Posts Tagged soundexchange
By Chris Castle
This post is a running version of the individual posts on Record Producer Agreements from the MusicTechPolicy blog. As we post a few single topics on MTP we will add to this post so eventually you will have the complete article all in one place. You may link to this post, but do not copy it.
Your record producer is probably the most important member of your creative team. Good record producers understand the physics of sound, but also understand the dynamic of performance and the craft of songwriting.
Your record producer is in many ways a member of your band, and is essentially the creative partner in your recordings. A good producer helps you understand when you are “ready” to go into the studio both in terms of your own performance as a musician or vocalist and whether your creative direction and songs are “ready”—meaning you are about to spend a fair amount of money and the producer is about to spend a fair amount of time capturing your performance in a recording. For your own sake financially as well as creatively, there’s not much point in taking that step unless you have a good idea of what your plan is and how you are going to accomplish your goals. Your producer helps you get there.
For further reading, we recommend the websites of Luke Ebbin and Rick Goetz to get more background on the creative side of producers, and we also recommend an interview with mastering great Bob Ludwig that will get you started on the physics of recording. Mix Magazine, Tape Op and Prosound Web are also good resources.
Like anyone else on your team, you need to engage the producer and this article will focus on the major deal points in record producer agreements from the artist’s perspective. Some math will be required.
1. Scope of Engagement: You generally engage a producer for one “album” project at a time. “Album” is a concept that is undergoing some renovation, but usually you would expect to engage a producer to record about 11-15 songs. Sometimes you will have the budget to “over cut” meaning that you will record more songs than you really need to complete a full-length CD, and you will put those unused tracks in “the vault”, meaning that you will keep them for bonus material of various kinds where you might want to add some value for your fans. This also requires that you have the luxury of extra good songs, and depending on how prolific you are, you may find that “extra” songs worth recording are a luxury.
2. Preproduction and Post Production: You may want to engage the producer to work with you at rehearsal while you prepare your album. Depending on the stature of the producer, this may or may not be feasible—the busier the producer is, the less likely they are to want to spend weeks in preproduction, unless of course you are able to pay them well. Every producer expects to spend at least a few days with the artist before they go into the studio and this is generally time well spent if for no other reason than you want to find out that the bass drum pedal squeaks or the favorite guitar needs refretting before you go into the studio.
After the record is completed (including mixes), you probably will want the producer to be available to accompany you to the mastering studio and perhaps do a couple of other mixes or redos depending on the genre.
3. Recording Budget and Recording Costs: You should always prepare a recording budget and have a good handle on what your record is costing as you make it. The producer may have his own studio and lots of plugins or outboard gear, as well as a “protégé” who is often an engineer. The producer or the commercial studio may also have keyboards, special or rare microphones, food services, messengers to look more like tape ops, and other goodies. Make sure you know before you start recording how much of this you are being charged separately for, especially rental fees. You would expect to pay for hard drives, but you might not expect to pay a rental fee for plugins or outboard gear. The recording budget becomes part of your producer agreement.
4. Recording Fund or Recording Budget and Advance: Producers have “fixed” and “contingent” compensation. “Fixed” compensation refers to an advance against royalties, and “contingent compensation” is a royalty (or more accurately, a share of your royalties) on sales or license fees of the recordings they produce. It’s called “fixed” because the advance is a fixed amount you pay “up front”, and it’s called “contingent” because the royalty is contingent on sales or license fees. Remember, an “advance” is just another word for a pre-payment of future royalties.
There are generally two ways a producer receives cash compensation, remembering that the recording budget (exclusive of the producer advance) is the payment of out of pocket costs and is not typically compensatory to the producer. (When you use the producer’s own studio this becomes a little blurred, but we will discuss this further below.)
The first way is that you decide on a budget with the producer and pay that money separately. This exposes you to the dreaded overbudget payments, but if you have good controls over the costs, you may decide to go this route. Some record labels like this approach. In addition to the budget for “out of pocket” recording costs, you will also pay the producer an advance.
Another way to get to the same place with less risk to you is the “recording fund.” This is a “keep the change” arrangement with the producer where you say no matter what happens, the most I am paying for my record is $X, and if the record costs less than $X, the producer can “keep the change.” You should still have a budget in this scenario, but it is more of a guideline.
So let’s say that you have a recording budget of $30,000. You might offer the producer a recording fund of $50,000. If the record really did cost $30,000, then there would be $20,000 left over. The producer would then “keep the change” and put $20,000 in his pocket as his fixed compensation.
The advantage to the recording fund is that you know that the record—probably—is not going to cost you more than $50,000. This happy result is most likely to occur if:
–you have budgeted well for the recording costs and you haven’t forced the producer to accept an unrealistically low recording fund so that the producer has too low a margin;
–the producer is using his own studio and staff;
–there is little likelihood of “trainwreck events” like illness, members quitting, unprofessional behavior, or the producer deciding to take a more lucrative project and make you wait;
–you win the inevitable arguments about who is responsible for unforeseen overbudget amounts.
5. Recoupable vs. Nonrecoupable Payments: Before the producer royalty is payable, you have to agree with the producer what payments are recoupable and from where. (For a primer on recoupability, see the Artist Glossary.) Remember—if it’s an advance, it’s recoupable from somebody’s money, and one way or another, if you’re the artist and there’s an advance, it’s usually recoupable from yours. If you don’t like that, there’s still time to get out and try another line of work.
In the case of producer royalties, there’s usually only two kinds of payments that get recouped: advances and also what I call the “bad boy payments”, such as unexcused overbudget, indemnity claims (like for uncleared samples or outright lying) or union penalties for late or no filing of session reports.
So leaving aside bad boy payments, the producer royalty will only be payable after the producer has earned enough money to recoup their advance. But when do you start counting the producer royalty to apply against the advance? This will be discussed in the producer royalty section below, but remember I said math was required.
In the recording budget plus advance, it’s easy to tell what the advance is because you will say what it is in the contract. If you are paying a recording fund, a “keep the change” deal, it’s not so obvious.
In the example we used of the $50,000 recording fund, we anticipated that the recording budget (that you still prepare regardless of whether it’s a recording fund) will be $30,000 leaving the producer with $20,000 “in pocket.” So for purposes of recouping the producer advance, you will agree with the producer that of the $50,000, there will be a “deemed” advance of $20,000. If the producer can deliver a $30,000 record for $25,000, then the actual “in pocket” payment to the producer is $25,000 and the producer’s deemed advance is only $20,000. This is good for the producer. For a number of reasons, that doesn’t usually happen. So the more accurate you are with your recording budget the more likely you are to have the “deemed” advance be fair or slightly overstated.
