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Reader questions: Digital Aggregator Deals–Is the New Boss Worse than the Old Boss?

February 1, 2012

We’ve had a number of questions lately about how artists should look at aggregator deals and how to evaluate them.  You would, of course, evaluate these deals the same way you would any other deal in the first instance–using break even analysis.  This requires a little bit–a very little bit–of high school algebra, but you can do it.

Why Do You Need an “Aggregator”?

Retailers like iTunes have a huge number of contracts that they administer–but they rarely will let you sign up directly as an individual artist.  Most of the time, they want you to sign up through an “aggregator”, a tech industry term that refers to a middleman who services the larger account (iTunes for example) with one deal that provides many independent artists.  This idea of a threshold volume requirement is not new and certainly existed in the music business for a very long time (hence the “one stop”).  It is also costly for artists to try to make separate deals with online retailers or other digital outlets.  So aggregators are middlemen who sit in between the retailer and the independent artist, providing a benefit to each like a typical middleman would.  In fact, you could easily say that an aggregator creates efficiencies like the quintessential middleman in dry goods or any other business.

It is almost required that an independent artist sign up with an aggregator in order to have your works serviced to many online outlets. Realize that mere servicing does not do one thing toward making the artist less of a needle in a bigger haystack online as hardly any aggregator will include any, or any meaningful, marketing and promotion in their basic distribution charge.  I think it’s safe to say that none will, but I try to avoid the categorical.

It is also important to remember that an aggregator makes money by collecting money for as many artists as possible and taking a split of revenue.  It is only good business for the aggregator to charge the highest fee the market will bear–and it is also only good business for you to let the aggregator charge you just enough to keep them incentivized to collect your money.  Realize that the aggregator’s costs are highest at the beginning of the deal and then every time they have human contact with you.  This is why some will charge a “set up fee” that you pay them up front even if they get a percentage of collections after that.  It’s also why it’s usually hard to get someone on the phone (just like it is at Google) because unless you are making over a certain amount of money which will vary by aggregator, one customer service call with you can eliminate the aggregator’s profit for the year.  So don’t expect much human contact from your aggregator.

It’s also important to remember that your deal is just about money.  Your aggregator isn’t advancing you money, they are not paying for your recordings, they do not pay you tour support.  It is not a social movement or a cult.  You are not authorizing the aggregator to act in your name just by signing up with the company.

An aggregator deal is really just about the money and for you it should be about getting the deal that requires you to pay the lowest “real distribution fee” (meaning the lowest percentage of your revenue whether calculated on a percentage or flat fee basis) and the deal that you can get out of the most easily when someone comes along who is willing to do more for you but requires those same rights be assigned to them.

Some deal points of aggregator deals to be concerned about include getting the ironclad ability to opt-in to any retailer or to opt-out at any time, and also to terminate the aggregator deal on short notice for any or no reason (e.g., 30-60 days), preferably at no cost to you.

Another key issue is to make sure that you are collecting your SoundExchange revenues yourself for both the featured artist share and the copyright owner share.  You do not need an aggregator to do this.  It is not unusual for an aggregator to try to collect at least the copyright owner’s share of these monies, but they should cave on the point.  This assumes, of course, that you have registered for SoundExchange WHICH YOU SHOULD DO!

Aggregators who try to convince unsuspecting independent artists who own their own sound recordings that they need to let your aggregator collect your SoundExchange revenue is unfortunately an old problem.  The best way I know of to avoid being in this situation is to register your sound recordings with SoundExchange before you make your aggregator deal.  SoundExchange will typically not change the sound recording owner to your aggregator without the permission of the prior registrant–you in this case–so that should keep your aggregator from incorrectly claiming money they are not entitled to.  Or shouldn’t (and don’t need to) be collecting.

What is the commission base?

You should focus on which revenue streams the aggregator is charging you commission for–the commission base–and which revenue streams you can carve out of the commission base.  They often don’t come right out and say “we are collecting and commissioning webcasting money that you could easily collect yourself particularly since you have to register with SoundExchange as a featured artist anyway and you may as well sign up for both featured artist and sound recording owner at the same time but if you are uninformed we will be happy to take your money.”

Not common to see that paragraph.

You should also be on the alert for any aggregator who has registered themselves as the sound recording copyright owner with SoundExchange.  Since the aggregator is never the sound recording owner (or they better not be), the only reason the aggregator would try to list themselves as such would be to collect your money–and commission it.

Negotiate Your Own Deal

In the case of webcasting monies, the language that you will often see in aggregator deals is a reference to “noninteractive” or “nonsubscription” or “statutory”.  Those words mean, essentially, royalties collected on your behalf by SoundExchange.  As long as those words are preceded by “The aggregator does not collect or commission….” that stuff, then that’s a step in the right direction.  But all too frequently the aggregator agreement is either silent on the issue or allows the aggregator to collect monies already collected for you by SoundExchange.  If the aggregator’s standard deal allows them to commission webcasting royalties collected by SoundExchange tell them they have to carve that out because you don’t need them to collect those monies as SoundExchange is happy to pay you directly both the artist share and the sound recording share, unlike some of the big retailers.  If you are not sure–ask.

