat.
The CIOsDeTullio of UMG, Gal of Warner, Miles Braffett of BMG, Bud Howey of Sony, and EMI's director for the U.S., Peter Bakalorfinally met in the fall of 2002, each accompanied by a small army of lawyers, to discuss how they might work together. It turned out that Sony and EMI had slightly more updated systems in place than Universal and Warner, and so felt less urgency about replacing them. "We were looking at a ten-year horizon, Sony and EMI were thinking they could go longer," Henny recalls. The result: Sony and EMI chose to bow out.
Warner and Universal, with the blessings of their respective CFOs, decided to work on a new system together. And though they were now in a position to halve their development costs, both wanted to further reduce the costs and limit the risks of development. They floated an RFP and watched the offers pour in. Gal recalls that just about every major consultant and software firm on the planet submitted a proposal. "IBM, Deloitte, Capgemini, Wipro, you name iteveryone was invited," he says. "But we were looking for something different. We didn't have the exact details, but we knew that, in general, we were looking for a vendor that was willing to share in the risks and the rewards."