The reciprocal of the “deemed” advance is the “deemed” recording budget—the other part of the recording fund. That will be necessary to calculate when the producer royalty is payable.
6. Producer Royalty Rates, All-In Royalty Rates and Net Artist Rates:
In the section we will distinguish the producer royalty rate from the artist royalty rate. Prior to the mid 1970s or so, record companies typically engaged the producer or the producer worked as an employee of the record company (also called “staff producers”). By 1980 or so, there were very few staff producers. While you run into the occasional staff producer in the contemporary music business, they are increasingly rare, and producers are hired by the artist.
Producers became “independent” meaning that they were not on the record company payroll and were hired on a project basis by the artist. When producers worked for the record company, the label paid the producer both fixed and contingent compensation. The label would also pay the artist a royalty, but the two royalty rates were not combined. This meant that the producer royalty and the artist royalty were both typically lower than those rates have been for a while.
However, just like the “recording fund” is an “all in” concept, the artist royalty is also an “all in” rate, meaning that it is inclusive of the producer royalty, and that the record company limits its royalty exposure by capping the artist royalty rate.
For example, if the “all in” artist royalty rate is 15% and the producer royalty rate is 4%, the “net artist rate” is 11%. If you look at the artist’s recording agreement, you won’t see a reference to the “net artist rate” as a general rule, only a reference to the “all in” royalty rate.
Remember that royalty rates apply to what could be called royalty base price sales, meaning a sale for which the record company designates a wholesale price, like a compact disc or a digital download. (Whether a digital download has a wholesale price is controversial, but that controversy is beyond the scope of this article.) If a recording is licensed in a motion picture, that income is not derived from a royalty base price sale—at least not for our purposes–because the license fee is negotiated for a motion picture master use license. In these instances, the producer receives a percentage of the artist’s share of income for the license fee determined by the proportionate share of the producer royalty rate to the all-in artist royalty rate.
In our example of a producer royalty of 4% and an all-in artist royalty of 15%, the producer’s share of license fees would be 4/15ths of the artist’s share of the fee, or 26-2/3%.
So another way of looking at the producer royalty is that it is based on a percentage of the artist’s share of income, in this case 26-2/3%. You could just as easily say that the producer always gets that share of the artist’s income from recordings (as opposed to publishing, merchandising or touring), but by convention and industry practice we do it the other way around and say that the producer gets a producer royalty rate of 4%, the all-in rate is 15% and the net artist rate is 11%.
7. Recoupment to Record One
Producer royalties are typically payable after the recording costs for the tracks that the producer works on are recouped, because the recording costs are an advance by the record company to the artist, or the artist has raised the money some other way such as through the artist’s own funds. Let’s stay with the record company example because most producer agreements are based on that standard. (We’ll go over some new ideas below, but you should know what the standard deal is.)
Producers want to be paid on every record sold. Fair enough, they did the work, they should get paid. But—if the producer is paid out of the artist’s royalties, and the recording costs are also recouped from the artist royalties, then how do you allocate the artist royalty income to recoupment of costs and pay the producer?
There are probably several ways that this could have been done, but the way that the industry typically does it is to create an artificial recoupment rate net of producer royalty obligations until the recording costs are recouped, and then calculate the producer’s royalty retroactively to the first record sold (or “record one”). So you hear this catechism: The producer royalty is payable retroactively to record one at the net artist rate, subject to recoupment of the producer advance.
So what does this really mean? (This is where the math comes in.)
Let’s say that each royalty point is equal to 10¢ and use our 4% producer royalty rate, 15% all-in artist royalty rate and 11% net artist rate example. We will also assume this is album-only sales at one price point for purposes of illustration.
All-in artist rate = $1.50 (15 points at 10¢ a point)
Net artist rate = $1.10
Producer rate = $0.40
Recording Costs = $30,000
Producer Advance = $20,000
Units to recoup recording costs at net artist rate: $30,000/$1.10 = 27,273 units
The album will recoup $30,000 of recording costs at 27,273 units. So far, the producer has not been paid a royalty, but his royalty is accruing and will only become payable, if ever, at 27,273 units. If the record sells fewer units and is cut out and is not licensed, i.e., never earns another penny, the producer will never be paid a royalty.
Because the producer is paid retroactively to record one, the producer will then be due a royalty payment on 27,273 units, or $10,909.20. Because the producer has already received $20,000 as a deemed advance in our example, the producer’s account has a negative balance of $20,000. When the producer is credited with $10,909.20, the artist will then owe the producer the difference, or $9,090.80.
8. Where Do Producer Royalties Come From?
You probably noticed that in a typical record company agreement, it is highly likely that the artist royalty account will still be unrecouped when the record producer is payable even if the recoupment point is artificially delayed by recoupment at the net artist rate (as opposed to the all-in rate). It is important for the artist to have an understanding with the label that they will pay the producer royalty even if the artist account is unrecouped overall.
9. SoundExchange Royalties
Although producers are not entitled to a share of the featured artist royalty for the public performance of sound recordings paid to artists by SoundExchange ( in the US), it has become fairly customary for producers to request a share of performance royalties for their sound recordings. While the producer may not be entitled to a share of these royalties under the Copyright Act, the law may be changed in the future. So in our example, the producer would request 26-2/3% of the featured artist share of performance royalties, but the language should be drafted as the lesser of any statutory payment that producers may become entitled to in the future or 26-2/3%. This payment is given effect by the artist sending a letter of direction to SoundExchange which SoundExchange typically will accept. No one can know how a statutory share of performance royalties would be given effect in the future, but it would probably be administered by SoundExchange the same way that the featured artist share of royalties is currently administered.
It is important to understand that the producer royalty we have discussed is intended to be prorated based on the number of recordings that are produced by a particular producer on a record or a “bundle”. So if the producer gets a 4% royalty rate, that rate is prorated based on the number of tracks. In the example we gave, the producer produced 12 out of 12 recordings on an album bundle. If the producer produced 6 out of 12, then the producer would get a 4% royalty rate, but the rate as applied to the bundle would be prorated by multiplying the royalty rate by a fraction, the numerator of which would be the number of recordings produced by the particular producer (or 6 in this example) and the denominator of which would be the total number of recordings on the record including those tracks (or 12 in this case). So the producer royalty would be prorated by 6/12 or .50.
