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20 Questions for New Artists Part 7: Sound Recording Aggregators

November 6, 2019 Comments off

[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).

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

May 26, 2019 Comments off

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).

 

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

February 1, 2012 Comments off

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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