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20 Questions for New Artists Part 5: Pre-Existing Contracts and Sound Recording Aggregators

May 26, 2019 Leave a comment

Pre-existing Contracts:

Ask your band mates for copies of any music industry contracts the band, or any of you, have previously signed before you formed or joined the band. Whether it be a credit card, management agreement, publishing deal, previous band agreement or a production agreement, it is important to understand the band’s current rights and restrictions. If any of the members are still tied to an exclusive recording agreement from a prior band, or has credit card debt from a prior band, that needs to be cleared up sooner rather than later. Extracting the artist from a prior agreement may not be quick or even possible.

Sound Recording Aggregators:

It is almost required that an independent artist 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 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 shakey 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) instead of a percentage.

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 that 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.

Now let’s pick the Spotify and Apple streaming rates:

 

$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 will make more profit from artists who sell less than artists who sell more than the theoretical break even.

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.  We will go into the benefits of SoundExchange membership in the SoundExchange topic, but highly recommend becoming a SoundExchange member rather than just registering for U.S. collections.

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 (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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20 Questions for New Artists Sidebar: The Economic Reality of Streaming

May 16, 2019 Comments off

Streaming is all the rage.  But–it is cannibalizing higher margin goods, even digital goods.  Because of the industry standard revenue share method of dividing up royalties, all artists essentially get a market share allocation of streaming service revenue based on the number of streams.  Plus, with some exceptions, your royalty rate is dependent on factors you have no control over.  What this means in simple math is that streaming royalties on a per-stream basis will always decline over time (see also Malthusianism).

 

Artists’ dismal streaming royalties on music subscription services are largely based on a simple calculation:  A per-stream payment derived from a share of the service’s revenue prorated by number of streams.  Artists get a portion of a service’s monthly revenue (at least the revenue the service discloses) based on a ratio of your plays to all the plays.  Your plays will always be a lot smaller than the total plays.  (This is essentially what Sharky Laguana referred to as the “Big Pool.”)

Sounds simple, but mixed with the near-payola of Spotify’s playlist culture and Pandora’s “steering” deals, it’s really not.  Negotiating leverage allows big stakeholders to tweak the basic calculation with royalty floors, advances (aka breakage), nonrecoupable payments that help cover accounting costs, and other twists and turns to avoid a pure revenue share.  All of which approximate a per-stream rate on a Rube Goldberg level, by the way, which is one thing these services seem to resist.

Cartoonist Rube Goldberg’s Automatic Back Scratcher

It’s pretty safe to say that all new artists get hosed on streaming royalties.  Setting aside the fact that your distributor will never get all the goodies that the big labels get in their deals, this is because even if a fan listens to your tracks only for a month, well over 90% of that fan’s subscription payment is allocated to artists she didn’t listen to and may not even like.  Of course all these machinations happen behind the scenes.  Fans are not usually not aware that their subscription pays for music they don’t listen to and artists they never heard of or don’t care for.   Plus, it’s virtually impossible for any label, digital distributor or publisher to tell an artist or songwriter what their per-stream rate is or is going to be.

Revenue share deals for big stakeholders have some bells and whistles that leverage can get you, like per-subscriber minimums, conversion goals, top up fees, limits on free trials, cutbacks on “off the top” revenue reductions, and the percentage of revenue in the pool (50%—60%-ish).  Even so,  the basic royalty calculation in a revenue share model is essentially this equation calculated on a monthly basis:

(Net Revenue * [Your Streams/All Streams])

Or ([Net Revenue/All Streams] * Your Streams)

In other words all the money is shared by all the artists.

Sounds fair, right?

Wrong.  First, all artists may be equal, but on streaming services, some are more equal than others.  Regardless of the downside protection like per-subscriber or per-stream minima, the revenue share model has an inherent bias for the most popular getting the most money out of the “Big Pool.”  (This is true without taking into account the unmatched.)

And of course it must be said that the more of those artists are signed to any one label, the bigger that label’s take is of the Big Pool.  So the bigger the label, the more they like streaming.

Conversely, the smaller the label the lower the take.  This is destructive for small labels or independent artists.  That’s why you see some artists complaining bitterly about a royalty rate that doesn’t have a positive integer until you get three or four decimal places to the right.  Why drive fans away from higher margin CDs, vinyl or permanent downloads to a revenue share disaster on streaming?  Because it’s all the rage.

Yet it increasingly seems that we are all stuck with the nonsensical streaming revenue share model with ever-declining per-stream rates.  Why is the rate guaranteed to decline?

If the month-over-month rate of change in revenue (the numerator) is less than the month-over-month rate of change in the total number of streams or sound recordings streamed on the service (the denominator), the per-stream rate will decline over those months.  This is because there will be more recordings in later months sharing a pot of money that hasn’t increased as rapidly as the number of streams.

As the number of recordings released will always increase over time for a service like Spotify that licenses the total output of all major and indie labels (and independent artists), it is likely that the total number of recordings streamed will increase at a rate that exceeds the rate of change of the net revenue to be allocated.  If there are more recordings, it is also likely that there will be more streams.