If you engaged multiple producers for your record, each producer may have a different rate, but all would be prorated. So if there were 3 producers in our example and one produced 4 tracks for a 3% producer royalty, one produced 2 tracks for a 5% royalty, and one produced 6 tracks for a 4% royalty, then the math would look like this assuming each royalty point was worth 10¢:
Producer Rate Tracks Proration Royalty Per Album
1 3% 4 4/12 10¢
2 5% 2 2/12 8-1/3¢
3 4% 6 6/12 20¢
So instead of a total producer royalty rate of 40¢, you now have a total producer royalty rate of 38-1/3¢. There is no magic to the tracks, rates and prorations that we have chosen, as you can see if you play around with the numbers, the total producer royalty rate (or “royalty load” as it is sometimes called) can be higher or lower.
11. Subsequent Producer or Mixer Royalties
If the producer is fired or if a subsequent producer is brought in for another reason, you may end up paying two different producers for the same recording. This is also potentially true of mixers who receive a royalty for mixing a track that the producer is also getting a royalty for.
In this situation (a common one for mixers and a less common one for subsequent producers), the artist will want to reduce the producer royalty by whatever royalty that the artist has to pay the subsequent producer or mixer. The producer will not want this, so there will be tension on the issue. Very often the compromise is that the producer royalty can be reduced by a fixed amount, usually 50%.
So if a producer is getting a 4% royalty and a mixer is getting a 1% royalty, then the producer can be reduced by the mixer’s royalty. That means the artist still only has to pay a 4% royalty, not a 5% royalty.
If the producer is fired, however, the producer may expect to forfeit his royalty altogether, but if any of his work is used (often the case unless the entire track is scrapped), the producer may want his 50% rate. This is negotiable.
For very high end producers, no reduction is acceptable, so expect a fight.
12. Accounting and Letters of Direction
Producers (especially for major or indie label releases) will not want to rely on the artist for payment. But because of the semi-fiction that the producer is hired by the artist, the agreement technically does not bind the label to pay the producer directly. So the producer will try to come as closely as possible to forcing the artist to make the label pay them directly (which the artist usually would love to do), but as the artist cannot usually force the label to do anything, this effort usually begins and ends with the artist agreeing to ask/really try hard to ask/try exceedingly hard to ask—but still just ask—the label to do what it does anyway according to the terms they do anyway and are going to do anyway regardless of what the artist has committed to in the producer agreement. And the producer will not sue for a breach of that provision.
However, the artist still has to go on the hook for accounting and paying the producer directly. This is truly a pain for the average artist to accomplish, but it is part of the cost of doing business. We will come back to this issue in the section on independent artists hiring producers. These provisions should be drafted carefully so that the artist is only obligated to pay if the artist gets paid (see above regarding paying the producer royalty regardless of whether the artist is recouped), provides that the artist can rely 100% on the statements from the labels, and if audited all the artist has to do is provide the producer’s royalty auditor with copies of the statements to the artist.
If the artist is directly accounting to the producer, the artist should be careful that the artist only has to account to the producer a reasonable period of time after the artist receives statements and payments from the record company (or distributor). “A reasonable period of time” is usually 45 to 90 days. This may seem like a long time, but unless the artist has a business manager or book keeper who can spit out producer statements, it’s actually not all that long. The producer will complain that if the artist gets paid semiannually 90 days after the close of the period and then has another 90 days to account and pay the producer for a total of six months after the close of the period, the answer is that is why they have letters of direction.
It is rare for a producer to audit an artist, largely because an audit is viewed as something of a hostile act and the artist wants to preserve the relationship with the producer and vice versa. The more typical result is that if the artist audits the label, the producer will participate prorata in the recovery, if any, payable for the producer’s masters.
There is a lot of energy expended by lawyers negotiating these clauses and it’s really not worth it. If two lawyers spend a lot of time negotiating these clauses, they will probably bill their clients more than will ever be made as a result of their work. Obviously, for superstar artists and producers this is not the case, but even then it is rare for a producer to actually audit an artist. For those contracts, it is my view that it is more important for the artist to know that the artist can lay off part of the cost of the audit onto the producer’s recovery, and for the producer to be sure that if he produced the only hit the artist ever had that he’s not in effect bearing the cost of auditing 5 LPs when there was only one that made any money. It’s also well to remember that the producer’s royalties (and so audit recovery) are not cross-collateralized across albums even if the producer produces several for the same artist. From the producer’s point of view, she does not want to create a de facto cross-collateralization through the audit clause.
Artists who are signed to record companies can promise producers any credits they want as long as the credit provision says something like “subject to the record company’s producer credit policies”. Realistically, the producer can expect credit in “label copy” which usually means the liner notes on a physical disc, advertising of certain kinds such as print ads of a minimum size (such as a quarter page), Billboard front cover “strip ads”, and sometimes the “label” on a physical carrier.
With the advent of digital distribution and online advertising, this starts to get more complex. Producers are typically not credited on iTunes, Spotify or other digital retailers, even on the “Get Info” panel. I frankly find this insulting and a gross oversight, but it is unlikely to be fixed anytime soon. It is still a good idea for producer representatives to request that the producer credit be included in metadata, particularly for sites like All Music Guide, Reverbnation, and other similar sites. Whether they use it or not—and if you read All Music Guide, records somehow seem to produce themselves—at least the credit is provided and maybe someday these sites will come to understand the business they are in and who the members of the creative community are.
Online advertising should probably not be treated any differently than the customary producer credits—meaning an ad that is not so small that it becomes burdensome to get the credit into the advertising copy, but it might make sense to include the producer credit in Facebook ads in proportion to the “artwork title” of the record, such as a size of type that is 20% of the artwork title, or what you are comfortable with and what the producer will agree.
If the artist is not signed to a record company, the artist needs to be specific about where the producer will be credited and what obligations the artist is undertaking. At a minimum, the artist should expect to credit the producer on the back cover of a physical carrier and in print advertising of a quarter page or more.
One other thing to keep in mind is that if you are going to have a mixer, that mixer will likely want credit which is typically subordinate to the producer credit. The mixer will want advertising credit, too, so that should typically be limited to advertising for a single track that he mixed of a minimum threshold size and the Billboard strip ads.
