Manage for Success: Ancillary Income (Newsletter #10, February 2002)

Most labels focus their efforts on marketing their music primarily through traditional record retail, but you shouldn’t neglect other potential sources of revenue.

Ancillary income. What is it? What does it mean to the success of your label? What are these additional sources of income that you should be looking for?

They include, but are not limited to:

International Distribution and/or Licensing
Publishing
Other Retail
Special Compilations: Retail Premiums for Specialty Outlets
Licensing to Films, Television, Commercials
Sponsorship and Underwriting
On-line Sales
Downloadable Music
Record Clubs

International Distribution and/or Licensing

You can sell your music outside the United States, either by making distribution deals territory by territory, or by granting licensing rights to selected honest overseas companies. I prefer distribution deals where you ship finished, packaged CDs to your foreign accounts. This way you know exactly what you've sold and what you'll be paid for. Be aware that this will not yield as high a price as you would expect from your experience with domestic distribution. The overseas company has to deal with freight and import duties, for example. But this will be offset somewhat by lower artist royalties, assuming you have such a standard provision for foreign sales in your artist and publishing agreements.

Licensing, on the other hand, can be a license to steal if you grant rights to less than scrupulous companies. Be sure you know who you're dealing with, and get solid advances and guarantees in front, since you'll never really know just how many disks have actually been manufactured and sold -- frequently a lot more than you may be paid for! Try to license a substantial portion of your catalog, not just selected titles.

You’ll have somewhat more control with a hybrid or variant arrangement than with straight licensing, where you sell finished CDs to your foreign distributor/licensee at your inventory cost, and subsequently receive a negotiated per-unit "royalty" as product is sold. This smoothes cash-flow for your international affiliate, yet helps keep him honest.

Publishing

All labels should consider establishing an affiliated music publishing company. Not all have done this, either through lack of expertise and experience, or insufficient time to deal with it. In fact, when I started my own label some years ago, I decided to forego the publishing aspect. I knew relatively little about it then, and didn’t have the time to deal with it since I didn’t want to be distracted from the A&R, marketing, and other aspects of running a start-up. It was a big mistake and cost me a lot. I regretted each time I wrote checks to pay mechanical royalties, not knowing I could have an outside party handle and administer publishing for me. Such firms do exist.

But when you set up your publishing, don’t be greedy. You should be fair to your artists and writers with a simple, straightforward deal where you equally share the benefits. For example, the artist might not only retain their normal 50% writer’s share, but you might also grant them half of your publishing share, giving them a total of 75%, for example.

And if you do set up a publishing company, be sure you, or your outside support agency works and properly exploits your titles. Considerable additional income can be obtained by having other artists record your copyrights.

Other Retail

Depending on the type and genre of music that you put out, consider selling into "life-style" retail stores. For example, specialty clothing stores, audiophile shops, surfer shops, even hair salons, may be potential customers -- it really depends on the type of music you release. There are most likely many other outlets that can profitably sell your music and from whom you may be able to obtain substantial income for relatively little work. Additionally, I’ve noticed that a buzz started at alternative retail has often successfully crossed over to mainstream sales.

Special Compilations: Retail Premiums for Specialty Outlets

I’m sure you’ve all seen special compilation CDs in Starbucks, Williams-Sonoma, or Pottery Barn of music that appeals to the customers of those stores. These compilations are generally created by the Special Products divisions of the majors, who supply them with "turnkey" CDs -- everything "all in" for a set price. So, depending on the nature of the music you record, think of other chain retailers whose products and clientele match your music. For such projects you should be able to make special deals with your artists and their publishers (normally included as a part of the original contract,) and sometimes even your suppliers, to hold down costs in order to achieve reasonable profit for all involved.

Licensing to Films, Television, Commercials, etc.

A great deal of supplemental income can be obtained through "master use" licensing of your tracks to feature films, television, documentaries, and commercials. Features films are particularly advantageous because of added incremental usage fees for soundtrack recordings, subsequent television broadcast, and home video. You can collect for each of these opportunities which are triggered as each milestone is reached. The dollar amounts are usually negotiated in the original contract, sometimes even with a sliding scale based on box office success. Television commercials are not only lucrative, but also provide additional wide-ranging exposure for your artists. And, if you control the publishing, you will also be able to receive "synchronization license" fees for the same usage.

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By the way, do you have line items in your Profit and Loss statements for "Licensing Income" and/or "Other Income?" You should, because it’s these additional items that can make the difference between black or red ink on your bottom line -- particularly for a small label.

Solutions Unlimited is not only highly experienced with these kinds of projects, but also in helping you set up systems and procedures to handle all business-related aspects of running your label.

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Sponsorship and Underwriting

You may be able to get a company whose publicity and image coincides with that of your artist and his music to sponsor that artist's tour. It takes a lot of work, but it means it’s less money you’ll need to provide to keep your artist on the road. And, as a result of the tour, you should be able to sell more records to a delighted public. Additionally, the sponsor will frequently buy CDs from you to use as gifts for selected worthies. Look for other special tie-ins between your artists and appropriate products.

You may want to seek underwriting, such as from the National Endowment for the Arts. (http://www.nea.gov) This applies to classical music, particularly contemporary composers, and also to jazz, folk, and indigenous artists. NEA grants must be applied for by the artist, and are given to the artist for a specified recording project, but the label derives benefit because the cost to make the recording is wholly or partially defrayed by the grant.

On-Line Sales

Many labels sell CDs from their web sites, but too many others don't. One advantage is that you can receive the entire suggested retail price, rather than the lesser amount you would get selling through your distributor. By the way, I don’t think it’s a good idea to grant exclusive on-line (or downloadable) rights to your distributor, even though some request this in their contracts. I urge you to make any such deals non-exclusive. I also encourage you to set-up sales at your own web site. Shopping Cart software is now available in various forms, so selling from your web site has become relatively simple, particularly if you have the capability to handle your own fulfillment. If you don’t, then consider generating a link to Amazon.com or similar company, where you'll at least pick up a small referral fee.

Downloadable Music

Another way to obtain income is to offer at your web site downloadable MP3 versions of selected songs at a reasonable cost. I don’t think, however, that you should do it in a way that cripples the ability to burn it onto a CD-R if the download has been paid for. Nor should you set a limited time-frame for how long the track remains viable on a customer's hard drive. Both of these are current practice of many major labels.

Record Clubs

I'm not a big fan of the clubs, none of whom have the clout they once had. But it can be very profitable if you can obtain a sufficiently high guarantee for your catalog.

This is not by any means an exhaustive list of ways to obtain additional income. But any one or more of the above may make the difference between having a profitable or unprofitable year. As much fun as the music business can be, you should find time to seek out these additional income-producing aspects.
Contact us to see how we can help you achieve this, and also develop other ways to improve your bottom line in such a fashion that you will be able to manage your label for success.

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Copyright 2002 by Keith Holzman, Solutions Unlimited. All rights reserved.