Channel Design Strategy for an Intangible Service

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Natasha Lee opened the market share report and she didn’t like what she saw. As VP of Sales and Marketing at SESAC (pronounced see’sak) she was responsible for generating profitable revenue. But the data showed her company losing ground in the general licensing category across the United States, with market share slipping relative to industry competitors. She had heard from her chief executive that some of SESAC’s best known artists and publishers were becoming uneasy with the pace of growth on the collections side. There were whispers that some might even be considering defecting to ASCAP, the largest of the industry’s three performing rights organizations (PROs). It was time to take a serious look at the sales and distribution strategy for SESAC’s service.
Natasha had one week to prepare an analysis of the situation for the CEO, and make a recommendation for growing the general licensing category (e.g., function halls, nightclubs, restaurants, etc.). Specifically, Natasha needed to decide whether SESAC should keep the call center that it had used for the previous 20 years, or change its channel strategy, perhaps by hiring a sales force.

Performing Rights Organizations

PROs have existed in the United States since the early 20th century. Emulating similar organizations in Europe, musicians organized an effort in the United States to protect their compositions from businesses that sold their material at a profit, giving the artist neither recognition nor reimbursement.1 The first PRO in America was established in New York City on February 13, 1914 primarily to protect the copyrighted musical compositions of Tin Pan Alley musicians. The American Society of Composers, Authors, and Publishers (ASCAP), as it was called, counted Irving Berlin and John Philip Sousa as some of its initial members.
Today, there are three PROs operating in the United States: ASCAP, BMI, and SESAC. The PRO business model is essentially the same. The PRO collects royalties from broadcasters and venues that play music, and then distributes the money to a pool of copyright owners that have signed to its roster (see Exhibit 1).
Royalties are negotiated with each user of the copyrighted material on an individual basis. Payments are then made to affiliates (i.e., copyright owners) based on the number of plays and audience size for each song registered in the PROs library; these calculations are generally made from nationwide sampling of radio plays.

Artists must commit exclusively to one of the three PROs, but each PRO can sign as many artists, publishers, and other copyright owners as it wishes. PROs must maintain a delicate balance between expanding their roster of artists and signing venues and broadcasters. If there are too many affiliated artists, the royalties pie is split too many ways, which is unattractive to artists. But if there are too few artists, then organizations that pay royalties are reluctant to sign up, thinking that chances are slim that they are actually playing the PROs’ music.

Traditionally, royalties were generated by sales of sheet music, record album sales, and radio play, but the new frontier appears to be in live performance and other nontraditional channels. It is estimated that between 50 and 75 percent of songwriters, compensation now comes from channels other than radio. For example, radio provides 35% of ASCAP’s total royalties, with the majority coming from television and performance venues. At BMI, general licensing and new media licensing had grown by almost 15% since 2000, while radio royalties had fallen by almost 20% over the same period.

All individuals and businesses that play live or recorded copyrighted music are required by law to pay royalties to the copyright holder, either directly or through a PRO. Violators face penalties of up to $20,000 per infraction. Special exemptions apply to organizations such as non-profit institutions that have no admission charge, record stores, movie houses, religious organizations (during worship only), and government bodies (state and federal).

The Company

SESAC, originally called Society of European Stage Authors & Composers, is based in Nashville, Tennessee. Founded in 1930 to support European music artists in the US market, it is the smallest of the three performing rights organizations in the United States (see Exhibit 2). SESAC is a privately held enterprise that operates as a forprofit business, and it retains an undisclosed amount of performance royalty income as profit.

The company has three primary divisions which are independently responsible for generating revenues for the company: General licensing, Broadcast licensing, and New Media licensing:

• General licensing: Sales receipts in the general licensing segment are primarily collected from entertainment venues such as restaurants, pubs, nightclubs, hospitals, and function halls. Any establishment at which patrons are charged, and music is a substantial part of the experience is legally required to pay royalties. Fees for venues are based on an algorithm that includes variables such as type of establishment, square footage, amount of live music played, and number of seats; the calculation is meant to estimate the number of people who hear music during a given week. Licensing fees can range from as little as $200 to thousands of dollars per year. Approximately one third of SESAC revenues come from the general licensing category.3

• Broadcast licensing: Music played on the airwaves is monitored primarily by a sophisticated digital tracking service called BDS (Broadcast Data Systems). SESAC generates revenues from every facet of public performance, including mainstream radio, college radio, satellite radio, Internet radio, and television.

• New media licensing: This division covers non-traditional channels such as Internet radio, satellite radio transmissions, and ringtones. While new media currently represents a relatively small proportion of SESAC revenue, this division is growing quickly.

Despite SESAC’s small size, company executives believe that its for-profit status affords it a competitive advantage in the industry. ASCAP and BMI are not-for-profit organizations, so they are required to accept all qualified copyright holders that apply for membership and to distribute all royalties to their affiliates (less an administrative fee). In contrast, SESAC’s has fewer operating restrictions. It enticed headliners such as Neil Diamond, Bob Dylan and Bryan-Michael Cox by tailoring agreements to the needs of those artists. The same flexibility is possible when signing general licensing venues. Thus, the company’s plan is not to challenge BMI and ASCAP head-to-head; rather it is to provide the best value to affiliates and licensees by being selective about the markets and segments it enters.4

General Licensing

The general licensing division of SESAC has a wide array of licensees. The size of SESAC’s library is the smallest of the industry; nonetheless, it has a sufficient number so that it would be difficult for an establishment that played music frequently to avoid hitting SESAC material. In practical terms, this means that nearly every venue in America could be a paying customer. Jazz, Latin, and Christian music venues are even more likely to play SESAC music. Exhibit 3 shows the number of establishments in key potential business segments.
SESAC typically charges between $400–$1000 per year for unlimited use of all SESAC material at a single location; the average price of a SESAC general license is just under $600. Some businesses (e.g., retail stores) play background music in a way that is barely noticeable, while others (e.g., dance clubs) feature music as their raison d’être. SESAC tries to reflect these sorts of differences in their calculations. The company believes strongly that if an establishment profits from the use of copyrighted materials, it should be responsible for paying music copyright fees. However, SESAC prides itself on eschewing the adversarial “pay-us-or-we’ll-sue-you” position that ASCAP had been accused of taking in the past. SESAC wants to build a relationship with licensees—a relationship built on mutual benefit. A reasonable fee can be worked out when licensees understand the value that SESAC songs can bring them.