Some mixers, especially remixers, ask for a credit of “Additional Production and Remix”. Artists will need to be careful about that credit being interpreted as a breach of the producer’s credit provisions by crediting someone else as a producer of the same track that the producer worked on. Of course, if you try to clear this up front, you run the risk of the producer’s lawyer having a hissy fit over the idea of someone getting credited as a producer—even if they replace every single track on the album version except the vocals.
Producer lawyers will often ask that the producer has the right to remove their credit if a version of their recording is created after the producer completes their services and the track is accepted. This situation arises if a subsequent producer is engaged for creative reasons—not because the first producer gets fired and someone else has to be hired to save the recording.
This request is in the nature of “moral rights” in copyright laws such as the Berne Convention, which provides that independent of the author’s economic rights, and even after the transfer of those rights, the author shall have the right to object to any modification of their work, if the modification would be “prejudicial to the author’s honor or reputation”. As long as the removal of the credit is prospective—meaning that it applies only to physical devices manufactured after the producer makes their request—and that the producer waives any injunctive relief or monetary damages, the producer’s request is reasonable. And frankly hard to argue against.
14. Grant of Rights-Joint Authorship Issues
There are good reasons for U.S. based artists to engage the producer to render services as an independent contractor creating a “work made for hire” under the U.S. Copyright Act. (If you live outside the U.S., you should consult your national laws.) This is an important distinction for a couple of reasons: first, the U.S. copyright law distinguishes between works made by authors that authors may license or assign, and works that are from inception created under an employment relationship or under a “special commission”. The work for hire status has some benefits and requires some special drafting in order to capture the rights. U.S. Copyright Office “circular” Number 9 on this subject is well written in simple language (a Copyright Office “circular” is a short handout from the Copyright Office that is designed to educate the public about particular issues in the U.S. Copyright Act.)
For reasons that frankly escape me, some artists have an issue with referring to anyone as their employee and view everyone involved in a recording project as a “partner.” Of all the words that one could choose to use in this context, “partner” is a very unfortunate choice from a legal point of view, because “partner” has an actual legal meaning. A simple example–was it your intention to allow your “partner” to incur debts in your name? Another and more apt—was it your intention to co-own your recordings—the ones you paid for and perform on—with your producer?
This raises the issue of joint authorship. Here’s an example of why an artist would want to avoid an implication that the producer is a joint author:
A producer developed an artist for a period of years and had a rudimentary written agreement that provided that the producer was to be paid a bonus if the artist was signed using the producer’s recordings. The band acknowledged that the producer was actively participating in the creation of the sound recordings and co-wrote the songs. The producer’s share of the songs was not disputed.
The band signed to a major record company (and actually became a multiplatinum artist). No one told the producer that the band was signed until he read it in Billboard. The band’s lawyer refused to pay the signing bonus. She was from New York.
The producer attempted several times to be paid and was rebuffed. This was probably due to a simple reason: When the masters were sold to the record company, the artist’s lawyer failed to disclose the producer as a joint author. Not only would the artist’s lawyer not deal with the producer, but the artist’s record company also would not deal with the producer and referred him to the artist’s lawyer who would not deal with him.
The producer found a lawyer who suggested it would be a good idea to send copies of the producer’s recordings to leading producer management companies. Particularly to one producer management company that also did artist management and to which the artist was being presented by the record company.
This drew a letter, copied to the record company, from the artist’s lawyer that accused the lawyer—the lawyer—of copyright infringement for distributing copies of these jointly owned recordings. And that’s the punchline. If the recordings are co-owned, which these recordings arguably were, the artist and producer can both issue non-exclusive licenses in the whole of the recording and each have all the rights of a copyright owner.
The producer’s lawyer responded with his own letter reminding the artist’s lawyer that the producer had the right as a joint author to distribute copies on a nonexclusive basis as one of the rights of a copyright owner of a sound recording.
Within minutes after sending that letter, the producer’s lawyer received a call from the label apologizing and wanting to know how to make this go away. The producer’s lawyer suggested a possible solution was the payment of money. That day.
The artist was then forced by its label to sign a release with the producer that included a withdrawal of the claim for copyright infringement against the producer’s lawyer “as though it had never been sent” and transferred all rights from the producer to the artist.
So if instead of being in this situation—or the rather asinine treatment of the producer’s lawyer by the unknowledgeable artist lawyer who may have been “cool” but had no idea what they were doing when it came to copyright—wouldn’t it have been better to avoid the situation altogether by having a work for hire agreement in the first place? And maybe if your producer is not clamoring for it because his last line of defense from being taken advantage of is pulling that card? (Or maybe that’s the plan of his wily lawyer?)
15. Grant of Rights—Producer Songwriters
Artists often collaborate on songs with their producers, and in many cases that producer’s songwriting ability is a significant factor in the decision to work with a producer. In the pop or urban side of the house, the producer/songwriter may bring a fully recorded track to the artist that only requires vocals and mixing, with minimal additional production.
The question immediately arises as to who is going to get to control decisionmaking about licenses for the song and who will administer the song generally.
A threshold issue, or course, is how much of the song does each writer own, or their “contributory share.” It is important to have a clear understanding about the splits. While there is no rule of thumb, I have seen bands labor over this issue and come up with odd results.
For purposes of the authorship of the song, I use the rule of thumb that the difference between the song and the arrangement of the song is the difference between the lyric and melody (which I would say is what constitutes the song) and the way the lyric and melody are presented to the listener, which has more to do with the arrangement.
Another threshold issue is the distinction between the recording of the song and the song itself, each of which are separate works of authorship.
So I have heard this kind of conversation among members of the band: Andy wrote the lyric, Bobby wrote the music, and Charlie wrote the intro drum lick. Andy and Bobby wrote the lyric and music separately and brought the lyric and music to rehearsal, where Charlie wrote the intro drum lick while the arranged the lyric and music that Andy and Bobby wrote.
In this real-world example, Charlie is not really entitled to 6-4/7ths of the copyright in the song. Charlie may be entitled to one-third of the copyright in the sound recording when it is made, depending on how the band has agreed that ownership should be decided. It is unlikely that Charlie has any share of the song, however.
So the ownership of the song in this example is probably going to be 50% Andy and 50% Bobby.
Let’s say that Andy, Bobby and Charlie now bring in Danny the producer who writes a new subchorus and rewrites the bridge. Now what?
