Rajat Kakar, Managing Director - Universal Music Group India, is a passionate, straight-talking leader who has been in the music business for the last 14 years, starting with Sony Music when it began operations in India in 1996. As MD UMG India, Kakar has been transforming UMG from a physical-media- and Bollywood-oriented outfit to an artiste-based 360-degree entertainment company with strategic alliances with production houses and telecom giants, and income streams from digital, live business and merchandising.

In conversation with Pavan R Chawla, Director Content & CSO - Indiantelevision Group, and Editor -  RadioAndMusic.com, Kakar shares, among other things, why he considers the Indian Music Industry a Rs 10000-crore business, why he is furious about the 2% royalties order, what he expects of the government on the piracy issue and the amendments to the Copyright Act, how he expects the Music business to pan out after the arrival of 3G in India, and what he believes both Music and Radio should do to work together, and how the one can help the other. Excerpts.

What according to you is the size of Indian music industry?

Earlier, the music industry was looking at purely physical sales; now, it's moved to include the vast digital space. We are looking at an approximate size of Rs 1000 crore. But I think there are various ways of measuring that number – in the digital space,  we take what is coming to us at a much lower price, where as in the physical,  we are looking at retail prices. If you take digital at retail prices, we are looking at a Rs 5000-crore industry.

However, if you take into account the ancillary businesses like radio, television and live gigs, the pie increases further. The music industry impacts revenues that can add up to Rs 10,000 crore. If we give content to television and radio in a way affects shows, public performances and other business, all of which our content is helping to monetize, it is no longer sensible to restrict our scope to the digital or the physical business. Because we are in the entire gamut of wherever music makes an impact.

Industry estimates say that legit music business in India was worth INR 7.5 billion in 2009 and is poised to grow to INR 26.5 billion by 2014 at a CAGR of 28.6 percent. What is your view of the projected growth? Will the music industry achieve these figures?

These are numbers that are purely addressing physical and digital and to that extent the emphasis is on the fact that digital will really come of age.

With 3G around the corner, new music services will happen. We are confident that this target will be achieved. In fact, the numbers have been iterated after discussion with the music industry.

Huge numbers will happen not immediately after the 3G services are launched, but only after services stabilize. After that newer services will come up in digital that one cannot even fathom right now -- from subscription services to user-generated content. Hence, as of now, the only certain thing is that physical is declining year on year and therefore newer models are being looked at.

Remember, when 3G happened in the western markets they were already very strong broadband-enabled internet markets where internet drove a very sizeable chunk of the digital market. In India we are not expecting the broadband scenario to change in 12 to 24 months. Hence the 600 million-plus subscribers in India will have their first true broadband experience only with 3G.

And that will be a double-edged sword with greater piracy possibilities…

Internationally, when broadband arrived, it too was a double-edged sword. On the one hand it gave a huge impetus to piracy. But it also provided legal models which were available even though they account for just 5 per cent. Still, that gave companies an opportunity to interact with consumers directly.

3G in a telecom scenario is still a little more secured than an unsecured internet where they can navigate and get to peer-to-peer sites. So we feel that what happened in broadband elsewhere will probably be better in terms of legit music consumption in India. It depends on how the telcos roll it out.

Can you put a number on the likely revenues from the arrival of 3G?

I can't put a number because I am not developing the pipe. Principally, from 3G, in its first 12 months, we are expecting at least 25 per cent of today's telco VAS revenues.

So your industry stacks up to…?

The total when you look at the music industry from a revenue perspective on only physical and original is around Rs 1000 crore. Physical is still a sizable part today. Physical music sells more in international because for an international product, with all the excellent packaging and add-ons offered, there is still a pride of ownership, unlike for a Hindi album. At Universal, our revenues are about 65 per cent from physical and 35 per cent from digital sales.

Genre wise, 50 per cent of our revenues are from international and 50 per cent from our domestic repertoire which consists of albums since 1970, which is principally Bollywood from our catalogues of and Polydor, Music India and Polygram.

We are also very active in the regional markets. We are the number two company in Punjab; we are entering into Bengal and have also done some good work in Maharashtra. The new releases in Bollywood are a very insignificant part for us.

Why the conscious shift from Bollywood to non-Bollywood?

It is basically the economics, which are so skewed towards not doing Bollywood. Earlier in Bollywood, volume was the way to go; today that has shrunk immensely. The biggest seller in those days was 10 million units; today, it is down to 100,000  units.

