Music-Industry Foes Join Hands to Accept Royalties - 'ZIFFPAGE TITLECollaboration or Collusion'

Collaboration or Collusion?

Of course, the music industry isn't the first to come up with a collaborative solution to a bedeviling process problem. Perhaps the most well-known business-process utility is Orbitz LLC, the collaborative effort of five airlines—American, Continental, Delta, Northwest and United—to create an online travel site. Orbitz has been a huge success, drawing in hundreds of business partners, going public in 2003, and eventually being acquired by Cendant Corp., in 2004, for $1.2 billion.

The comparison of Royalty Services to Orbitz brings up a sticky subject for the music industry, however. Many industry observers already have concerns about the potential for collusion among the major labels. The 2004 Sony–BMG (Bertelsmann Music Group) merger was bogged down by an extensive investigation by European Union and U.S. Department of Justice regulators as to whether the reduction in the number of major labels would lead to "tacit collusion." And the movement of the labels in lockstep toward raising online music prices has renewed those fears.

Add to that the industry's repeated failures to pay royalties in good faith, and there could be regulatory hurdles ahead. "In any market that is dominated by an oligopoly, the natural impulse will be to collude," says Aram Sinnreich, managing partner of Radar Research LLC, a Los Angeles-based media research firm. "And I can only assume that this system would be less auditable than the older systems. You can build a computer system to be as transparent or opaque as you want. I don't see any incentive for them to be transparent."

Concerns about collusion are hogwash, says Universal's Henny, and he's got the attorney bills to prove it. "These people are misinformed," he says. "We will not be sharing proprietary information, we will not be informing our competitors of our relationships. This is the back office. It's not competitive, it's just keeping costs down." DeTullio also says that the platform is being built to be more open, with auditors, and Sarbanes-Oxley, specifically in mind.

After the project is completed, says Henny, Sony BMG and EMI will be given a chance to evaluate it and sign up for the service, but the chance for them to share in the success, or failure, of Royalty Services may have already passed. "They are still in wait-and-see mode," he says. "If another company comes in and uses the service, our unit costs will go down. But that doesn't mean that equity will be available to them at that point."

DeTullio decided to resign from Universal and join Royalty Services this past spring, after an exhaustive, six-month search for a CEO came up empty. Since then he hasn't had time to wonder if he made the right career move. He focuses mainly on managing the software development process, and keeping the lines of communication open with his two biggest sales targets. "We are still talking to Sony BMG," he says, staring at the wall outside his window. "And EMI, which was at first the most standoffish, is at least expressing an interest again. I'm hoping there's a little more open-mindedness."

And Henny is driving DeTullio as hard, or harder, as when they were both together at Universal. "I didn't lose Joe; he's now working full-time on my royalty system," Henny says. "I like to think of myself as his most important client."