This is doing to depend on the deal among the writers about bringing in the new writer, Danny. Assuming that Andy and Bobby have dealt with Charlie’s issue and co-own the song equally, and also assuming that Andy and Bobby are still in the band and talking to each other, Andy and Bobby can agree among themselves that Danny should get a share of the song.
How much should Danny get? That will be a process of negotiation. Andy and Bobby will probably feel better about giving Danny a 25% share than a 33-1/3% share. But Danny may say, you aren’t paying me much to produce this record, so I think I want 50% and by the way I also want to get 20% of what you are getting—which 20% bears a striking resemblance to what Danny has to pay his manager in commissions.
So you can see that it is important to get these things tied down early on, both with your band members and with the producer.
The “administration” rights for a song essentially boil down to who controls the song from a legal perspective regardless of ownership share. For example, if a music supervisor has a use for the recording of the song by the band that the band thinks is really cool, but only pays $1,000 “all-in”, whoever administers 100% of the song can make that decision to license the track.
The tendency is to say that each writer administers their own share, which of course sounds very fair at the beginning. But taking our example, let’s say that Danny got a one-third share of the song and has a publishing deal with a big music publishing company.
The first question is what does “all-in” mean? It means that the total license fee including the recording and the song is $1,000. The music supervisor could care less how it is allocated between the two, but usually wants a quick answer. Typically, the allocation is 50/50 song and “master”. So now the songwriters are dividing $500 among them, and the band is dividing $500 among them.
The big music publishing company is going to be looking at $167 as their share of the fee, from which they will probably take 25% as a co-publisher and maybe an administration fee—about $60 altogether. You would think that they would say, go with God let’s make it easy.
That’s where you are probably wrong. They will more likely say, we are the professionals and you are not, we can get you more money. Or better yet—the big publisher’s “policy” is that they do not license “their” songs for less than $x (fill in the blank, but more than what you are getting).
If the reason you are doing the deal is not because of the money—we all know it is small potatoes—but because of the platform and the reputational value for getting the price up on future licenses, then you don’t really want these people screwing it up.
So now you are looking at an argument that may blow an opportunity—even though the big publisher only has one-third of the song and is arguing about the difference between their making $60 and maybe $160. Or zero. Because some of these people would rather make zero—and have you also make zero—than bend their “policy”.
This is why you have to control the administration of your songs if at all possible, and definitely control the administration of your recordings of your own songs.
Controlled Compositions/Maximum Mechanical Royalties
Artists will eventually have a contract presented to them that provides for special reduced mechanical royalty rates in the U.S. and Canada on songs they record. (See our iTunes podcast with David Basskin of CMRRA for a more detailed explanation of this.) You will have some flexibility on these terms, but not much. You should get your producer to agree to take the terms of your controlled compositions or maximum mechanical royalty provisions for any songs he writes because the rates are going to apply, regardless. If the producer is a superstar, you’re going to have a fight on this, but there aren’t that many of those, so most of the time it should be a pass through to the producer of whatever the artist gets.
This is another place where the big publishing company administrator can screw things up for the band. It’s going to be especially true of the royalty free uses, like iTunes download of the week, for example, that you would be thrilled to get. If you don’t have this tied down, though, the big publisher could blow these opportunities for you because of their “policy” about no free licenses, for example.
Yes, we all know free is bad, yes we all know money is tight, but no that doesn’t mean you never give it away to build an audience.
It is pretty common for pop or urban producers to come to an artist with a nearly completed track of a song that the producer has written. If the artist accepts the song and recording, then the artist may start working on the track or complete it. For whatever reason, the artist may not include that track in their initial releases.
The question then arises as to what happens to that track if it is not released in a certain time, and also what happens to the song. The producer may have a different artist who wants to record the track and would like to replace the vocals with the new artist who will release the recording.
We will deal with the recording side of what happens in this situation later in this article, but from the songwriting perspective, the artist has to be careful that any songwriting contribution is documented. For example, the producer may bring the track with no lyric, some lyric, or complete lyric that the artist rewrites either slightly or a lot. Like pregnancy, you can’t be “slightly” a writer, so if the artist contributes anything to that song—as opposed to the recording of the song—that contribution can live on regardless of whether the artist’s recording is ever released.
The typical use of a vault track involves wiping the artist’s performance and starting over with a new vocal—the question is, starting over with which version of the song.
16. Grant of Rights: Consent Rights and Music Publishing
If you decide to agree that songwriters (including producers) of songs you record have any approval rights over exploitations of songs on sound recordings you perform, you should also try to get clarity on what approval means as a practical matter. For example, no one is usually thinking of the songwriter’s heirs at the time the song is written. It may sound a little over the top to be worried about it, but if you have ever been through a situation where a writer has unfortunately passed away and you suddenly find yourself trying to extract approvals from someone you never met, are not themselves a songwriter, and may have a tenuous claim on reality, much less the share of the song that they seek to control—you will understand what I mean. When the statutory copyright heirs produce a new “partner” for you whom you never chose and who has, shall we say, decision making challenges depending on the time of day, this can be a Kafka-esque experience. Particularly when it involves control over one of your most important assets.
So one solution would be to provide that any approvals or consents be personal to the writer and must be given personally. Just to be clear—I’m not suggesting that the heirs do not participate financially, get paid less, or give up any ownership rights that they inherit. They definitely should keep the income stream they are entitled to. But what they should not be able to do is make your life difficult.
Producer Music Publishing Administration
When you are not in a position to pay a producer their customary fees, you will have to make up the shortfall in creative ways. One is to give up some additional publishing interest to them on songs they did not write, or for songs they co-wrote. If you are fortunate enough to have a successful producer work with you for less than the normal fee, you should not look a gift horse in the mouth and ask to see its molars. But you should also not throw caution to the winds.
This is another situation to tread carefully. Sometimes you just don’t have the leverage to get any beneficial concessions, but there are a few points to understand. We will use an example to better see what is going on.
Let’s say Andy and Betsy, the artists, co-write a song with Paulette their producer with equal splits:
Writer: Andy Betsy Paulette
Writer’s Share: 33-1/3 33-1/3 33-1/3
Publisher’s Share: 33-1/3 33-1/3 33-1/3
Copyright Ownership: 33-1/3 33-1/3 33-1/3
Remember, the “writer’s share” and the “publisher’s share” refers to income not ownership. Songwriting income is split 50% to the writer and 50% to the publisher by custom and practice, not based on anything in the Copyright Act.
