20 Questions for New Artists: Pre-existing Contracts and Aggregators

We have posted sections from the article “20 Questions for New Artists” by Chris Castle and Amy Mitchell some of which has been posted various places. If you are interested in getting a free copy of the article, it’s available at the Semaphore Music podcast page on iTunes under “Article: Twenty Questions for New Artists”. Be sure to check back from time to time for any updates or changes in the law or business practices.

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.

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 over 300 different retailers.

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.

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 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 based on a prior grant of digital rights. As digital becomes the primary means of sales, this issue is front and center.

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 low (10% or so) 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:

[Flat Fee]/[percentage] = Gross Income

Gross Income/wholesale price = breakeven units

or, for example:

$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 for permanent downloads). That means that at 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.

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%

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 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.

See Also: Band Administrator/Split Sheets

See Also: Social Networks and Domain Names/Trademarking the Band Name

See Also: Performing Rights Society Affiliations

See Also: Bank Accounts/Tax Returns/Accountants

See Also: Have you Registered with SoundExchange?

Copyright 2009 Chris Castle and Amy Mitchell. All Rights Reserved.

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