See, the way the music industry is moving worldwide is that one has to monetize rights from a 360 degrees perspective. You cannot say we'll just own the physical rights, give the video rights to someone else, concert rights to somebody else. Everything has to be owned and monetized together. Bollywood doesn't lend itself to 360 degree ownership. There, you own only the sound master, you don't own the artiste rights or merchandising rights. Universal has become largest player in the merchandising space by buying out Bravado. We want to be only in businesses that give us the 360-degree potential.

Bollywood is still the biggest chunk of music industry in India, but it doesn't make economic sense for a company to just dabble in a few movies each year  Either you do it with the full-scale efforts that a couple of other companies are doing, are there's no point touching it.

Other music labels in India are going down South, which you don't seem to be interested in. Why?

We are not bothered about what the others are doing. As I just said, it's about only doing projects where we have 360-degree rights. Unfortunately, the South is also dominated by cinema, which again has the same issues as Bollywood. We are only going into markets which are artiste-driven. Punjab is a huge artiste-driven market with large artiste loyalty. In fact, it is the only place where a large multinational cola is endorsed by a music superstar and not an actor! Even in Bengal there is a strong culture of performance; similarly in Maharashtra, there is folk-based culture. So we are looking into markets where we have 360-degree rights potential.

This is how we will go. We are treating India like Europe. There are multiple countries within the country, and we will address each one of those markets separately, make ourselves market leaders in each market, and look at the national presence as it pans out.

Coming to music royalties… the music industry has been universally unhappy about the 2% order…

And why not? You are linking me to someone else's (radio's) professionalism, which is unfair. Most of these radio companies are part of large media networks, so cross-subsidizing can happen very easily, and I won't even get to know about it. I don't want to be linked to others' ability – or otherwise -- to build a successful business. If a station cannot get business for itself, why should I be crucified for that?

I would have been happy had it been a needle hour rate. If needle hour was fixed at least city-wise too, I would know what I was getting. Now, if a radio station goofs up, their inefficiency will be partly borne by the music industry. If a station is not getting anything, then my revenue is also zero, though it is playing my music all the time! Why should I subsidize the Radio business?  If they say radio is in infancy and hence needs help, then we (the Music industry) were on a virtual death-bed five years ago, and came out of it on our own business merits. Even now the Music industry faces the daunting challenges of falling physical sales and rampant piracy.

The order says that the 2% figure came about in view of the social upliftment of people that Radio is doing, whereas the heads of radio stations say they are not in the business of charity!

Here, 2% is all there is to it. Internationally,  it is much higher – 4 to 5% for the publisher and an equivalent amount for the underlying IPR to the creators and performers. And that too in markets that are thriving and mature. You also have to take into consideration the number of stations abroad in mature markets. The revenues from 4 to 8 percent from a mature market with 5000 stations are much higher than those from 2 percent from a small market like India. To just pull out a number from the hat is unfair!

The industry needs to realize that music is raw material, and hence there will be a price for it. We could have negotiated the pricing in Phase III, and in Class-2 and  3 towns  But to cut everything into a reservation of sorts makes no sense. I do not want to be connected with profitability, the efficiency or inefficiency of a radio station. If I am a label buying the best of music, I don't want to be linked to the revenues of a station if it is not being run professionally.

What would be a fair number for both the parties?

Let both sides put everything on the table. We are ready to talk about the pricing for small-town stations, but then you also have to keep in mind that radio stations in the Mumbais and Delhis need to pay higher. I am sure we are all suitably qualified and can come out with common economics that work out for various stations. But to say that you will get something which does not compensate you for the costs of acquiring the best music is unfair.

So how can Music and Radio work together?

Very simply, you have to treat each other as equals and with respect; not as victor and vanquished.

We have to see ourselves as promoting the same product, which is music; then, there is so much we can do together. Like promoting different genres of music, new talent, breaking new talent. We are only playing current film hits in the present scenario,  and therefore not promoting the real potential of radio, which is its fantastic ability to break good new music. Internationally, talent is showcased first on radio.

That's also because internationally, film soundtracks are a small part of the music business -- it's the bands, the individuals and their albums that form the bulk of the music labels' business. To come to my next question, what you said above is what Radio can do to help Music. What do you think Music can do to help Radio?

Music uses television for showcasing new ads, and that is an expensive medium because you have to first get into producing or sourcing videos and then the much bigger advertising costs TV entails. But if Radio helps to break new talent and music, it can give me a really cost-effective opportunity to showcase a far larger number and a far more diverse group of artistes. It would also mean we divert those advertising spends towards Radio which today are being taken away by television, which is a far more expensive and a fragmented medium. And Radio, being an audio-only medium,  would give me a far more focused TG of music lovers who come to it only for the music.

What is your view on the proposed Copyright Act amendments?