The most important aspect of this comes with public performance royalties because writer’s royalties are paid directly to writers and the publisher’s share of royalties is paid directly to publishers. (Public performance royalties are those collected and paid in the U.S. by ASCAP, BMI and SESAC.)
Your publisher can either be a publishing company you set up on your own to collect earnings, or it could be a third party publisher (such as a major publisher) who will pay you an advance that is recouped in part from the publisher’s share of revenues.
Remember this: The amount of the advance is going to be calculated based on how much of the publisher’s share the publisher can collect. This is because an “advance” is the prepayment of royalties, so if the royalties are lower the advance will be lower. The royalties can be lower because you don’t earn, but it can also be lower because you have given away an additional percentage of the publisher’s share. (Also realize that the societies will typically not pay the writer’s share to a publisher, so it is not included in recoupment of the writer’s advance.)
Let’s say Paulette the producer asks for a percentage of “publishing” to compensate her for taking a lower producer fee. This additional percentage would be in addition to the percentage she is entitled to as a co-writer. Let’s say that Paulette would normally get $2,500 a track to produce, but she has agreed to take $1,000 a track plus an additional 10% of the “publishing”. Here are a few things to consider:
(a) Have a clear understanding of what “publishing” means in your particular situation. Usually it means the publisher’s share, but you need to tie this down because it could also mean 10% of the entire song. A 50% difference.
(b) This is a financial deal—so if the publishing is intended to compensate for a reduction in her fee, you should know what that reduction is and ideally the additional benefit should end when that reduction is repaid to Paulette out of the additional percentage of publishing she is taking in compensation. We know that Paulette is taking a $1,500 per track reduction. One way to accomplish this is to have the producer and the writers sign an agreement that 100% of the co-writers publisher’s share will be paid to Andy and Betsy but the two of them will pay the additional 10% of “publishing” until that 10% is equal to $1,500. (Note: this could mean that if Paulette produces more than one track, the recoupment of the $1,500 reduction may occur at different times on different songs).
Paulette’s lawyer is probably not going to like this, and will want Paulette paid “at the source” meaning that the society will reflect Paulette’s publisher share as 10% higher than it otherwise would be. There will need to be a “springing” contract to reduce Paulette in the future. This will get a little complicated.
(c) Andy and Betsy have to decide how they are going to bear the additional 10% to Paulette in terms of reducing the publisher’s share for Andy and Betsy. Typically, this would be an equal reduction.
So to revisit our chart after giving up the additional 10% of the publisher’s share, the splits would look like this:
Writer: Andy Betsy Paulette
Writer’s Share: 33-1/3 33-1/3 33-1/3 (Based on 50%)
Publisher’s Share: 28-1/3 28-1/3 43-1/3 (Based on 50%)
Total Financial Interest: 30.833% 30.833% 38.334 (Based on 100%)
Copyright Ownership: 33-1/3 33-1/3 33-1/3
Notice that copyright ownership did not change with the adjustment to the financial interest. Also notice that giving Paulette an additional 10% of the publisher’s share results in a 5% increase over all, because the publisher’s share is 50% of 100% of the income.
If your intention is to give the producer 10% of the song, i.e., 10% of 100%, you would still do it by adjusting the publisher’s share by 20%, not the writer’s share, so the splits would look like this:
Writer: Andy Betsy Paulette
Writer’s Share: 33-1/3 33-1/3 33-1/3 (Based on 50%)
Publisher’s Share: 23-1/3 23-1/3 53-1/3 (Based on 50%)
Total Financial Interest: 28.333% 28.333% 43.334 (Based on 100%)
Copyright Ownership: 33-1/3 33-1/3 33-1/3
Producer Publishing Administration
With more accomplished producers, you may encounter a demand to give up your publishing administration to the producer as a condition of the producer even listening to your band.
If that feels greedy, that’s because it is. Do not do this.
If the producer wants to administer your songs to cut demos, be careful about giving up blocking rights. If you are not paying the producer for studio time and services, you should expect to have to barter something away, and that something is usually publishing.
Avoid giving up copyright, and also try to create a legal scenario where you are able to get the rights back, particularly when the producer is not a writer at all.
17. “Must Have” Indemnity Terms: The Four Horsemen of the Apocalypse
Contracts have paragraphs that deal with what happens if it turns out that the contracting parties lied to each other, or lied a little bit, and the non-lying party suffered losses. It also covers situations where one party breaches the agreement and the other has losses. The non-breaching party is able to get back the amount of their losses from the breaching party. The windup doll lawyer version of this story is that the breaching party only has to cough up the cash when the non-breaching party gets a final, non-appealable judgment or settles with the consent of the breaching party.
While no one can predict the future, statistically you will never in your life time have a final non-appealable judgment for anything. Those are what happens with Google and [fill in the blank], because a “final nonappealable judgment” means that you have exhausted every possible appeal and that is a very expensive enterprise.
Settling with consent mean that you have to get the breaching party to agree that (a) they were wrong and (b) will pay you the amount of the settlement—plus your legal fees.
An indemnifying party not only picks up the tab for the actual settlement that is due to something they did, they also—should—pick up the rolling costs of your defense. (Bearing in mind that these provisions tend to be mirror images of each other, so if you ask it of your producer you should expect to give the same promise to you producer.)
But what is more likely the key issue for artists is going to be when you can offset money that you otherwise have to pay the producer to cover your losses (including your attorneys’ fees). And if you can’t offset these monies in the contract, then you are going to have to separately sue for the right to offset—another cost you will have to bear out of pocket.
There are four key points—what I call the Four Horsemen of the Apocalypse—that you want to have a clear right to offset in your producer agreement because you will feel absolutely nasty about having to pay the producer while you pay these costs and you wait for your final nonappealable judgment. All of these claims should be immediately offset from “all monies” otherwise payable to the producer or the producer’s publisher—advances, royalties, mechanicals, the works.
(a) Overbudget: You need a clause in your agreement that makes your producer responsible for staying on budget, particularly in a recording fund situation. If the producer goes overbudget, then the producer has to pay that overbudget amount, or you can deduct it from any money you otherwise have to pay the producer. The producer’s lawyer will not like such a cut and dried overbudget definition, so there will be some back and forth about fault—but just remember that you don’t want to have to prove what someone’s mind set was at the time you went over budget. But you can think of this as “unexcused overbudget”.