We also assume that your aggregator will be willing to negotiate the terms of your distribution agreement as opposed to a one-size-fits-all arrangement which some will and some won’t.  Acquisition costs, i.e., the cost of getting your deal done, is another sunk cost of an aggregator, so like any good middleman they will try to reduce these costs with no-negotiation or click through agreements (sometimes called “adhesion”).  So unlike a record company that may refuse to negotiate certain aspects of their artist agreement, an aggregator often won’t negotiate at all.

You want the ones who will negotiate with you if you can get them.  And even if they won’t, by registering your sound recordings with SoundExchange in your name before you go to the aggregator, that is pretty good protection against “accidental” collecting by your aggregator.

How can you tell if your aggregator is playing this game?  Go to the SoundExchange “PLAYS” database and search for your aggregator’s name in the sound recording owner field.  PLAYS is a public facing database that SoundExchange maintains that allows you to search for sound recordings and see who they are registered to in the SoundExchange accounting system.  (For more information on SoundExchange you can read my interview with SoundExchange President Mike Huppe on the Huffington Post, part 1 and part 2, also in a podcast available at Arts+Labs Innovation Central.)

Getting Out of the Aggregator Deal

If you are asked to sign a deal with an indie label or with a major label, these labels will require that you give them exclusive  distribution rights–including the digital rights you have already granted to the aggregator. That means that you need to have the ability to terminate your aggregator deal and transfer digital distribution to the new label. There have been instances where digital distributors tried to hold up artists from signing to bigger situations because the aggregator tries to hold the artist to the aggregator deal and block the artist getting into a more desirable label. As digital is rapidly becoming the primary sales channel, asking a label to accept a deal with no digital rights is like asking them to sign an artist they can only license for film and TV.

Commission Rates: Percentage vs. Subscription

How the aggregator is compensated is also an issue of concern. In the traditional model, the aggregator took a percentage of sales as their compensation. This meant that the aggregator only made money if the artist made money. Some aggregators charge a flat fee on some basis (such as a per-retailer basis) instead of a percentage, or an annual flat fee.  This makes the aggregator deal more like a subscription model where your credit card is banged every year for a magazine subscription.

Each model has its strong and weak points. The percentage model pays the aggregator a percentage of your gross revenue the aggregator collects regardless of whether they are making an effort to stimulate sales (which few of them do in any event regardless of how they are compensated). However, under the percentage model the aggregator only makes money if you make money, so at least the incentives are aligned. The percentage should be low (15% or so is fairly typical) to take into account that the aggregator  has lower incremental costs over time of maintaining content in their catalog.

The flat fee model has the artist pay the aggregator a fee for distribution instead of paying the distributor a percentage. While this is attractive from the point of view that the artist knows what their distribution costs will be up front, it also transfers all of the risk of distribution to the artist. In order to determine which is the better model, the artist should compare their most favorable percentage based offer to the flat fee model and see what the breakeven point will be. Try using a formula like this and solve for “X”:

[Flat Fee]/[percentage] = Gross Income

Gross Income/wholesale price = breakeven units

or, for example if the flat fee is $100 and the comparable distribution fee deal is 10% (which would be very low but this is an illustration):

$100/.10 = $1,000 (Gross Income)

$1,000/$0.70 = 1428 units (rounded down)

In the example, a $100 flat distribution fee is equivalent to a 10% distribution fee model if you sell 1,428 units at a wholesale price of $0.70 (a typical wholesale price per track for permanent downloads). That means that if you sell exactly 1,428 units you will be indifferent between the two models. It also means if you sell fewer than 1,428 units, you will be better off under the percentage model. If you sell more than 1,428 units you will be better off under the flat fee model.  (You could argue that the units would be 10% higher to get to a net number to the artist, but we are trying to keep it simple.  That difference would be another 159 units [(1428/.90)-1428], rounded.)

This example is only for one accounting period and only uses one revenue stream–permanent downloads.  It is more likely that you will see blended revenue streams, but we factor out limited downloads and streaming because permanent downloads are the overwhelmingly dominant revenue stream for most artists.  That may change over time or be different for you.  Also, as you extend the distribution costs and revenues over longer periods of time (with additional flat fee payments per year under the subscription distribution model), your results may vary.

To take another example of the flat fee model, what would the flat fee equate to under the percentage model at 500 units at a wholesale price of $0.70 (a typical wholesale price for permanent downloads)?

[Flat Fee]/[Gross Income] = Distribution Fee as a percentage

$100/[(500) x ($0.70)] = 28.6%

Under these assumptions, a 28.6% distribution fee for an accounting period would be in the astronomical zone for a digital aggregator–who should be getting around 15%.  It would even be on the high side for a major label distributor who was also giving signficant (and expensive) marketing, PR, sales and radio promotion support.

But these are just assumptions to illustrate the issues.  In any of these examples, you will need to use your own projections on sales, wholesale price and configurations in order to get a projection that is personalized for you.

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