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20 Questions for New Artists Part 7: Sound Recording Aggregators

November 6, 2019

[From 20 Questions for New Artists by Chris Castle and Amy Mitchell]

An independent artist is practically required to sign up with an aggregator in order to have your works serviced to many online outlets–some aggregators service hundreds of different retailers. (So one example of a pre-existing contract under Question #10 may be a band member’s contract with a sound recording aggregator.)

It is important to remember that without marketing and promotion, a new artist is simply a needle in an even bigger digital haystack. Do not expect the aggregator to do any significant marketing or promotion, much less guarantee it.  This is the primary difference between a traditional distributor and an aggregator, but even traditional distributors may have a shaky ability to do marketing and promotion.

Given that there are so many potential digital outlets, it is important for an artist to be able to decide on a case by case basis whether they want to be included and preserve the right to opt-in to any retailer or to opt-out at any time.

Artists should also be able to terminate the aggregator deal on short notice for any or no reason (e.g., 30-60 days). If you are asked to sign a deal with an indie label or with a major label, these labels may well 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, often as part of an exclusive bundle of rights. There have been instances where digital distributors tried to hold up artists from signing to a label with the previously released recordings–a problem solved by the payment of money. Keep an eye on that issue.

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. (This is similar to a traditional distributor model.) Some aggregators charge a flat fee on some basis (such as a per-retailer basis or an annual fee) instead of a percentage. There may also be initial setup fees.

Each model has its strong and weak points. The percentage model pays the aggregator regardless of whether they are making an effort to stimulate sales (which few of them do in any event). However, under the percentage model the aggregator only makes money if you make money, so the incentives are aligned. The percentage should be lower than the traditional 12-25% 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 much if not all of the financial 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:

[Flat Fee]/[percentage] = Gross Income Required to Equal Aggregator Payment

Gross Income/wholesale price = breakeven units

or, for example, if the flat fee charged is $100 compared to a distribution fee of 10% for the same services, a distribution fee of 10% will equal a flat fee payment of $100 if you earn $1,000 of gross income.

Said another way, the 10% model is better for the artist for the first $1,000 of income

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

How many units would you have to sell in order to reach $1,000 of gross income?

$1,000/$0.70 = 1428 units (rounded down) for a download.

$1,000/$0.00397 = 251,889 Spotify streams to earn back either a $100 flat fee or 10% distribution fee, or $1,000/$0.00783 = 127,714 Apple Music streams (roughly half what it costs on Spotify).

This means at breakeven, you will be indifferent between the two deals.  But it also means that if in reality you sell less than the breakeven numbers, you will be better off under the distribution fee model.  If you sell more, you will be better off under the flat fee model.

From the distributor’s point of view, on flat fee distribution deals they (i.e., distributors) will make more profit from artists who sell less than artists who sell more than the theoretical break even. It’s essentially a perversion of the normal goal of a distributor to encourage sales because a flat fee model distributor profits the most when they simply have a lot of content (rather than “popular” content). The classic quantity over quality.

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 relevant for your own use.

Also, the aggregator need not collect SoundExchange monies and should not be able to list itself as the sound recording copyright owner in order to receive statutory royalties.  The artist need only sign up with SoundExchange in order to collect statutory royalties.  SoundExchange has an entire artist relations staff to help you with registering and becoming a member.  (See Question #2 on SoundExchange).

Be aware that it may not be that obvious from the click through aggregator agreement that the company intends to collect SoundExchange royalties.  Look for words like “non interactive statutory royalties” which means royalties collected by SoundExchange.

It must also be said that no digital aggregator should be able to enter into any agreements on behalf of the artist/copyright owner that allows the aggregator to waive any rights on your behalf (such as litigation rights) or to settle any claims or audits.

Another big problem with flat fee aggregators is that you have no idea what their deals with their accounts may be and you are betting on their ability to both negotiate a favorable deal and also pass those benefits along to you directly including audit recovery (especially since you may not have the right to audit them).

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