(b) Union Penalties: The producer is typically responsible for filing union session reports and paying (out of the budget) session fees, pension and welfare payments and other sums. Those reports have to be filed within a certain time and if they are late you will have to pay a penalty. Since the producer is responsible for filing the reports, the producer should be responsible for fees you incur because the producer filed late.
(c) Uncleared Samples: If the producer is responsible for clearing samples and fails to do so, then you should be able to offset losses from having to do it yourself.
(d) Indemnity Claims: If you are subject to an indemnity claim, and the producer fails to fulfill the indemnity obligations (especially to defend you), then you should be able to offset these costs against other payments to the producer.
If it turns out that you offset these sums incorrectly, then you should expect to have to recredit the producer’s account.
But here’s your guide: First, would it make you sick to your stomach to have to pay the producer’s royalties when the producer was breaching their agreement with you?
Second, do you have an obligation to someone else—such as a record company or music publisher—that allows them to offset the same kind of sums from your monies in which the producer participates. If you don’t have a mirror image off-set right against the producer that the source of these royalties has against you, you may find that you have to make a payment to the producer for which a share of these monies that you have not been paid due to the source offsetting against you a claim that ultimately comes down to the fault of the producer.
Because the source has a contract with you and you have a contract with the producer, the source does not have the ability to distinguish between your money and the producer’s share of your money so they will squeeze you. If you get squeezed, you should be able to squeeze the cause of the problem, too. Hence, the Four Horsemen of the Apocalypse.
18. Contingency Funds It is not uncommon to build a “pad” into your budget for unforeseen costs or if you need a little extra money to make the record better. This is not a way to hide money or to inflate costs, or it shouldn’t be. Even if your producer is working on a recording fund basis it is a good idea to have a contingency built into the recording budget to give you some flexibility. The typical contingency is 10% of the budget, but could be higher or lower depending on circumstances.
19. “Fan Funded” Projects: Producer Budgets If you decide to use fan-funding for your record and you also plan to use a producer, remember you are on your own as with any “DIY” effort. You will not have the structure of the record company to protect you on enforcing terms so it would probably be a very, very good idea to have at least a signed deal memo with your producer that grants you the rights in the recording—see the discussion of the joint authorship problem in this article.
Also remember that if you go overbudget with fan funding, there’s no record company to advance you more money. So what that means as a practical matter is that you are operating under the “advance plus budget scenario” for recording cost purposes discussed in this article, except that you have more reason than ever to hold back a portion of the producer’s advance until satisfactory completion of the recordings. This is because you have raised a specific amount of money from your fans to record your tracks and you will have to put up your own money or raise more money if you go over budget. If the producer causes you to go over budget on a fan funded record, you will want to be particularly careful about having a contingency to invade if necessary before you go after the producer’s delivery payment—which in theory you will only be able to invade if the producer actually caused the overbudget through no fault of yours. These are always awkward conversations to have, so take advantage of your contingency.
Before you ever ask your fans for a contribution, you should have been through your budget thoroughly so you don’t have these surprises. It’s one thing to fight with your record company about money—they sell your records. It’s another thing to fight about money with the precious few people who show you enough respect to buy your records.
20. “Fan Funded” Projects: Recoupment We spent a fair amount of time on recoupment issues in this article. With “fan funded” projects, there is no recoupment, at least not for the fan funded part of the costs. Those will not be the only costs, however, Another thing to remember is that if you produce a record on a fan funded basis and it is successful, you may find that a label wants to “buy it”, meaning pay you for the record in what will become a term recording artist agreement. And we know that the only money that record companies pay to artists is payable royalties, right? Meaning royalties that are payable after recoupment. So if you have a fan funded record for $15,000 and you pay your producer $3,000, but because of your touring and other hard work you are able to have a major label “pick up” that record for $500,000, what happens? If the label advances you $500,000 can you put all of money in your pocket? Great payday, right?
But what about your producer agreement? For example–if your producer agreement for your fan funded record doesn’t take into account at least the potential for an advance at some point in the future, then you are going to owe the producer a royalty on those records it takes to recoup that $500,000? Probably. And where are you going to get that money from? Hopefully your producer agreement will tell you how to do that.
A great video about integrating Topspin.
Webcasting Royalties and SoundExchange
by Chris Castle
When a record is played on “terrestrial” broadcast radio in the United States (i.e., over the air), who makes money? Since a radio broadcast is a “public performance” of the song in the record under the U.S. Copyright Act, the songwriters and publishers make money through their performing rights organization, whether ASCAP, BMI or SESAC. But does the artist? Does the session drummer? Does the record company?
Not in the United States.
If the same record is played in Canada, the United Kingdom, Japan, or any one of a host of other countries, not only do the songwriters and publishers get paid a royalty through their PRO, but the artists, session players and copyright owner of the recording also get paid through a sound recording PRO.
But—due to changes in US law in the 1990s–if the same record is played in the U.S. online (like Pandora or Sirius-XM Radio), not only do the songwriters and publishers get their royalty, but the artists, session players and vocalists and record companies also get a royalty through a new PRO for sound recordings.
Weird, you say? True. But no stranger than the tax laws. Just like the tax laws, our copyright laws are the result of deals cut in Washington between interested parties, and the deal that cut out sound recordings from a performance royalty was made a long time ago between the broadcasters and the record companies. The goal of the recording community is to bring the U.S. in line with the laws of most other countries–the broadcasters oppose that goal because it makes the music they play more costly, and they have had the clout to win the issue in Washington, just like so many other changes in the laws that have created the most severe media consolidation in the world. If you were a cynical person, you might say that’s because there is a radio station in every Congressional district, but record companies in only a few.
Congress amended the Copyright Act in the 1990s to establish a limited public performance royalty for digital transmissions of sound recordings. “Digital transmissions” includes satellite radio like Sirius-XM, webcasting (or “Internet radio) like Pandora, and the Internet broadcast (or “simulcast”) of terrestrial radio stations like when your favorite radio station simulcasts its broadcast signal over the Internet. Although this limited performance right is a small step forward, it is a huge victory against the broadcasters, particularly as the industry moves toward digital radio.
These new laws established what is commonly called a “statutory” or “compulsory” license to stream sound recordings as long as the music being streamed complies with the restrictions on the license limiting the use to public performance, sequencing, and a few other restrictions. This statutory license does not include on-demand streaming or downloads (such as an on-demand subscription service). The statutory license eliminates the need to get a separate license from each copyright owner as long as you comply with the rules and pay the royalty. (We already have a compulsory license for mechanical royalties paid on songs when a digital or physical record is sold.) The statutory license only applies to streaming, not to downloading or any other interactive use of music that involves the user choosing which specific tracks they want to listen to.