Whatever be the changes, the industry will adapt to it because that's how the business works. The main thing is that it kind of does not see the intricacies of the Indian music space of which Bollywood music is a sizeable chunk. It has applied the western model to Indian context specifically for Bollywood music, to which a little more thought should have been given.

The Act also makes music copyright unassignable, which is the biggest worry. If you make it unassignable, there is no music business!  You have to assign rights to the labels for them to be able to exploit them  That is where we are a little concerned.

Also, the Act is silent about what happens to all the copyright acquired before the Act comes into play. That is a significant period about which the Music Industry is concerned. What happens to the exploitation of rights acquired in the past that can be exploited in the future? There should be more clarity on this.

It must adapt to the Indian context. See, worldwide, film soundtrack is a small part of the overall music business which is essentially artist-driven; here, it is a significant chunk. If you make it unassignable, then the whole thing comes tumbling down. If it means that today I am buying something which tomorrow the seller too will control, then I am not interested in acquiring it in the first place. There is a price that I am paying; I am putting a fat cheque on the table, and even after that if I have a doubt on whether or not it is mine indeed, then that is not acceptable.

What is Universal Music doing to overcome piracy?

We are battling it at two levels: One, to combat piracy itself, and the other, to induce listeners to go legit.

At a macro level, we are contributing a share of our revenues to the industry body IMI, which in turn is doing things like conducting raids and e-cyber monitoring. So year on year, we have invested to make sure that the industry keeps piracy under check.

It is strange that the government is not doing enough to curb the piracy that is happening on a medium like the internet, which is completely traceable, and where the responsibility can be assigned…

Yes. You can trace exactly the source of the pirated material. But pirates are really smart; if you serve notice on the guy who has the server, he just moves it to some other location. So we are beseeching the government to ensure that in the new cyber law, the responsibility lies with the pipes that is the ISPs, so that if a subscriber is found to be downloading from a pirate site, their connection must be snapped. This is being debated in western markets. In South Korea the physical sales have increased by 40 per cent after the law has come into force.

We need to apply the three-strike rule here as well, under which, the first time you warn the user and serve him a notice, the second time you cut the connection temporarily, and the third time you snap off the connection permanently  We are making requests to the government to implement the law which will be a huge boost for IPR protection in the country.

As I said, we also give the listeners a choice to go legit. We need to bring back the pride of ownership by providing them some great packages, bonus tracks, extra trivia. We have to find ways to bring them back to buy a CD. From the net you can only download tracks, not the emotions behind them  We are the only company that puts so much into packaging, bonus elements, maybe a link to a track online, discography, biographies you couldn't find anywhere else…  hence it entices the audience to buy. We need to provide them with conscious value additions that will make a big difference.

What percentage of your revenues do you invest in marketing? What are your preferred modes of reaching your TGs?

We invest a significant amount– close to 40% -- of our revenues into marketing-related activities.

On the mediums we prefer, well… for international music, frankly, in the case of 90 per cent of the albums we put out, the artistes don't even come to India. We popularize them mainly through television, which is the biggest medium.

Secondly, because only a very few stations play an international music nowadays, radio airplay does help us to whatever extent it happens.

Third but most important is the internet and social media. There is a very good fit between the international music and internet. Users use it to the hilt.

For our Indian catalogue, we need television advertising. The compilations are tailored to suit occasions since it is the same old songs.

For pop in the regional space it is very interesting, since you have artiste access. You do gigs, press conferences, clubs and concerts – actually going the whole nine yards in terms of how a music artiste should really be marketed. There you have very enthusiastic media support.

Tell us about your deal with Bravado

Two years ago Universal Music bought out the biggest merchandising company Bravado, which is home to artistes like Rolling Stones, Michael Jackson, Metallica, Justin Bieber, Lady Gaga, and to have a few. It has almost 60 to 65 % of the market share. That, for us, was a very significant entry, because when we do our artiste deal we take on merchandise rights also, which we exploit under Bravado. We have kept it as a separate company, but we exploit it fully in an integrated manner and it is a significant contributor to revenues.

This is a model we would like to exploit in India too. Though merchandising is still a nascent business in India, we still keep the rights so we can exploit them at a suitable time. Today the marketing money that is put in to provide minimum exposure for an artiste is not commensurate with just physical and digital sales, so we need to have other broader rights.

Is Universal planning to get into production like other labels?

Our DNA is to be a music business. We will do everything that keeps us as a music company yet diversifying into other income streams around music. Our music creation process will always to be centric to all our properties revenue.

What are the future plans of Universal?

We plan to be a provider of music services. In the past all music labels have been ala carte music companies. We want to be a company that sells music services. If you have a marketing need and you require music for it, contact us. From brands to telecom operators -- anybody who wants music solutions can get them from us.