So streaming royalties in the Big Pool model will likely (and I would say necessarily will) decline over time.  That’s demonstrated by declining royalties documented in The Trichordist’s “Streaming Price Bible” among other evidence.

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There is a move afoot to switch to a “user centric” model of revenue share allocation that rewards the artist with a share of everyone who listens to them.  I have a version of that concept I call the Ethical Pool.  But the simplest approach would be to abandon the revenue share model altogether and negotiate a per-stream royalty–unfortunately, no one seems to be interested in the simplest approach.

For our purposes, just understand that regardless of what you hear about streaming saving the industry, streaming is unlikely to save you.

 

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20 Questions for New Artists Part 3: Insurance/Legal Names/DOB and Nationality

May 8, 2019 Comments off

For the next few weeks, we’re going to post sections from the article “20 Questions for New Artists” by Chris Castle and Amy Mitchell some of which has been posted various places. This doesn’t constitute legal advice, or any intent to form the attorney-client relationship. Chris, Amy and others will also be publishing occasional excerpts from the “Artist Glossary of Industry Terms” as a companion guide.

Insurance

Many bands overlook the importance of insurance, often until it is too late. Even if you don’t overlook it, many artists don’t fully understand why their coverage may be lacking. It is a very good idea for the band to meet with an insurance agent experienced in music industry insurance (we often recommend Doodson for liability insurance and the venerable MusicPro policy for affordable musical instrument insurance)  and get a report from that agent about the coverage the band has (if any) compared to what the agent recommends. In the early days, the band may not have sufficient monies to both get insurance and set up limited liability entities. We always recommend insurance in this case. At a minimum, the band should have commercial insurance on your van and sufficient coverage to protect against loss or damage to the band’s musical instruments (often different policies). If feasible, the band should also seek general entertainer liability insurance, which is an umbrella policy that covers artists above and beyond the typical automobile insurance and other common coverages. (Tip: Watch out for exclusions for thrown objects.)  You should also confirm which insurance programs might be available to you from you PRO membership (such as ASCAP’s insurance programs.)

Legal Names of Members

Each member should provide the managing member  or accountant with the member’s full legal name. This will be necessary for contracts, registration of copyrights, etc. It is a good idea to have a list of each member’s cell phone and email so you can give that to anyone who needs to reach the band, particularly on the road or in case of emergencies. If there are any sidemembers (i.e., “hired hands”), list them as well. This type of information can also help the band’s accountant spot red flags like the employee versus independent contractor issues.

Date of Birth and Nationality

It is important to know early on if any members are not of the age of majority in your stat so that if someone is under age, you will be prepared for any issues in your state relating to age of consent (usually for contracts) and employment law (performing in clubs that serve alcohol, for example). If the band tours out of state, you will need to consider these issues. Often this involves having a parent or guardian available to sign off on any written agreements. Many states have court procedures (particularly California) that can allow minors to have special rights to do business or make contracts, such as “emancipated minor” laws or “judicial ratification” of contracts. Do not assume that these laws apply to minors in your band without talking to an experienced labor lawyer familiar with your state (and any other states or countries you may be touring in). It’s also handy to have each member’s date of birth available for any copyright registration applications you file if required by the U.S. Copyright Office.

 

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20 Questions for New Artists Part 2: Performing Rights Society Affiliation

April 30, 2019 Comments off

[For the next few weeks, we’re going to post updated sections from the article “20 Questions for New Artists” by Chris Castle and Amy Mitchell which has been posted various places.  This doesn’t constitute legal advice, or any intent to form the attorney-client relationship. (If you miss an installment, try searching this blog for “20 Questions for New Artists”.)]

There is a bit of strategy involved with affiliating with a songwriter performing rights society in the United States. PROs license and collect royalties for the performance right in your songs, such as a performance on television or radio or live music venues (including in some cases your own performances of your own songs).  Each writer should affiliate with one of the societies although all members of a band or co-writers on a song don’t need to belong to the same society.  This is why you see some songs with both ASCAP and BMI writers.  We will discuss publishing and affiliating your publishing company with a PRO later.  For now, just realize that your publishing company should be affiliated with the same PRO you are affiliated with as a writer.

All the societies have a creative staff. The decision to affiliate with a particular society should be made after the artist/writer has taken some meetings with the performing rights society and decided if there’s more love coming from one than another.

Most of the time we like to wait until the music is fairly well formed and the band has gelled into a working unit before approaching the societies unless there’s a reason to move more quickly, such as getting a film or TV license, or substantial radio/webcasting play. In more experienced bands, the writers will already have an affiliation, so it is a good idea to know this in advance for purposes of servicing the creative staff with new music, competing for slots on compilations and festival shows, etc.

The major U.S. performing rights societies are the American Society of Composers, Authors and Publishers (http://www.ascap.com/), Broadcast Music, Inc. (http://www.bmi.com/), the Society of European Stage Authors and Composers (http://www.sesac.com/) and Global Music Rights (http://www.globalmusicrights.com).

There are, of course, payment differences among the societies.  For detailed background on PRO payments (and many other subjects) we recommend the book Music, Money and Success by Jeff and Todd Brabec available in paperback.

Copyright 2019 Chris Castle and Amy Mitchell. All Rights Reserved.

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