These amendments to the Copyright Act divided statutory sound recording royalties among four groups: copyright owners (50%), featured artists (45%), nonfeatured musicians (2.5%) and nonfeatured vocalists (2.5%). “Copyright owners” typically means record companies, but independent artists, or any artist who owns their own recordings, qualifies as a “copyright owner.” It does not include songwriters or music publishers, although their right to public performance income requires no change in the law.
The Act also established the first sound recording PRO in the U.S. called SoundExchange. SoundExchange is a non-profit organization with a board of directors divided equally between artist and sound recording copyright owner representatives.
SoundExchange collects royalties from the subscription satellite radio providers, webcasters and radio simulcasters, and pays that money out to the four groups. The nonfeatured musicians and vocalists, also known as session players and singers, have their money paid to trust funds established by the American Federation of Musicians and the American Federation of Radio and Television Artists. Featured artists and sound recording copyright owners are paid directly by SoundExchange.
While the Congress established how the pie was to be split in 1995, they only set a rate for certain satellite radio providers but didn’t establish any other rates. That started a long process of negotiation which culiminated in the Webcaster Settlement Acts that allowed SoundExchange greater flexibility in negotiating rates with service providers and is a very positive step in the evolution of the PRO.
The Role of SoundExchange
Persons using the statutory license, such as Pandora or Sirius-XM Radio, must account and pay royalties to SoundExchange. SoundExchange must then account to individual members of the four groups. Establishing the databases for Sound Exchange to track plays and pay royalties is a monumental undertaking. Because the compulsory license is unlimited in scope, SoundExchange effectively must be prepared to account for every recording in the history of recorded music, both U.S. and foreign repertoire. SoundExchange has received massive downloads of label copy and accounting data from its record company members to establish its own database for accounting. This means that whatever information that an artist’s record company has in its accounting system is likely now in the SoundExchange database, which is updated periodically.
It is important to note that featured artists who are signed to record companies are paid their webcasting royalties directly—regardless of whether they are recouped in their accounts with their labels.
Independent artists, however, may not have been included in the SoundExchange database. You can confirm whether you are listed in the database by signing up for a free account on the “PLAYS” system and also checking if SoundExchange is holding money for you. Remember, if you are a “featured artist”, that just means that you are the artist who is featured on the recording, not that you have to be signed to a record company, so independent artists qualify for webcasting royalties, too, and probably qualify as copyright owners as well. Also–you do not have to be a US citizen or resident. SoundExchange collects for everyone, so go to the site to see if they have money for you or to register.
The Price of Liberty is Eternal Vigilance
It would be a very unusual result indeed if every piece of data in the SoundExchange system was exactly correct, and I frankly don’t think it’s fair to expect perfection under the circumstances. I will say that I believe that the SoundExchange staff are committed to running a tight ship and giving people a straight count. I would strongly suggest that everyone with a stake in this royalty pool check to confirm if you are in the SoundExchange system, and if you are that your information is correct. You can do this by yourself by getting a PLAYS account and looking up your recordings. If you haven’t registered yourself with SoundExchange, you should assume that there’s something incomplete or incorrect about the data and you need to review it to make sure it’s complete and correct. If it’s incorrect, the SoundExchange staff will work with you to correct it. In my practice, the two most common problems are absence of information, or someone incorrectly claiming copyright ownership. Absence of information is often providing the missing link on data that is in the database, or inputting data for the first time.
The trickier problem is the problem of the incorrect copyright owner. Most of the time I believe this to be innocuous and innocent mistakes. For example, if a major label distributes an independent label—and only distributes, i.e., takes no ownership interest—they are not entitled to the copyright owner’s share of royalties because they are not the copyright owner. Yet very often the distributor ends up being reflected in the SoundExchange database as the copyright owner.
The more insidious problem—and let’s just call it a head scratcher without casting aspersions or assigning blame—is when a content aggregator is reflected as the copyright owner when the artist is not registered. This means that the SoundExchange database recognizes that independent artist Joe Smith is the artist for Joe’s Song but has no contact information for Joe Smith. However, Joe Smith has done a digital distribution agreement with one of the aggregators to represent his catalog and SoundExchange reflects the aggregator as the copyright owner and pays the copyright owner’s share to the aggregator. No aggregator agreement should ever allow an aggregator to do this, or to have anything to do with SoundExchange in my view. It’s not really SoundExchange’s fault, either, as they can only do so much to police the information they are provided in the first instance. At the end of the day, its up to each interested party to make sure that their business is organized and that they are correctly registered with SoundExchange, just as they would expect to be correctly registered with ASCAP, BMI or SESAC.
Foreign Royalty Collection and the Future
SoundExchange collects hundreds of millions of dollars in statutory royalties in the US, and has begun collecting foreign public performance royalties for their members. (You don’t have to actually join SoundExchange, but membership is free and has benefits–review the SoundExchange website for details. If it were me, I would join.) The total performance royalties in the European Union alone are in excess of $500 million annually. SoundExchange has reciprocal agreements with some of its counterparts in the United Kingdom, Mexico and the Netherlands and that list is groing.
But the real significance may arise when and if Congress passes legislation that extends these royalties to regular radio (that is, over-the-air broadcasts) and television broadcasts. (There has been legislation in the U.S. Congress to establish this right, see MusicFIRST Coalition and the Performance Rights Act.)
SoundExchange will very likely be the administrator of these royalties, and that will be real money. So it’s a good idea for artists to get their business straight with SoundExchange now.
Copyright 2003-2011, Chris Castle. All Rights Reserved.
(A version of this article first appeared in the December 2003 issue of Music Connection and has been updated. Information in this article may become out of date, so do not rely on it without checking with SoundExchange at www.soundexchange.com)
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.
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.
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).
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!
What is the commission base?
You should focus on which revenue streams the aggregator is charging you commision 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, what you will see is a reference to “noninteractive” or “nonsubscription” or “statutory”. As long as those words are preceeded 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 webcasting monies. If the aggregator is commissioning 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, 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. You want the ones who will.
Getting Out of the 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 desireable 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 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 and solve for “X”:
[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 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 10%. 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.