Two Options for Channel Structure

Call Center Channel

For the past 20 years, SESAC has operated a call center in order to develop the general licensing program. There are currently 35 full-time employees working in the center. The system is simple. Leads are generated by purchasing lists of establishments in entertainment related industries, such as pubs. Leads can be inputted automatically into the database and set on “active” status. This means that a direct mail piece is generated automatically and sent to the establishment telling the prospect that a representative will be calling to answer questions and arrange for payment of money owed based on the characteristics of each establishment. In order for a lead to become active it has to be assigned to a call center member. Each caller is given 500 accounts to work on at any one time. When a customer account is successfully contracted as a licensee, the next lead in the queue is assigned to whoever closes the account, and the corresponding direct mail piece is sent out. The caller’s database automatically alerts him or her that the mailing needs to be followed-up with a call in a timely fashion. In the event that a caller finds it impossible to secure an agreement from an establishment, he or she can terminate an account with the approval of a supervisor. This is a source of numerous disputes between callers and supervisors since it is quite difficult to secure a sale and callers are always eager for fresh leads.

Many of SESAC’s affiliates are artists that are concerned with their reputation. SESAC takes its responsibility as a representative of affiliates very seriously. A sales manager is assigned to control quality for all calls. Calls are recorded at random and monitored to ensure that callers act with courtesy and professionalism. Scripts are used in order to guide callers through conversations with prospects. These scripts have phrases of introduction, answers to frequently asked questions, and suggestions on ways to close a sale.
Each quarter, the call center manages to sign 8% of all open leads on average, although rates of individual callers vary considerably. It generally takes about 3 months from the moment that a lead is assigned to the time that a contract is signed. There are three reasons why it is difficult to close sales.

• Managers at establishments that play music are exceedingly difficult to reach. Many primarily use their cellular phone which may not be registered and others are protected by gatekeepers who keep undesirable callers from getting through. Moreover, some managers view royalties as a non-revenue generating expense and avoid calls from SESAC call center.

• The service is difficult to explain to managers. It may require a phone conversation and several letters just to assure prospects that SESAC is a legitimate business representing artists that are entitled to royalties. Establishments that are already paying ASCAP and BMI may think that this absolves them from contracting with SESAC as well (most establishments must sign with all three PROs to get full coverage).

• Suing establishments is not a credible threat. Although SESAC is legally entitled to file suit against establishments that infringe on copyright laws, the company tries to avoid this path at all costs. SESAC does not want to be seen as attempting to strong-arm small businesses since it could result in a public backlash against SESAC and its affiliates.

Most callers have some experience in other telemarketing jobs, but very few have college degrees or experience in the recording or hospitality industries. Employees working in the call center are paid just under $15 per hour and usually work an eight hour shift from 11:00am-7:00pm. Each employee is expected to make at least fifteen calls per hour.

Sales Force Channel

The call center channel had operated of for years and Natasha was hesitant to propose a change that might mean a significant investment in time and money for SESAC. Nevertheless, she wondered whether sales might pick up with a decentralized sales force in local markets. An arrangement like this would give individuals more freedom to contact whomever they wished without the burden of scripts or monitoring. She thought that a more professional sales force might have greater success with the difficult clients that are found in the hospitality business. Her calculations suggest that with a portfolio of around 500 leads a professional sales person could probably convert about 15% each quarter. This translated to 75 accounts per quarter per sales rep on average.

Of course, sales people would have to be compensated at a considerably higher rate than call center employees, eroding margins. Professional sales people demanded a salary of between $60,000 and $150,000 depending on experience. A 50% commission on first year revenues of newly acquired customers would be consistent with norms for sales people compensation.
Hiring sales consultants on a commission basis might actually lower SESAC’s overhead. For field-based sales consultants, $150,000 per quarter would cover an experienced sales manager and training of new field-agents. In contrast, fixed costs for the call center reached $250,000 (not including wages) per quarter; this includes renting the space, maintain the telephone system, and paying managers to monitor callers. All othe costs were comparable for either scenario.

The Decision

General licensing presented a substantial opportunity for revenue growth, but SESAC’s coverage of venues was still quite spotty. It was essential to increase the base of licensed clients in order to balance the steady growth of affiliates. A good decision could put SESAC in an enviable position as successful company in an industry with strong cash flows. The wrong decision could do irreparable harm to the company’s standing as respectable player in the industry. Natasha’s needed to decide:

• Should SESAC keep the centralized call center channel or move to a field-based sales force channel model?

• What are the benefits and risks of remaining with the call center channel?

• What are the benefits and risks of moving to a sales force channel model?

Discussion Questions

1. What other channel strategies might be appropriate here besides a direct field sales force channel structure or the call center channel structure?

2. Given the intangible nature of the service provided by a PRO such as SESAC, are there any channel strategies or tactics that might help to tangibilize the service?


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